Markets into 2022?, page-5

Garimpeiro would be wasting everyone’s time if he tried to predict the next move in the US gold price.

It what it is, and it will be what it will be, as the tug of war between taming inflation and supporting economic growth plays out.

But what he does know is that the gold price in Australian dollar terms is actually up in the last 30 days, and at a smidge over $A2,550/oz, the Aussie industry does not have much to complain about.

Souring sentiment on gold in 2022 because of the coming interest rate hikes has nevertheless taken the shine off Aussie gold equities in recent days. But that’s not to say local gold equity opportunities have gone sour as well.

While things remain jittery in the gold space, Garimpeiro reckons a focus on Aussie developers close to making the transition to producer status – at a time of historically high local gold prices – might have its rewards. It is all about the re-rating that comes from making the transition.

RED 5 (ASX:RED): Trading at 26c for a market cap of $600m. Looming first production from its King of the Hills (KOTH) gold project near Leonora in WA stands a major re-rating event for the company.

Somewhat remarkably, given all the bleating from the WA gold industry about cost pressures and COVID-related impacts, the $226 million project is on time and budget to achieve first gold production in the June quarter.

Red 5 is already a producer from its Darlot operation (62,000-72,000oz forecast for FY2022, with the operation to eventually become a source of satellite feed ore to KOTH, some 80kms to the south).

KOTH is at another level. Its production is due to crank up to 176,000oz annually in the first six years of an initial 16-year mine life, with life-of-mine all-in sustaining costs estimated at $A1,415/oz.

The feasibility study for the project was based on a $A2,500/oz price assumption which is pretty much where things now stand.

On that basis, annual earnings (EBITDA) of $166 million were forecast. Make that $96 million if gold were to fall away to $A2,000 an oz. Either way, the earnings potential is impressive for a company with a $600m market cap.

Assuming a successful commissioning, and the production targets and cost profile being hit, Red 5 will quite rightly be putting its hand up for a major re-rating of its market value.

Now add to this commentary, that of Goldmans Sachs, who have raised their December 2022 gold price prediction to US$2100.
But worse case analysis of A$2000/oz which is 0.8 of todays A$2500 which means a US$1440 ( 0.8 x US1800 ) shows how robust the KOTH project remains even in a gold bear market. Moreover, the production levels quoted in the above analysis are the very conservative figures in the FFS.
With the addition of Darlot ore sources, production is planned for an increase from 4mtpa to 4.7mtpa, which requires no further changes to KOTH, but management has alluded many times to the KOTH potential for 6mtpa inherent in the plant design and the installation of many components necessary as we speak .... so, as I said many times, RED's bad times are past and the best of times are imminent. RED remains as safe sound secure investment with upside potential ... even if an inexplicable gold market emerges. Clearly, in a gold bear market, the pressure for M&A will markedly increase and RED and SLR will be among the most desirable of dance partners.