Red 5 Ltd
ASX:RED
Earnings Call Analysis
Q2-2024 Analysis
Red 5 Ltd
At the earnings call, executives from Red 5 Limited, a dynamic gold production company, detailed a strong second-quarter performance for fiscal year 2024. The company operates three mines—the KOTH open pit, KOTH underground, and Darlot underground—all central to its integrated processing hub. In recognition of the company's production scale and maturity, Red 5 was newly included in Van Eck's GDX ETF, exposing them to a broader investment base.
Red 5's emphasis on safety paid off, with total recordable injury frequency rate (TRIFR) plunging from 15.5 to 4.7, alongside achieving a lost time injury frequency rate (LTIFR) of zero. Such safety improvements often correlate with enhanced productivity, which manifested in an impressive 108,027 ounces of gold produced in the first half of FY '24 at an all-in sustaining cost (AISC) of $2,008 per ounce, setting the company on track to meet or exceed their annual production guidance.
Significant extraction achievements were reported at the KOTH open pit, with a focus now on accessing high-grade ore deposits. The KOTH underground mine also yielded strong metrics, with initiatives to overcome worker shortages during the holiday season. Over at Darlot, emphasis on higher-grade stopes has been fruitful, improving mined grade quality and overall results.
The past quarter saw record crushing and milling operations at KOTH, with the adoption of a finer crush size now becoming a standard practice, lifting throughput rates significantly. The processing plant also met a few challenges with lower metallurgical recoveries due to circuit issues, but corrective measures are underway with expectations to restore expected performance levels.
Red 5's financial performance showed resilience, with $140 million in sales and a slight decrease in total operating and capital expenditure from $120 million to $117 million. This resulted in a free cash flow of around $23 million for the quarter. Additionally, the company made significant strides in debt reduction, repaying $10 million and reducing net debt to $49.5 million. These efforts are in line with their strategy to secure refinancing in calendar year 2024 for an even more robust balance sheet.
Looking ahead, Red 5 is focusing on the King of the Hills Stage 2 cutback, improving crusher performance, and completing the TSF4 dam wall lift, all aligned with strengthening operations and financial standing. The company's continued performance and strategic optimization point to an ambition to bolster their operations and ensure long-term viability.
Red 5 announced a change in inventory costing policy that came about from a periodic review of its accounting strategies. This adjustment leads to a higher allocation of processing costs to lower-grade ore. Though it introduced a net realizable value expense affecting all-in sustaining cost, the half-year figures should provide a more accurate reflection of inventory cost credits moving forward.
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Thank you, and good morning to everyone on the call today. On the call, we have Richard Hay, Red 5's Chief Operating Officer, and myself, David Coyne, CFO and Joint Company Secretary. As Mark Williams, Red 5 Managing Director and CEO, is committed to other external meetings on the east coast of Australia this morning, Richard and I will present Red's quarter 2 results for FY '24, referencing the slide deck that was released to the market this morning, alongside the quarterly report. As explained by the operator, there will be time for Q&A at the end of the presentation.
Moving to Slide 3, please. I'll now hand over to Red 5's COO, Richard Hay, for opening remarks and an overview of our quarter 2 results.
Thanks, David. Red 5 has 3 active mines: the KOTH open pit, KOTH underground and Darlot underground, with the ore being centrally processed at the KOTH hub, which in the December quarter achieved significant periods of throughputs well in excess of 5.5 million tonnes per annum. Red 5 also owns a 3.25% royalty from the Siana gold project in the Philippines. And we note that the project's owners have announced receivable of their debt funding to advance mine development and production. Additionally, during the quarter, Red 5 was included in Van Eck's GDX ETF, which is good recognition of Red 5's production scale and maturity.
Moving to Slide 4. We are pleased to see the continued improvement trend in safety performance. Over the past 12 months, the TRIFR had reduced from 15.5 to 4.7 and the LTIFR has reached 0. Our operations leadership team continues to focus on activities to improve our leading indicator safety statistics, which we know ultimately, over time, has a positive impact on our lagging safety results.
Production for the first half of FY '24 was an excellent result, achieving 108,027 ounces produced at an all-in sustaining cost of $2,008 per ounce, with 53,018 ounces of gold produced for the December quarter at an AISC of $2,328 per ounce. The AISC includes a noncash NRV expense on accumulated low-grade stockpiles of $132 per ounce for the first half and $267 per ounce for the December quarter. David will cover this aspect in more detail later. The strong first half year production from all 3 mines and the KOTH processing plant has set Red 5 up for a strong second half and it has us on track to achieve the top end of guidance for the year.
Moving on to Slide 5. Mining of the KOTH open pit made good progress during the quarter, with a total of 3.41 million BCM moved and 1.37 million tonnes of ore mined at a grade of 0.74 grams per tonne, which included 851,000 tonnes at 0.97 grams per tonne of high-grade ore. Access to the high-grade ore in the Stage 1 pit floor is now fully established and very consistent, providing optionality to the business as to how fast we mine the high-grade ore, which is dependent on the status of the ROM pad stocks.
In Stage 2, we are ahead of our mining schedule with consistently good digging in the predominantly oxide waste of the upper benches. Stage 2 oxide material has been strategically incorporated into the planning schedule and stockpiled separately to supply construction materials for the TSF4 dam wall lift that is due to commence shortly.
The KOTH underground completed another solid quarter, mining 244,000 tonnes at 1.8 grams per tonne. During December month, a number of improvement initiatives culminated in a record 69,000 tonnes of ore mined from stopes in the Regal, West, East and Central areas. The mining contract continues to perform well, meeting planned schedules despite some personnel shortages over the Christmas and New Year period.
Over at Darlot, the team continues to string solid quarters together, mining a total of 168,000 tonnes added an improved grade of 3.2 grams per tonne, reflecting a focus on higher-grade stopes in the Boon West area and the completion of a large lower-grade bulk stope in the prior September quarter. Airleg mining at Darlot made an improved contribution versus the prior quarter, mining 14,000 tonnes at 4.9 grams per tonne.
The processing team at KOTH posted a quarterly crushing record of 1.25 million tonnes and a record 1.24 million tonnes milled, having resolved some crusher reliability challenges in the first half of the quarter. A trial of a finer crush product in the second half of the quarter was very successful, resulting in a record 519,000 tonnes milled for the month of December. This finer crush size is now standard practice.
The finer crush products saw consistent days well in excess of 20,000 tonnes per day crushed and 17,000 tonnes per day milled for a throughput run rate equivalent to well in excess of 5.5 million tonnes per annum. The finer crush product is now standard practice for the team, with the challenge of achieving a 5.5 million tonne per annum run rate throughout the second half of FY '24.
A mobile crusher was purchased by the company during the quarter to assist with building a 150,000 to 200,000 tonnes of crushed ore stockpile to derisk this section of the processing circuit. The [ metallurgical ] recoveries were slightly lower in the quarter at 91.2% as a result of reliability issues with the carbon regeneration circuit. Remedial actions are being put in place and should see recoveries rebound back to the expected run rate of around 92.5%.
Moving on to Slide 6. Darlot has proved over 2023 that it can consistently deliver positive cash flow. And as a result, the company has mobilized an additional jumbo to assist in opening up the Dar-Cent and other areas, together with the diamond drilling program designed to derisk the FY '25 and FY '26 mine plans. A total of 11,748 meters was drilled in the first half of FY '24 of a planned program of 17,500 meters. This program is very likely to be extended based on the success we are seeing to date. The Darlot drilling results shown on this slide contained in our November 2023 announcement highlight the ongoing strong potential for additional conversion of mineral resources to ore reserves to extend the mine life past FY '26 as well as derisking areas earmarked for mining in the FY '25 and FY '26 years.
And now over to Dave.
Thanks, Richard. And on to Slide 7, please. 53,087 ounces sold at an average realized price of $2,619 per ounce, yielding almost $140 million in sale proceeds to underpin another solid financial quarter for the company. Total operating and capital expenditure for the quarter has decreased marginally from the prior quarter, from $120 million down to $117 million. And resulting free cash flow for the quarter was approximately $23 million. A key focus for us during the quarter was on implementing methods to reduce consumption of diesel when equipment is idle.
Pleasingly, we are starting to see some positive effects from this in terms of behaviors and an overall reduction in diesel costs. As operations across all 3 mines in the process plant continued to perform well, we are increasingly turning our attention to improved efficiencies and cost optimization activities, such as extending durations between mill relines, tendering for longer-term supply of key services and materials and the like. All of these is placing Red 5 in for a solid financial position, opening the window to replace the current project finance debt facility with a more appropriate corporate style facility in the coming months.
On to Slide 8. Strong gold production and management of our costs has enabled us to progress our strategy of accelerated debt repayments, with $10 million of bank debt repaid in the quarter being a combination of both scheduled and voluntary repayments. At the end of December, Red had $102.8 million in outstanding bank debt and $53.3 million in cash and other liquid assets, resulting in a net debt improvement to below $50 million, or $49.5 million. Most importantly, though, we are on track for our goal of refinancing in calendar year 2024.
Some key activities in the second half of the 2024 financial year are continuing to deliver on our target of safely, profitably and strengthening our balance sheet. Areas of particular focus are further progressing of the King of the Hills Stage 2 cut back, improving our overall crusher performance, which Richard alluded to a little bit earlier, and substantially meeting the TSF4 lift at King of the Hills.
On to Slide 9, please. In our quarterly activities report released this morning, we announced a change in our policy to Run of Mine ore inventory costing, pragmatic for the company to periodically review the accounting policies that underpin its financial results. The review of the inventory cost methodology highlighted the need to change the basis of how current and future processing cost were apportioned from an accounting perspective. This change puts a greater proportion of processing costs onto lower-grade ore than what was applied under the previous methodology. The net outcome of this change is the recognition of a net realizable value expense that unwinds part of cost credit to the all-in sustaining cost.
The half year outcome for ROM inventory movement still remains as a cost credit to AISC, however, and we expect the half year cost credit will be a better indication of future inventory movement cost credits to AISC going into the future. I think it's important to recognize that this has no cash flow impact and does not change our FY 2024 guidance range of $1,850 to $2,100 per ounce.
The company will continue to build its low-grade ore stockpiles into the future, and our mine plan does not see us needing to utilize this material for some time. This means that this asset will be classified as a noncurrent asset on our balance sheet for the foreseeable future.
I'd now like to hand back to Richard for some concluding remarks.
Thanks, David. And on to Slide 10. Thanks. As I said earlier, we were very pleased to see Red 5's entry into the Van Eck's GDX ETF during the quarter and we certainly welcome them as a major shareholder of approximately 10%. The bubble chart on the right-hand side is the clear indicator of the excellent value proposition as it emerges. As Red 5 emerges into the mid-tier Australian gold producer status, companies such as Capricorn, immediately above Red 5 there, indicate the opportunity for Red 5. So in conclusion, a very solid quarter for Red 5, well setup for the second half. And reiterate what David mentioned that we are on track for meeting our guidance at the upper end for production and well within our guidance range for AISC.
With that, I'd like to hand back to the operator.
[Operator Instructions] The first question today comes from Hayden Bairstow with Argonaut.
Just a couple from me. Just quickly on the accounting policy shift, just the no change in the all-in cash cost. And so are we stripping that out of the guidance? Or do you think you'll still hit that even if I'm adding, what, $130 an ounce every quarter pretty much on this inventory adjustment?
It's Dave here, Hayden. Yes, at this point in time, even factoring that into the half year result and a forward projection perspective, we're still comfortable there with the AISC guidance range of $1,850 to $2,100, even taking that into account in that regard. So what it meant was under the prior policy, we're probably in a slight overcredit to AISC costs and we were tracking -- partly tracking ahead of our expectations. So in essence, the policy change brings us back into line with what we would ordinarily expect for the full year for that low-grade inventory build credit to AISC. So hence why we are pretty comfortable there maintaining the full year guidance range from a cost perspective.
Yes. So I'm just knocking down the credit going forward, right, as you still have a credit because you're building stockpiles.
Correct. Yes. Yes. Just [indiscernible]. As you saw in the September quarter, it was a pretty large credit. But if you take the average of what we've credited for the half year, circa $4 million, that's probably a better indication of the net credit moving forward as we continue to build those stockpiles.
Okay. Perfect. And then just on the mill, I mean running at 5.5 million tonnes-plus for a little period is pretty encouraging. I mean assuming you could actually keep that going, would -- can you wrap the mining up easily to deal with that? Or would you just have a lower -- low-grade stockpile build if you're going to run at a higher rate to the mill?
Absolutely. In the open pit, which provides the baseload, has plenty of capacity to produce the high grade to fill the mill and has been doing so through those periods. We got -- there's plenty of the high grade above 0.5 gram cutoff that reports to high grade.
[Operator Instructions] The next question comes from Paul Kaner with Ord Minnett.
Firstly, just on your balance sheet. I see that you've sort of made an additional debt repayment beyond your required repayments. What sort of cash buffer are you happy with to make further accelerated payments? Is that sort of $50 million? And should we just assume any additional free cash flow will be used to make further repayments?
It's Dave here, Paul. There's no specific answer on that. I think that circa $50 million is a good guide. Is there something definitive set in place as an internal rule? No. $50 million, let's call it, cash/liquid assets is generally a good buffer there for us that, in essence, covers, in rough guide, 2 months for the cost of having that buffer there. That's probably a good indicator.
We do have a very stated policy there of accelerated debt repayment. So you can generally assume there at the moment that anything above that circa $50 million cash balance range we would look to make additional repayments there over the next couple of quarters for amounts over and above that as, I guess, a general guide. But yes, that's, by no means, definitive but probably a good way to assume at the moment.
Yes. Great. That's clear. And then secondly, maybe another question for you still on the balance sheet. Just on your working capital position, are you able to sort of disclose where your trade payables are out and if that's at a normalized level with the Stage 2 strip that's sort of continuing?
Trade payables are certainly in what I would call normalized levels in regard. So there's no -- we're not paying people outside payment terms or any of that nature. So everything is running pretty much normal as it has done now for almost 9 months and continues to do so on a monthly basis there. So kind of that strong cash generation and plus 50,000 ounces produced each quarter is a key contributor to that.
There are no further questions at this time. The conference has now concluded. Thank you for attending today's presentation.