Red 5's Transformational Journey to Become a Mid-Tier Gold Producer

Western Australia-based Red 5 Limited (ASX: RED) has undertaken a remarkable journey over the past 6 years to transform from a junior gold explorer to an established mid-tier producer generating strong cash flows. Red 5 acquired the Darlot and King of the Hills gold mines in the Leonora region of WA in 2017 for A$35 million and has developed them into operations forecast to produce 195,000-215,000 ounces per annum at low costs.

Large Scale, Low-Cost Mine with Exceptional Growth Potential

The centrepiece of Red 5's transformation is the King of the Hills (KOTH) mine, located 100km from Darlot. KOTH was acquired as a high-grade underground operation but exploration success has unlocked the potential for large-scale open-pit mining. An A$170 million investment in a new 5.5Mtpa processing plant at KOTH was completed on time and within budget in 2022.

KOTH now comprises a modern plant processing high-grade ore from both open pit and underground sources. The open pit is vast, measuring 2.3km by 1.2km and over 400m deep. Mining is progressing through a series of staged cutbacks that will extend through to 2037, with each stage representing a substantial standalone mine. Ore grades are exceptional, ranging from 1.5 to 5 g/t gold.

The sheer scale of KOTH provides Red 5 with an extraordinarily long mine life. Mining of the first two stages alone will continue until 2030, with total open pit mineral resources containing 15 million tonnes grading 2.2 g/t gold. Outstanding exploration results also indicate significant potential to further expand the open pit over time.

The 1.5km long underground mine is open in all directions and continues to deliver high-grade ore as expected. Ongoing underground exploration is likely to extend the mine life beyond current estimates.

Darlot - Providing Additional High-Grade Ore

The Darlot underground mine, 100km from KOTH, continues to perform well after benefiting from a A$60 million investment in new infrastructure. Recent development and exploration have opened up new mining areas and extended mine life to at least 2025. Ore mined at Darlot is trucked to KOTH for processing, providing additional high-grade mill feed.

Low Costs and Strong Cash Flow Generation

The scale efficiencies and favourable ore characteristics across both KOTH and Darlot enable low processing costs of around A$14/tonne - a key strategic advantage in the region. Together with low-cost gas and solar power supply, Red 5 is forecasting extremely competitive all-in sustaining costs (AISC) of A$1,850-2,100/oz.

With KOTH now in full ramp-up mode, Red 5 achieved record gold production of 62,000oz in the June 2022 quarter. This impressive result demonstrates the cash-generating potential of Red 5's rebirthed operations. The company is firmly focused on accelerating debt reduction to further strengthen its financial position.

Significant Exploration Upside Across Extensive Tenements

Beyond its current operations, Red 5 controls extensive exploration tenure around KOTH and Darlot covering highly prospective ground. While remaining focused on mining operations in the near term, Red 5 plans to ramp up exploration spending in 2025 to pursue substantial organic growth opportunities within its portfolio.

Investment in Red 5 Offers Leveraged Exposure to Gold

In summary, Red 5 presents a compelling investment case combining low-cost production, long mine life, excellent cash flow and significant upside potential. The company's dominant tenement position within a Tier-1 gold province provides outstanding leverage to the gold price. Red 5 currently trades at a substantial discount to peers on traditional valuation metrics, indicating potential for strong rerating as the ramp-up at KOTH continues to deliver. For investors seeking leveraged gold exposure combined with low-risk production and cash flow, Red 5 warrants serious consideration.

A compelling investment case for gold investors

• Large scale, low-cost production - The sheer size of the KOTH open pit combined with favourable ore characteristics enables low all-in sustaining costs forecast at A$1,850-2,100/oz. This provides strong leverage to the gold price.
• Long mine life - With staged open pit mining extending to 2037, and underground potential beyond that, Red 5 has a multi-decade pipeline of production and cash flow ahead of it.
• Strong cash flow generation - With costs under control, Red 5's production profile should generate robust free cash flow, especially if the gold price rises. This gives Red 5 financial strength.
• Significant exploration upside - Red 5 controls extensive exploration ground with demonstrated potential to expand its resources and extend mine life. This provides upside potential.
• Undervaluation - Trading at a discount to peers suggests Red 5's shares may be undervalued relative to its assets and potential. Rerating could occur as operations continue to ramp up successfully.
• Leveraged gold exposure - All of the above combine to give investors leveraged exposure to the upside in the gold price, which many expect to rise over the coming years.

In summary, Red 5 offers an attractive risk/reward proposition, with low risk production and cash flow funding extensive upside potential from exploration success, mine life extensions, and the gold price. For investors seeking gold leverage, it appears to tick many boxes.