red alert

Reality behind super bull's Red 5 alert

BARRY FITZGERALD

November 23, 2009 .

Charlie Aitken at Southern Cross Equities has declared himself a super bull on gold. "Peak gold is a reality; buy Newcrest and Lihir today,'' Aitken said on Friday.

But Garimpeiro's interest today is in the final item in Aitken's Friday note on Perth-based Filipino gold group, Red 5 (ASX: RED). It was described as a highly leveraged call option over ''peak gold'' and was recommended as a buy up to 16c - a level Red 5 got to in a hurry on Aitken's note doing the rounds.

Friday's 2.5c gain to a closing price of 16c prompted a speeding ticket from the exchange, Red 5 mentioning, among other things, the recommendation from Southern Cross.

As luck would have it, a fuller explanation for the interest is expected this week with Red 5 expected to get the all-important regulatory clearance from Filipino authorities to develop its flagship Siana gold project.

In its response to the speeding ticket, Red 5 talked about the approval being close. The word out of Manila's mining circles on the weekend was that the required government orders to begin work on developing the $US72.5 million ($79.3 million) Siana are now in hand.

That means that once Red 5 secures financing, Siana will be on its way to becoming a producer by the March 2011 quarter. Based on an initial mine life of 10 years, with 850,000 ounces of gold produced, Siana is set to become a low-cost producer with expected costs of $US350 an ounce.

Assuming a $US1000 gold price, Siana is said to have a net present value of some $US252 million and an internal rate of return of 55 per cent. That's all very interesting for a company with a market capitalisation of $105 million, less $21 million in cash.

And while Southern Cross's Friday recommendation was to buy Red 5 at up to 16c a share, its net present value and target price for the stock was 27c, using a long-term gold price of $US850. Plug in $US1100 an ounce and the NPV becomes 35c a share