RED 5 Investment OutlookGold Equities Pushed Up by Increasing...

RED 5 Investment Outlook

Gold Equities Pushed Up by Increasing Demand for Exposure to Gold Price

There has been a considerable increase in the interest by investors in gold stocks, including RED, and this is likely to continue, with the majority of market commentators suggesting that gold is likely to continue in its move upwards in the short to medium term, due to various factors such as:

1. Continuing weakness in the US dollar (and a weak outlook due to ever increasing debt levels and increasing money supply);

2. A shift into negative supply vs demand over the past 8 years – “peak gold theory” that suggests that gold will be increasingly harder to find and produce as costs of production and exploration increase, gold ore grades decrease and demand increases in the bigger countries such as China, India. Since peak gold production in 2001 gold has supply worldwide has reduced 9% in 2008, from 2,350 tonnes to 2,140 tonnes!;

3. Reduced availability of gold from Central banks and the IMF – heightened by the substantial purchase of 200 tonnes of gold by the Indian Central Bank announced a couple of weeks ago, at a time when IMF had already indicated a reduction in its sales outlook and a likelihood that the Chinese Central Bank was expected to become involved in a substantial purchase – china currently only holds 1.8% of its total US$2 trillion foreign exchange investments in gold - (China purchase of IMF holdings may still happen and could potentially sharply increase gold price AND demand!);

4. As a corollary to 3 above, an increasing concern by China and other major economies to divest its large investment portfolio out of US currency into asset classes with a more positive and stable intermediate outlook, including gold;

This list is not exhaustive, there are other factors also seen to be affecting the outlook for a continuing increase in the price of gold beyond those listed above!

RED Basic Facts

Most on the RED thread will already be aware of the main aspects of RED5, but at the risk of boring some I will list a few basic important elements:

1. RED has completed a Bankable Feasibility Study (BFS) for its 90% owned Siana gold project, located in a historic and secure location in northern Mindanao in the Philippines. This BFS confirms viability based on a resource inventory determined using resource outlines and a US$650/oz for a Whittle pit optimization study, with the BFS using a base case of US$800/oz gold price. That BFS enables a discounted cash flow analysis that confirms an NPV of US$251 million at a gold price of US$1,000/oz, internal rate of return of 55%, and with the gold price now at US$1,150 those financial statistics have been considerably enhanced.

2. Siana is a long life (at least 10 years) mining operation, based on a start up open pit (requiring a dewatering of the old pit area that is now fully submerged – this is usual practice for opening of old pit operations being deepened), followed by development of an underground phase of operation at higher ore grades. Capex is estimated at US$62.5 million including contingency. The operating cost estimate averages US$351/oz, and the total gold produced for the BFS is 975,000 ozs gold (plus 1.88 million ozs silver) over the life of the mine. Ore processing is stock standard for the gold industry, with no big issues and gold recovery is assumed to be in the mid 80’s life of mine.

3. RED has completed a number of milestone achievements in the past 6 months, that have progressed the likely development of Siana, and the outstanding requirements prior to a development announcement are expected shortly, including:

a. Notice To Proceed;

b. Offer of Finance (anticipated to be a mix of debt and equity) with an aim to minimize hedging requirements under the debt facilities to maximize the projects leverage to an increasing gold price.

4. RED has also finally been granted MPSA status for its Mapawa project located some 30 kms north of Siana that has two targets,the first being a shallow gold resource, possibly containing around 3 – 4 million tonnes at grades between 1.5 – 2.5 g/t based on historic drilling by others. This could add approximately 200,000 odd ozs gold to the inventory for Siana gold production, and also would enable further simplification of mining when underground development commences. The second target is a substantially bigger resource, possibly containing both copper and gold mineralization that may underlie the gold cap already drilled. This second target potentially exists to substantial depth, maybe 1 km and could conceivably hold many hundreds of millions of tonnes of lower grade copper/gold resource.

5. Commencement of exploration activity at Mapawa has been scheduled for this current quarter (Oct –Dec 2009), but has yet to be announced – drilling of up to 6 holes has been planned based on field work, especially historic work, carried out to date.

RED Public Relations and Research Reports

Whilst there has been an indication of an intention to increase the level of PR by RED in recent times, most RED shareholders are of the view that this is yet to fully occur – certainly there has been only limited updates provided by RED to the market other than those that have either been forced on the company due to speeding tickets (thank you ASX for extracting that information for us) and regulatory quarterly reporting.

But it is clear that BEHIND the scenes, RED clearly is putting considerable ground work in place. We have now become aware that in fact meetings have been occurring with overseas investment groups located in London, Hong Kong, Singapore, and these have been supported by brokers at Southern Cross Equities (SCE) and Petra Securities (Petra).

SCE has published a research report for its own clients (and presumably also made available to those overseas investment groups) that recommends RED as a speculative BUY with a target price of 27 cps, and upside target of 35 cps (based on a US$1,100/oz gold price), and suggested that RED is the best leveraged exposure to a rising gold price within the small cap gold companies based on its low operating costs, its current low market cap and high sensitivity to gold price (remaining completely unhedged at present).

SCE also summarises particular factors about RED’s Siana gold project:

1. Significant production averaging 85,000 ozs for 10 years;

2. Low operating costs;

3. Valuation potential upside to 37 cps if secondary by-product zinc is included in the process circuit;

4. Excellent exploration upside at Mapawa (NOTE: Mapawa has been valued at ZERO for valuation purposes of RED);

5. RED has $20 million cash at present;

6. Siana mine approvals expected soon;

7. Financing getting close;

8. Country risk is not considered high in this part of the Philippines;

RED has also been recommended as a BUY by Wise-Owl, and The Bull.

Petra Securities may also have provided research, but that has not been made available to the retail market that I am aware of. I certainly have not seen anything published.

RED OUTLOOK

Clearly RED has gathered investment momentum very slowly, and there is a growing groundswell by the market to accept that things are about to happen. While RED has increased in share price, this is nothing compared to what may happen when the company finally announces some positive news about:

1. Notice to Proceed;

2. Finance Approval;

3. Mapawa Exploration Drilling Commencement.

All these milestone announcements are expected in the next couple of months, and each has the potential to substantially increase the move towards fundamental value, and the realization that RED is progressing towards producer status.

RED remains substantially discounted to fundamental value, and it is clear that the price outlook for RED is very exciting even compared to where RED has been in the past few months.

Also to consider, any investment group (such as a new entrant overseas in London for example) seeking to get a strategic holding in RED will have to take up a substantial holding (currently there are 659 million shares on issue), probably no less than 5% of the company (representing 33 million odd shares) – this suggests that even Friday’s 22.8 odd million shares traded is nothing compared to what may happen as the market continues to re-rate the stock.

With the gold price increasing on Friday night (US time, to US$1,151/oz) its is possible that the daytraders hopes of RED sliding back to 14 cents may evaporate at the open on Monday morning . . .

IMO RED will trade up at the open, but even if it doesn't, that is just the first few minutes in the next history of RED, and that history will be characterised by a considerable re-rating by the market to its fundamental value (my own discounted cash flow analysis suggests it should be more like 40cps excluding Mapawa valuation which is yet to be established! IMO if I didn't already have a holding and wanted exposure to the gold price then I wouldn't be waiting for it to slide back to 14 cents!

Go RED Go ...