carrying values

The accounting test used to determine a carrying value takes a company net present value (NPV) of the cash flow model. When there is uncertainty, auditors will always push for the most conservative treatment to be taken.

Red has a firm open pit mine plan and a definitive feasibility on the underground which will be used to model future cash flows.

So in the current situation where the open pit life has been reduced by 74koz the profit and cash flow associated with those ozs goes from something certain because they were in the open pit mine plan to something less certain because they will be mined partly/mostly/fully from underground.

The issue for carrying value is that the underground DFS is a point in time study. Until this is formally changed (with a DFS update or new study), you can't just assume anything about increased cash flows from ozs which were previously assumed to come from the open pit that will now be in the underground.

So in effect the profit and cash flow of 74koz is gone from the perspective of carrying value calculations.

On top, the auditor (and board) may have assumed a low gold price to determine carrying values, this will further reduce the theoretical value.

As I said before however, the fact the new carrying value is circa $160m is indicative that using a model which takes actual company operating forecasts, current prevailing (or likely lower) gold prices and conservative assumptions shows a net present value for the project of $160m+. This is encouraging, but not surprising.

Remember that carrying value doesn't subscribe to exploration upside, potential future cash flow or similar. Red has this everywhere and in my opinion it will create a whole lot of future cash flow so I see $160m (20 cents a share!!) as very much a baseline - just the starting point.

Red 5 is cheap, very cheap. Now they are delivering, shareholders ought to see this value gap close.