Ann: Sprott facility drawdown , page-8

Investment Perspective

The commissioning and ramp up at Siana has been problematic for RED, with
remnant silt following the de-watering of the open pit impeding access to ore.
With these issues now largely resolved, we expect production and operational
cash flow to improve significantly going forward.
There has been no less than seven M&A transactions in the ASX gold sector in the
last two months, and the recently announced agreed takeover of Philippines
focused CGA Mining by TSX-listed B2 Gold is a vote of confidence in the country.
Given the operational and share price underperformance to date, and the deep
discount the shares currently trade on, could RED be the next gold sector
takeover target?
Investment highlights

• Remnant silt in the open pit at Siana has taken to longer to remove
than originally expected, and as such, we expect the Company to revise their
FY13 production guidance. We have reduced our production estimates for FY13 to
52,623 oz (down from 73,727 oz).
• With almost all of the silt in the pit now removed, production and
cash flow is expected to show significant improvement going into the DecQ as ore
volumes and grade to the mill pick up. At the same time, recent managerial
appointments should help improve the performance of the mining contractor as the
Company ramps up production towards steady state levels.
• While RED’s current funding position is tight, the prospects for
much improved operational cash flow combined with the likely drawdown of the $8m
Sprott working capital facility should now start to alleviate financing
concerns, which along with operational issues have been weighing on the share
price.

Target revised to $3.00; SPECULATIVE BUY maintained

With the revision to our FY13 production and cash flow estimates, we have
reduced our Net Asset Valuation (US$1,600/oz, AUD=USD1.00, 6% discount rate) and
target price to $3.00 per share (previously $3.20 per share). Low earnings
multiples (FY12/3 EV/EBITDA of 4.1x and 2.3x respectively) and a P/NAV of only
0.49x support our investment case for the shares. We maintain our SPECULATIVE
BUY recommendation.