Ann: March 2023 quarterly presentation, page-38

An all scrip takeover of RED by NST at 1 NST for 35 RED, on the face of it, looks a little improbable but could actually be plausible. Maybe not as an initial bid but perhaps as a final bid to blow away any potential counter-bidders.

Strategically, a takeover of RED would be a great consolidation of the Leonora precinct for NST (already a major player in the area).

Financially, although they'd have to absorb around $175m of RED debt, the extra shares they'd have to issue would result in their Balance Sheet being less geared than it is at the moment. NST's current share price is as high as it's been for a while so that may encourage them to use the scrip for takeovers - particularly for goldminers whose share-prices are a bit depressed at the moment.

Issuing 100m odd new shares to buy 3.5bn RED shares would increase the NST's shares on issue by about 8.7%.

If we're prepared to put down RED as a 200,000 ounze a year operation with an AISC of $1,750, this compares with NST's current year forecast of about 1.6m ounzes per year at an AISC of about $1,750 (though their production is forecast to grow in future).

A takeover of RED at this point would add about 12.5% extra production to NST for an 8.7% increase in shares on issue. Earnings per share would rise in this scenario.

RED does have hedging and a $175m debt but these will all run off in about 3 years. With a 16-year forecast mine life, this leaves the KOTH operation debt and hedge free for 13 years (plus any extended Life of Mine which could come about from additional future discoveries).

If NST were to spend around $30m cash (without pushing up the RED share-price too much), they could pick up just under 5% of RED on the quiet in the near term as a platform to launch a bid. That'd slightly reduce their ultimate average price in a future successful takeover bid but slightly increase their gearing.

The question boils down to what response would come from the Smorgons' entities. They're already on record as saying they see NST as a good investment and already own shares in the company. Would swapping their RED shares for about $140-150 million worth of NST shares deliver them with what they consider an adequate return on their investment in RED?