Red 5 glad to be home after Philippines foray

Home, sweet home.

If Australian gold producer Red 5 ever needs a corporate slogan those three words are a perfect fit after a bitter experience in the Philippines forced a return to safer ground in Western Australia.

Investors, who rushed for the exits when the Philippines Government dramatically changed its mining laws, effectively killing Red 5’s Siana goldmine, are regaining confidence in the stock, lifting its share price by 50 per cent since early last month.

What’s driving Red 5 (ASX:RED) is a complex deal due for completion next week, which will totally transform the company from being a political victim to significant gold producer with the twin bonuses of exploration upside and the financial backing of two major new shareholders with deep mining experience.

The key element of the makeover is a double-barreled acquisition of a producing goldmine and a nearby growth option with the potential to catapult Red 5 from zero output to 80,000 ounces of gold a year, with more to come.

There is a price to pay for the deals which include the acquisition of the Darlot goldmine near Leonora, and the King of the Hills, a gold resource within trucking distance of the Darlot processing plant.

But with the price tag of $34.5 million, Red 5 also gets Gold Fields of South Africa, the company selling Darlot, and Saracen Mineral Holdings, the company selling King of the Hills, as major new shareholders.

Both Gold Fields and Saracen are accepting a mix of cash and Red 5 shares, as well as acting as partial underwriters to a share issue Red 5 is making on a one-for-three basis to existing shareholders at a price of 5c per share to raise $12.7 million.

An unusual deal involving multiple assets and multiple vendors, the end result is the conversion of Red 5 from a company lost in the mess which is the modern Philippines into a pure-play Australian gold stock with extensive interests in one of the country’s major gold provinces.

The reason Red 5 required corporate surgery is a lesson for Australian investors who might not understand the term “sovereign risk”, perhaps thinking it simply means higher taxes (such as WA’s recent increase in the State gold royalty).

In some countries it means forfeiting an entire business when government changes the rules.

In the Philippines, where activist President Rodrigo Duterte has declared war on drug dealers and mining companies, Red 5 is one of several companies forced to quit the country, closing its Siana goldmine at a total cost approaching $100 million.

There is the potential to return to Siana in the future, but only after receipt of government approval for a long-life tailings dam, and an end to martial law declared on the island of Mindanao, centre of an Islamist uprising.

The Leonora region of WA, despite its harsh climate and remote location 900 km north-east of Perth, is a much less risky location for Red 5 to re-start its gold-mining business.

The first stage of the revival is the acquisition of Darlot, a mine which has been in production since 1989, averaging 94,000 oz a year, but more recently down to about 80,000 oz.

Along with the processing plant which Gold Fields refurbished three years ago comes a resource of 1.2 million tonnes of ore assaying 6 grams a tonne for a contained 224,000 ounces — enough for almost three years of production without adding more ounces from exploring the 13,900 hectares of land contained in the packaged deal.

King of the Hills, located 80 km south of Darlot, is rated an advanced gold project with an underground resource estimated at 402,000 oz contained in 2.71 m/t of ore assaying 4.6 g/t.

Events at Red 5 are moving rapidly with shareholders voting to approve the deals with Gold Fields and Saracen, the chairman, Kevin Dundo, delivering a confident address on the changes which he described as a significant turning point, and for a final reckoning of the damage done at Siana.

Having already recorded expenses of $70.4 million associated with the Siana shutdown, Red 5 is preparing to make a non-cash impairment charge of between $28-and-$30 million to recognise the reduced value of an asset that was once the company’s crown jewel.

In time, Red 5 might return to the Philippines with Siana possibly becoming a second gold production centre.

But, until then the new home for Red 5 is the Darlot mine, followed by development of King of the Hills, and then exploration in a region that has a history of prolific gold discoveries.