How the $226m King of the Hills development will make Red 5 a mid-tier gold miner in 2022
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Back in 2017, when Red 5 bought the historic King of the Hills mine in WA from Saracen Mineral Holdings, it was supposed to be a high grade add-on to the mill it bought from Gold Fields around 100km north at Darlot.
While Darlot was a grand old operation that had continuously produced almost 3Moz of gold over three decades, King of the Hills had largely been a high grade satellite underground operation for St Barbara and Saracen since its life as the 1.65Moz Tarmoola open pit ended in 2004.
At that point it had the misfortune to be in the portfolio of Sons of Gwalia, which also owned the Gwalia gold mine 30km to the south, on the doorstep of the northern Goldfields town of Leonora.
SoG infamously collapsed under heavy debts and the weight of a poorly conceived hedging regime.
A large rockfall also forced Tarmoola into care and maintenance. A portal was blasted years later by new owners St Barbara, and companies since, including Red 5, have extracted gold from narrow quartz veins a few hundred metres below surface.
For Red 5’s geologists it was a case of seeing only the trees. Red 5 managing director Mark Williams says a new geological approach means they can now see – and mine – the forest at King of the Hills.
Now, the ageing and constrained Darlot mill will be shut in April next year and the ore trucked instead to King of the Hills, which is being redeveloped at a cost of $226 million and will deliver first gold by mid-2022.
Construction is well under way by contractors MACA-Interquip (ASX:MLD) on a new 4.7Mtpa processing plant, one of the largest in Australia, reimagining King of the Hills as the Goldfields’ next large-scale bulk open pit and underground gold mine.
A mine once thought of as spent, King of the Hills now boasts a resource base of 4.1Moz, Australia’s ninth largest gold ore reserve of 2.4Moz and a 16-year mine life, an operation which Williams says our children will be mining.
Underground mining was halted at King of the Hills last year to prepare for the redevelopment, which promises to significantly scale up Red 5.
When Red 5 paid $35 million in cash and shares for King of the Hills and Darlot in 2017 it was a tiddler worth around 4c a share looking for a new identity after the suspension of its Siana gold mine in the Philippines.
Exploration results from King of the Hills energised its share price in 2019, and the company is now up 105% over the past five years.
Despite a dip with the rest of the gold sector in 2021, Red 5 is still a $518 million capped producer trading at 22c a pop, which analysts at Morgans, Petra Capital and Canaccord Genuity have 33-35c targets on.
With commercial production from the revamped King of the Hills expected in the September Quarter next year, Red 5 is poised to well and truly enter the ranks of Australia’s mid-tier gold miners.
It sold 75,907oz at all in sustaining costs of $2,273 an ounce in 2020-21, as KOTH wound down and its ore feed was replaced by the Great Western satellite mine.
The new KOTH will produce 176,000ozpa alone for its first six years, with contributions from the Darlot gold mine pushing its overall production to up to ~240,000ozpa from 2023.
Building economies of scale will also bring down life of mine costs to $1,415/oz and $1339/oz over its first six years, improving margins and providing a cushion against any future weakness in the gold price.
“So it’s all about economies of scale, we’ve got a 4.7Mt processing plant, which will be one of the largest here in Western Australia,” Williams told Stockhead on a site visit last week.
“We’ll be able to expect it to produce over 200,000 ounces, once we roll in the underground ore feed at Darlot.
“And so therefore what we’ve created is this supersized regional hub that will be fed from one open pit and two undergrounds that we own producing that 200,000 plus ounces on an annual basis.”
The new processing plant is a simple crusher, SAG mill and carbon in leach process, which will garner recoveries of around 92%. It means the plant has ample room to increase in the future as drilling uncovers more ore sources in and around King of the Hills.
“We have the opportunity for organic growth with our own tenements,” Williams said.
“And also in the future, our long term goal is to be able to potentially grow processing plant greater than the 4.7Mtpa. And again, deliver even stronger economies of scale.
“If there’s the mine plan and the ore feed to sustain that we can grow to greater than 5Mtpa, potentially up to 6Mtpa.”
Red 5 chief geologist Byron Dumpleton was involved in the formation of Kalgoorlie’s Super Pit in the 1980s, when Alan Bond conceived the idea to consolidate the series of underground mines in that richest square mile on Earth into a single massive open cut gold mine visible from space.
He sees many similarities in the process Red 5 has undertaken to reimagine King of the Hills, which has emerged as a system at least 4km long by 2km wide.
The drill hits that convinced Red 5 to study the open pit cutback including multiple intercepts as long as ‘three to four football fields’ grading 1.5g/t or more.
Despite having 900km of drilling data from a series of owners, Dumpleton says there remains more to be found around the open pit, where mining will largely take place in the newer southern end before heading north into the historic open pit and intersecting with current underground workings after seven years.
“From what we know it’s at least 4km long, what we do not know is how far down it is to the north,” Dumpleton said.
“We have a good understanding where it is to the south. And we’re not too sure how far it actually goes out to the west, how we define all this is through geophysics.”
Williams said Red 5 is effectively picking up from where Sons of Gwalia left off in 2004, when the mine last operated as an open cut operation and gold prices were around US$400/oz.
Yesterday they were US$1828/oz according to Kitco and, thanks to favourable exchange rates, $2450/oz Australian.
It has helped convince lenders and shareholders to back the development, which was funded from a $60 million entitlement offer and $175 million in debt facilities from a high-powered syndicate including BNP Paribas, HSBC and Macquarie.
“We’re turning the clock back 18 years picking up where they left off. But the difference is one, we don’t have their hedge position, two, the gold price is four times what it is back in 2004,” Williams said.
“Thirdly, we understand the geology better in our view, because we have the underground so we’re actually in the guts of the ore body.
“And fourthly, we have the ability to put in the high grade underground feed that the Sons of Gwalia didn’t have.
“Certainly from an underground point of view, we’ve only explored a fraction of the potential. (It has a) 16-year mine life, which will certainly outlive my working life, and if there’s underground mineralisation that’s economic and with the other areas, our children will be mining this project.”
Red 5 recently struck a deal to sell its mothballed Siana project in the Philippines to a local company for US$19 million and a further royalty worth up to US$36 million.
It means the company will be entirely focused on its burgeoning WA gold business.
Operations in resource-rich WA have been boosted by successful efforts to lock COVID out through Premier Mark McGowan’s hermetic but politically and economically effective hard border with those states suffering major outbreaks like New South Wales.
But they are under increasing scrutiny with cost pressures and labour shortages rising as the mining sector booms. Some big firms with operations in WA like BHP, South32 and Wesfarmers (but not Rio, FMG or Woodside) were included in a group of 80 companies that submitted a letter to major newspapers last week calling for a clear path to reopening the country.
WA Mines Minister Bill Johnston, who visited the mine with journalists, maintained his leader’s hardline stance, saying the state’s tough border policy had kept mines from pandemic-related closures that would have been devastating for the state and national economy.
“As the Premier has continually explained, if we had the hard border removed with New South Wales, we would have to have restrictions on economic activity in Western Australia,” he said.
“So that would actually lead to a lower outcome for our economy in Western Australia. So we can’t risk that until we have a significantly higher vaccination rate in this Australia.”
Johnston praised both the strength of the exploration and mining sectors in WA, encouraging the state to increase its investment in the Exploration Incentive Scheme from $10m to $12.5m a year.
The WA Department of Mines, Industry Regulation and Safety will also invest in a program to digitise analogue mines department data, increasing the amount of pre-competitive data accessible to modern explorers by 200%.
“One of the reasons for that is that we’ve here in Western Australia managed COVID so well, and it’s kept the industry strong,” he said.
“We’re really pleased with the level of exploration activity in Western Australia.
“And we want to contribute to that because we understand the government understands the connection between exploration and discovery and discovery and new mines.”
King of the Hills will employ some 450 people in its construction phase and 600 while operational through Red 5 and its partners like mining contractor Macmahon (ASX:MAH).
But Williams said he was confident COVID would not prove a barrier to finding workers for the $226m expansion.
“Certainly we all want the borders to to open when … safe to do so,” he said.
“In the meantime, we’re able to find a good pool of workforce.
“The decision to close the surface operations at Darlot and be able to transfer the surface staff from the processing plant to King of the Hills gives us a ready-made workforce for the large bulk of what we’re looking to do.”