Fundamental Valuation

Just wondering what people are thinking about this stock. Any reason that it is trading at such a discount? Is it simply the production downgrade? Or because markets are bearish on the gold price? Do people have a problem with management?

I’m convinced that they are going to be a great long-term bet. Soon they will lock in financing for KOTH. Gold miners typically trade 5-8x EV/EBITDA, RED5 are currently at 6.7x EV/EBITDA, even with their growth story. The development of their mine is highly likely at post-tax IRR of 64% and as such stock is not priced appropriately. They have a backable feasibility study and are already developing mine expansions. Net debt is ($70m).

If they are at year 1 production, 3x current production, in mid-CY22. This will move their EBITDA from ~$44m LTM, to ~$190 run-rate conservatively as the new mine will have a much lower AISC to mine and some scale effects. If you build some scenarios around the gold price for this and I’m still pretty confident. In a world where they don’t pull off mine expansion it tanks but in the world where they achieve the mine build-out I see a EBITDA multiple at say todays 7x and you can do the math on TSR (5-6x in this scenario). So look I think there’s a lot of room to move here for the gold price downward, but I kind of believe I will do at least ok. Seems like a good story right?

Figure1: AUD gold prices could come off 15% and project still has a pre-tax IRR of38%

Figure2: Today St Barbara has a 3x market cap on RED, and Westgold a 2.3x