red investment outlook, page-5

Hi Talktome, and thanks for your query, of course I am a bit biased, but what it does allow me do is expand on some more facts about investing in gold stocks, not necessarily RED.

Firstly, I do need to explain a few basic facts about valuation, so I do apologise if I am telling you to suck lemons, its not my aim, but its necessary to fully explain my view.

Any gold producer or would be producer has some fundamental value imputed for them, based on their particular production profile, and theoretically any valuation should be based on a discounted cash flow valuation on the reserve schedule. This is done for all gold stocks (and all other resources stocks too, and as for any industrial stocks too but using slightly different criteria of course!).

In the case of any resource company having any less than a reserve (eg in the case of a company with an "inferred resource") the discounted cash flow is not a reliable indicator to value, but attempts are made to "cover up" the less than reliable estimate by using some form of discount factor (different to the discount rate applied for an NPV valuation) eg discounting the imputed value by say 90% to cover the inferred resource risk etc.

In the case of RED, the basis of the valuation is predominantly on probable reserves (which derives from Indicated Resources with economic and technical factors applied), which are considered acceptable for cash flow analysis - banks use that category of reserve for their own cash flow analysis when they develop production profiles and repayments.

[The highest reliability of course is always the Proved Reserve (from measured resources) but normally the measured resource category is less frequently attained due to the higher level of cost incurred by more intensive drilling of the resource. Most companies rely on the Probably Reserve, similar to RED.]

ALL GOLD PRODUCERS have an imputed valuation based on the discounted cash flow, and that I am aware in normal investment times (the GFC recently past was not normal!) ALMOST EVERY GOLD PRODUCER has a market value IN EXCESS of the FUNDAMENTAL VALUE CALCULATED by discounted cash flow analysis!!!

That means, that once a gold producer has a production profile established, and the risk of development etc has been taken out of the equation, then the market cap is most of the time considerably MORE THAN the fundamental value.

THIS WILL APPLY TO RED AS WELL!!!

As good examples of how a gold stock can run far IN EXCESS of the imputed valuation, Newcrest, the largest ASX listed Australian gold stock, is currently trading at a 30 times PE ratio! That is huge.

Another example, close to RED's home, is Medusa (MML), which has currently got a market cap of greater than $700 million, but its still being rated as a BUY in the market -its reserve base is in fact LESS than RED's base, but then it has a lower cost of production (for the next 3 years of each company's history).

So why should you consider investing in RED when its target is only 130% (by your calculation) of current share price. Well, because its discount at present does not allow for the fact that once closer to production (and the risk of whether or not it will produce) is factored into the share price, THEN RED is likely to trade at a premium to the fundamental value - that is why I suggest as an indication of the potential, that MML is about 7 times of share price on a similar reserve base in a similar production area of Mindanao - that means RED could potentially move up towards $1.00 once the announcements are out there!!!

And Mapawa, its the most important upside to the overall blue sky value that RED has at the moment.

But also, don't forget that RED has a considerable Inferred Resource base still at Siana, in the underground section of the project. This will add to overall value once production starts and potential resources are turned into real reserves!

To invest in RED enables you to enjoy both an exposure to the gold price if it continues to move north, also to the slowly removing discount factor to fundamental value once the risks are slowly removed from the project, and also to the premium that ALL gold producers traditionally enjoy in a normal market!