RED 5 Limited
SWB:RKM
Earnings Call Analysis
Q1-2024 Analysis
RED 5 Limited
Red 5 has entered the market's spotlight by hitting the prime ore body in the King of the Hills open pit, marking a significant turning point for the company. With this success, the share price has strengthened, securing a market cap and enterprise value of over $1 billion. The September quarter saw changes in Red 5's Board composition, including new appointments, retirements, and a completed Board renewal process that aligns with the company's size and outlook.
The recent quarter exhibited commendable operational cash flows of $44.8 million due to consistent production across all three mines and optimized processing through the King of the Hills mill. Enhanced mining techniques have been adopted, resulting in reduced costs and impressive grade control drilling results that suggest potential extensions to the mine life and growth at King of the Hills.
Red 5 has successfully focused on debt repayment, paying off a total of $37 million over the past six months, reducing its net debt to $68.2 million at the quarter's end. The company emphasizes its strategy to utilize all excess cash flow to further accelerate debt repayment, with the goal of transitioning its project finance facility into a corporate facility by 2024.
The management expresses strong confidence in the upcoming performance of King of the Hills underground mine and the Darlot mine, which have become vital contributors to the company's cash flow. Red 5 has also placed focus on maximizing ore grades to maintain strong production levels, although a slight decrease is expected in alignment with increasing mill tonnage.
The company is relentless in its efforts to optimize operations, with particular attention to resolving crusher feed issues to maximize throughput. There are maintenance plans in place to ensure the stability and efficiency of the mill operations, promising a steady production pace. Red 5 anticipates that ongoing and future exploration activities will reinforce its strategic plan for extending mine life and securing sustained profitability.
Red 5's robust performance combined with its strategic asset base has placed it at a comparative valuation advantage over peers. Assured with the current upward trend in the share price, management believes Red 5 is in contention for ASX 200 inclusion, which could further boost the company's market standing and attract investment.
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Thank you for standing by, and welcome to the Red 5 September 2023 Quarterly Activity Reports Investor Call [Operator Instructions] I would now like to hand the conference over to Mr. Mathew Collings, Corporate Development Officer. Please go ahead, Mat.
Thank you, and good morning to everyone on the call. We're doing things a little bit differently today on our end, dialing in from the Darlot Gold Mine where management has been presenting our results to the operations teams, both here and also the King of the Hills.
On the call today, we have Mark Williams, Red 5's Managing Director; along with Chief Corporate Development Officer, Patrick Duffy; and Chief Operating Officer, Richard Hay. We're also joined by our new Chief Financial Officer, David Coyne. But Patrick will speak to the results from the last quarter of the financials.
We'll present Red's first quarter results for FY '24, referencing the slide deck that was released to 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. And I'll now hand over to Red 5's Managing Director, Mark Williams, for opening remarks and our Q1 results. Over to you, Mark.
Thank you, Mat, and good morning, everyone. Firstly, I'd like to say that we're very pleased with the company's overall performance during the September quarter. This has been the second solid quarter we've delivered since we've hit the prime ore body in the King of the Hills open pit in February of this year, which was the key inflection point for the project.
As a consequence, the Red 5's share price has continued to strengthen as we continue on our focus for this year to be able to deliver safe, cost-effective and efficient ounces quarter-on-quarter. The company's market cap and enterprise value have currently held firm at over $1 billion, which is a watershed for the company and our employees, as we continue to generate cash and accelerate debt payments.
I would also like to welcome Silver Lake as a new significant shareholder to Red 5. We see this as a great validation of what we've created at the King of the Hills Hub.
Moving on to the next slide. The September quarter has been a busy period for us. with Russell Clark and Peter Johnston joining the Red 5 Board as Chair of the Board and Non-Executive Director, respectively. Whilst long-serving Nonexecutive Directors, Colin Loosemore and Steve Tombs have confirmed their intention to retire from the Board at the company's upcoming AGM in November.
I would like to acknowledge the significant contribution that both Colin and Steve have made to the company over many years of service as well as the exceptional service of our former Company Secretary, Frank Campagna, who retired during the quarter. This will leave the Board with 5 Directors, which we believe represent a good fit for the company given our size and status and concludes the Board renewal process.
I welcome David Coyne, as CFO and Joint Company Secretary; and Lisa Wynne as Joint Company Secretary, who joined Red 5 during the quarter. And I'd also like to give my heartfelt thanks to Patrick for his contribution, whilst in the CFO role.
Moving to the next slide. A key feature of the quarter has been that in parallel to our improved operational and financial performance has been our continued improvement in safety performance. This is seeing the TRIFR rates continue to reduce quarter-on-quarter, which is great to see and is, of course, an ongoing focus forever.
We produced over 55,000 ounces for the quarter and an all-in sustaining cost of $1,696 per ounce at an all-in cost of just over $2,000 per ounce. This continued strong gold production has enabled us to make good progress on our core strategy for the year, which is to accelerate our debt payment and strengthen our balance sheet. We paid $15 million of bank debt, we paid during the quarter, and improved our net debt position by $13.7 million.
Moving on to the next slide. I will now hand over to Richard, who will take us through the operational performance in more details.
Thanks, Mark. The September quarter saw all 3 mines produced consistently to supply the King of the Hills mill with the best quality ore available, which in turn allowed the mill to achieve another very solid quarter of production of 55,009 ounces that led to operational cash flows of $44.8 million.
The King of the Hills open pit mine, 792,000 tonnes of high-grade ore above a 0.5 gram per tonne cutoff or a grade of 1 gram per tonne. Whilst the open pit was producing sufficient baseload or to fill the mill for the quarter, the company took the opportunity to realign the work areas of the Stage 1 open pit to improve mining efficiencies in the future.
Mining of Stage 2A and B (sic) [ Stages 2A and 2B] starter pits progressed well during the quarter, providing some very valuable high-grade oxide ore, which is blended at 5% to 10% to assist with viscosity and throughput in the mill. The King of the Hills underground continued its very strong performance mining sub 258,000 tonnes at 1.98 grams (sic) [ 1.93 grams ] per tonne. Excellent grades from development ore in addition to solid stoping tonnages contributed to the highest quarter of grade mines since the restart of the underground. Development continues to focus on opening up new areas, including the East and Regal declines.
Moving on to the Darlot mine. The Darlot mine has continued its turnaround success with a very, very consistent production at much lower costs. Mining produced 190,000 tonnes at 2.65 grams per tonne in the quarter, including the commencement of a new low-cost bulk stoping area located in the Pedersen area of the shallow Darlot workings. The lower cost turnaround of Darlot has allowed the company to plan for additional development meters and resource definition drilling in the second half of the financial year, aimed at extending the current mine life which is now looking very positive for Darlot.
The King of the Hills mill operated for a long period at a run rate of 5.5 million tonnes per annum, significantly higher than the design of 4 million tonnes per annum. With tonnes per operating hour through these periods ranging between 680 to 720 tonnes per operating hour.
Overall, mill tonnes for the quarter was 1.23 million tonnes at a very good 93.3% overall recovery. Reduced tonnage was as a result of crusher performance, which was primarily impacted by crusher feed operations. During the quarter, management is focused on improving this aspect with the ROM pad and skyway reconfigured to improve efficiencies as well as a third standby loader to maximize time with 2 liters -- loaders feeding the crusher. The first 10 days of October have seen a marked improvement as a result of this focus and will remain so moving forward.
Moving to the next slide. The growth potential of the King of the Hills is starting to look very exciting in both the open pit and underground with multiple targets presenting. Recent grade control drilling in the Stage 2A pit included a hole that resulted in an intersection of 26 meters at a whopping 168 grams per tonne. Importantly, this zone was previously unidentified by the water-based original resource definition drilling.
Other resource definition drilling intercepts were very encouraging during the quarter, including 1 extension hole intersecting 16.5 meters at 16.5 grams per tonne targeting the Regal [ Imperial ] down plunge area. These results demonstrate that there is a strong potential to extend the underground mine life along the Regal and Eastern flanks of the ore body.
In the zone beneath the southern open pit design in blue on the slide, located on the left of the long section, there is very strong potential to deepen the pit below the current design. If successful, it should have a very positive impact on the 2- to 3-year medium-term open pit mine schedule as well as extending mine life.
Targeted deeper drilling from surface will commence in the December quarter to identify zones that can be brought into the open pit mine plan. In addition, as you can see on the long section, there are a number of underground targets below the south pit that will be tested in the future.
Finally, of note, approximately 85% of the FY '24 mine plan is underpinned by grade control drilling. This has increased the confidence level of achieving our production forecast in the current financial year and beyond. Now over to Patrick.
Yes. Thanks, Richard, Well done.
Just on to the cash flow slide, Slide 8. So in the past 6 months, we've paid off $22 million in the June quarter and another $15 million in the September quarter and in an excellent position where we've been generating positive cash flow since March in the company -- as the company in King of the Hills had some straps.
Importantly, since April, when we were able to normalize our creditor payments. And since that point in time, we are able to pay our creditors within the normal credit terms, and it's a simple story of generating positive cash and repaying debt. Pleasingly, we're now at a point in time where at the end of September, the net debt was down to $68.2 million. And importantly, going forward, we will look to prioritize all excess cash flow to accelerate the repayment of debt over the next 6 to 12 months with the objective of refinancing our project finance facility into a corporate facility in calendar year 2024.
On to the next slide, Slide 9. As Richard highlighted on Slide 7, we have seen a huge turnaround in the King of the Hills underground and now generating very good cash flow. After a difficult first 12 months of ramping up, we've put in a strong management team led by Graham Burns. And we are now 100% confident in the future of the King of the Hills underground mine. Similarly, at Darlot, it's had 2 outstanding quarters and generating excellent cash for the business. We're able to strip 30% or 40% of the cost base out of Darlot to reposition it as a lean underground satellite mine feeding the King of the Hills process plant.
And without that process plant at King of the Hills, it's difficult to see how Darlot would have continued as a stand-alone operating asset. Later in this quarter, we anticipate putting out more drilling results and a broader story about Darlot. Currently, it has a 2- to 3-year reserve life, but we anticipate that it's got a much longer mine life as a result of the rebased cost base plus the processing cost at King of the Hills and also at today's gold price results in it being a very profitable mine.
I would note that the number of analysts only put minimal value on Darlot. However, we see it as a very strategic profitable mine into the future and highlights the capacity of the King of the Hills process plant to turn marginal gold mines into a very profitable -- having very profitable future lives. I think it's a nice segue into this graph. So we've just done 55,000 ounces and had sub $1,700 costs for the quarter, and we're very confident on the guidance that we've set for this year. We feel it's cautious and conservative and confident we can come in at the top end of guidance, if not above that.
Relative to our peers on an EV to ore reserve basis, we've now valued at just over $400 per ounce. But given that reporting year mine life, the fact that it's a brand-new gold mine, large open pit, 2 additional profitable underground gold mines, we don't see any reason why Red 5 would not be valued in line with some of our peer years, in particular, Gold Road and Capricorn.
We're also confident given that the recent momentum in our share price that we are approaching sort of ASX 200 inclusion over the next couple of months and there's excellent potential for further uplift in the gold price if and when we are put into the ASX 200. On that note, I'll hand it back to Mathew for questions.
Thank you, Patrick. That's the final slide for today. Before I hand over to the operator for our Q&A section of the call, I just want to remind everyone that you can subscribe to our mailing list via our website or follow us on LinkedIn and Twitter to get regular insights as to what is happening within the company.
I would now like to hand back to the operator for the Q&A section of the call. Thank you.
[Operator Instructions] Your first question comes from Paul Kaner with Ord Minnett.
Good quarter. It looks like you're on track to deliver at the top end of guidance for FY '24. Could you maybe just provide a bit more color on how you expect processed grades to change through the year? I mean will this come down with lower grades out of the open pit?
Yes. Thanks, Paul. Richard here. The grades will be slightly down on where we had been in the past as the mill tonnes go up to hit our 5.5 million tonne per annum run rate targets. However, we will be maximizing grade wherever possible from Darlot, from the King of the Hills underground and in the open pit as well. We don't see the grades declining in any great manner, but it will be in line with the mill tonnes.
[Operator Instructions]
While we wait on the phone questions, we have one question from the webcast line. It's another one for Richard Hay from Brett at Petra. Can you outline the issue experience with the crusher and what the likely maximum capacity is for the crushing circuit?
Yes. Thanks, Brett. The challenges we've had in the last quarter have mainly been around the loader fee mechanics at the front end of the crusher. We regularly see instantaneous rates of up to 1,200 tonne per hour through that crusher. So we know that the crusher design at 6 million tonnes per annum, we know that we can exceed that significantly. What we're doing is working at the front end of the crusher to make sure that we can feed it consistently and efficiently, and that's been the main focus in the last quarter. Hence, the third standby loader to ensure that we always have 2 loaders to feed. And also, we're working on the abilities of the loader operators to ensure that the material is the right size and reduce the number of blockages that we have incurred.
A follow-up question from the line. Is there any more detail on the plant maintenance through the quarter and what our plant maintenance is for the second quarter of the year?
So we have a mill reline shutdown next week. It's the full shell, approximately 4.5 days for that one on the mill. And then the next one, big next shutdowns in February next year. And we anticipated that February shutdown should extend us through to the very end of the financial year and aiming to try and get it into the next financial year.
I think we've addressed the 2 webcast questions that we've received during the call as well now. So we'll finish the Q&A section. And on that note, on behalf of management team, I'd like to thank everyone who's dialed in for today's results and for the questions asked, and we look forward to updating the market on our full year results -- or our half year results and quarter 2 results in due course. Thank you. And operator, that ends today's call.
Thanks, everyone.
Thank you.