beatle ramblings from afar

i'm sure beatle won't mind if i copy his posts from elsewhere, and i hope HC doesn't object

from last cuppla days...........

Ramifications of MCC Acquisition

The announcement yesterday of RED acquiring Merrill Crowe Corporation (MCC) is one of THE greatest milestones achieved by RED over the past 12 months IMO. Whilst the broader market may not appreciate the subtleties of the acquisition, the ramifications are far-reaching and extremely positive:

1. Until this transaction occurred RED was not the registered owner of the Siana MPSA with the Philippines Mines Department. It had held its interest via a legal contract with MCC, its joint venture partner up until the acquisition. NOW RED holds the registration of the Siana MPSA IN ITS OWN RIGHT (via the subsidiary MCC).

2. RED has made all (100%) cash contributions (exploration plus development and budgeted for 100% of future capex) assuming it will get 90% equity in Siana now it owns 100% of Siana via its Philippine corporate structure.

3. The project financing probably required RED to be the primary sponsor for 100% of debt funds despite it only getting 90% of cash flows, now RED gets 100%. Thus now on the debt side of funding the development at Siana RED has much stronger repayment and debt servicing capability. IF the project finance before was ever in any doubt, this acquisition will remove that doubt, and its more likely now with reasonably enhanced commercial terms.

4. Previously RED held 80% of Mapawa, now due to the acquisition of MCC RED owns 100% of Mapawa, and similarly previously held its interest via the joint venture with MCC, but now holds direct ownership via MCC subsidiary.
These points will all be considered substantially more favourable by banks wanting to fund the Siana development via the debt, and will similarly considerably enhance its attractiveness for investment by institutions otherwise concerned about ultimate ownership of Siana and Mapawa.

These changes will have a profound positive affect on RED for the future of mining activities as well, being its own boss in terms of how it develops the operations at Siana on a professional basis, without any interference from what otherwise would have been a joint venture partner (who has had no previous mining experience whatsoever).

Is the Acquisition Price Fair or Dilutionary?

I have looked at a number of differing gold price scenarios on a pre- and post-acquisition basis (in the range of US$1,000 US$1,200, currency exchange rates $0.87 $0.935) and can confirm that the acquisition price for just Siana alone at the increased equity is commercially more attractive to RED5 and the other shareholders of RED (each scenario provides an increase in NPV for RED), thus the acquisition is NOT DILUTIONARY.

IF Mapawa has any value attributed to it (currently no value is assigned in broker valuations of any significance) then the acquisition is a considerable plus, bearing in mind that its equity increases from 80% to 100% to RED.
IMO the only thing that has held RED back from achieving its indicated NPV for Siana has been the outstanding issues remaining to confirm development of the project. This announcement today removes the majority of that doubt about development, and yesterdays slightly positive share price move suggests it is likely to move further towards indicated NPV value. Based on the current gold price of US1,150 and $0.925 exchange rate, and with the changes in shares plus cash involved Siana value to RED share price equates to, based on 10% discount rate:-

33.5 cps

At the time of first production RED should trade ABOVE the indicated NPV valuation! (This happens to ALL gold producers with long life, low cost operations).

IF Mapawa shows promise, then value assigned to it will increase RED valuation beyond the indicated NPV valuation (of 33.5 cps currently).
Thus the acquisition announced yesterday is very a very positive one, with a very acceptable cost to RED and removes any doubt about future development of Siana.

The ultimate owner of the 40 million shares clearly is another issue to be considered, but the fact that there are escrow provisions to the shares limits any immediate downward (ie selling)pressure on the share price, and clearly at a time when RED remains severely discounted to its DCF valuation, is unlikely to present any significant risk at this time or the intervening period up to production (or a significant re-rating in share price, whichever is the earliest event).

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Mapawa

The first hole announced by RED for Mapawa is staggering, with a 189 metre intersection of 1.0 g/t!!! This is WAY above the grades normally encountered on these huge porphyry deposits that have made BIG money in the past for major companies. The value of these large gold-copper projects is valued in the billions, and usually well outside the reach of small market cap companies if a small market cap companies identifies one then either it gets re-rated immediately, or will be the subject of a takeover by a major company!

If you look at REDs announcement re Mapawa and consider the big porphyry operations currently in production such as Batu Hijau you will realize that these are the THE BIG money earners for major companies:

Batu Hijau (48.5 % beneficial interest to Newmont). Newmont has just sold 7% of equity in the project for US$247 million (1% = A$38 million at an exchange rate of 92.5 cents!!!).

Batu Hijau 2009 production forecast to produce 500 million pounds of copper and 525,000 ozs gold, and was amongst Newmonts lowest cost producing assets.

Batu Hijau (last published resources) total 1.01 billion tonnes at 0.37 g/t Au, 0.48% Cu.

Cadia (100% Newcrest, NCM).
NCM has just announced development of Cadia East, at an estimated capex of A$1.9 billion, to produce annually around 700,000 800,000 ozs gold and 75,000 100,000 tonnes of copper for the first 10 years of production, with cash operating cost around A$100/oz!!!

Cadia resources total 2.347 billion tonnes at 0.44 g/t Au, 0.28% Cu.

Potential for Mapawa:

The geophysical anomaly delineated by RED for Mapawa has a diameter of 900 metres, and commences at a depth below about 150 metres vertical. The first hole has confirmed that the anomaly points to a porphyry lithology that is analogous to the mineralized Boyongan prospect owned by Philex (where in excess of 100 million tonnes of likely economically viable resources exist and are now in the process of an economic feasibility study). Above this anomaly at Mapawa, there is an established resource (drilled by Suricon to a depth of 100 120 metres) that indicates a gold enriched resource totaling around 3 4 million tonnes grading 1.5 2.5 g/t Au is likely this will be an extremely high grade sweetener to any large gold/copper processing facility being developed by RED for Mapawa.

Of the 900 metre diameter target zone to a large deep mineralized porphyry, the first hole has intersected above average porphyry gold ore grade mineralization to a depth of 450 metres. This suggests that the potential for a large mineralized porphyry, of grades analogous to Batu Hijau and Cadia is possible, with tonnage around 500 million tonnes possible.

As a back of the envelope calculation (and subject to many other considerations and skeptical critics!) to keep things in perspective with the value assumed for 7% of Batu Hijau (and assuming development cost at 50% of Cadia development, say A$1 billion for Mapawa), this would suggest that Mapawa valuation has the potential to be ascribed at something like:

Back-Of-The-Envelope Valuation for Mapawa when developed A$38m/2 per 1% = A$1.9 billion (ie assume total Mapawa resource 50% of Batu Hijau)
Less Capex A$1.0 billion

Net value to RED (100%) = $900 million

ie 91 cps

To be conservative if we DISCOUNT this value by 90% to this potential we get 9 cps

Thus RED valuation potential:

Siana 34 cps
Mapawa 9 cps (90% discount)
Other Cash 2 cps
Total RED Value 45 cps

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Share volume for RED has been extremely high, and very pleasing, based on the move upwards 2.5 cents from 16.5 cents to 19.0 cents, with just 15 minutes to go. It demonstrates that bigger insto's and large traders are now on board, but the irony is that IF those selling considered what has just been announced to the market regarding Mapawa, they may regret their disposal of shares.

Currently RED is completely discounted, about 50%, of the indicated discounted cash flow basis, for the Siana gold project (around 1 million ozs production to be produced over a 10 year life span with a low US$351/0z operating cost). Indicated share value based on Siana alone is 33.5 cents based on the current gold price and exchange rate.

Mapawa, based on the first hole, has demonstrated its potential to grow into a huge porphyry project, with potential to be a major low cost producer, maybe of many millions of ozs of gold, based on the first hole and the indication that the second hole is similarly heavily mineralised and at a similar depth (and more visible sulphides logged on that second hole) to the first hole. That suggests that the porphyry system is large and likely to hold a large bulk tonnage of good gold grade ore. It has already been described as such by RED in a prior announcement to the ASX, referring to "The anomaly
has characteristics typical of many porphyry style (bulk tonnage)
mineral systems." in the announcement of 25 Jan 2010, and that there is a large sulphide component, with "The diorite hosts variable quartz veining and sulphide mineralization, predominantly pyrite but also minor zinc, lead and copper sulphides."

It suggests to me that Mapawa could in fact become the centre of attention of investors soon, with the announcement of the second hole assays in about 2 weeks, and the third hole being targeted to a depth of 800 - 1,000 metres! And the fact that RED is about ready to announce the project financing for Siana suggests that there is plenty of positive news in the pipeline that could push the share price way above its highly discounted 19 odd cents today.

The attention on Mapawa is likely to draw the interest of gold-copper majors, and with RED being highly discounted at present may become an attractive target by various resource groups!

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Hi Morton_Mains, very happy to see your post, and by the way I am trying to work out why I am banned so please feel free to copy/paste anything I say here to anywhere else you see fit (hmmm!).

I agree with you, that the volumes are fantastic and I can only say that my thoughts previously about a share price mid-30's is now long gone, its going a LOT higher!

The reason why the price increase yesterday I believe is due to the main insto's involved are trying to work it along slowly, for a few particular longer term objectives - they want to wear out any longer term holders plus any smaller parcels by short sighted insto's at current levels. But I think the main consideration is that there are now another 40 million shares due to be issued soon, and whether they are longer term holders is questionable - maybe the main insto thinks they can take them out around current prices if they are patient. As a result I think you will see a bit more of the playing games with the share price before advancing further, but as was demonstrated yesterday that there are BIG guys in there now so the weight of considerable funds being interested will push this much higher in the short term even!

I agree that the porphyry grade of gold is excellent but actually characteristic of this province, and is a good omen for the future holes. Seems to me that if we get another good hole announced in the next 2 weeks (hole 2 as RED suggest) then maybe the price will naturally move up a lot more soon!

I did notice also, via a copy of the RED announcement that was forwarded with a message by the Chairman of RED, his comment ...."Folks, The first hole at Mapawa delivers economic grades by typical porphyry deposit standards, and with elevated gold which could attract the attention of gold majors as well as the base metal majors."

This is quite an apt point, that it could attract the gold/base metals majors, and if that occurs then there might be some very interesting positions being taken by large companies. In that regard, "Tokyo's" prior observation about the Chinese being a possible buyer of RED is very relevant - remember that Tokyo first pointed us RED observers to the fact that the biggest gold producer in china had moved into Philippines looking for acquisitions, and within about 1 week had announced the deal with Tampakan! So Tokyo's comments are more interesting now with Mapawa a real project!

As i said above Morton-Main, please feel free to distribute anything I post more widely if you think its relevant, especially the post about the acquisition of Merrill Crowe Corporation, which must be considered very positive going forward!
Regards
Beatle

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RED share price looks weak today, then all of a sudden there are 13.5 million odd shares traded at 1.5 cents down from yesterday. It was a cross sale, so that means maybe a big holder putting them into a more suitable associated entity. I wouldn't be surprised to see the share price strengthen now, clearly that buyer/seller was setting up the market for that cross trade!

In the short term I can see RED moving back up, no one in their right mind will allow a company, with a DCF on its Siana project of 33.5 cps, and now with Mapawa (valued at anything upward of 9cps) plus excess cash 2 cps (ie total value now about 44.5 cents) languish at 18 cents for too long - there are too many reasons now why RED will be moving up in a hurry, soon!