Gold Road now a “relevant comparison” for Red 5, says Petra Capital

31st May 2019
Resources Rising Stars

Sydney-based institutional broker Petra Capital believes that a comparison between Red 5’s (ASX: RED) King of the Hills gold project and Gold Road’s (ASX: GOR) Gruyere project could be indicative of “material upside” in the Red 5 share price.

In a new research note issued last week, Petra Capital maintains a BUY recommendation and 20c price target for Red 5 following the company’s “material increase” in the King of the Hills resource to 3.1Moz (from 1.88Moz).

“We see the current resource underpinning a 150-200kozpa operation for >10 years, with scope to significantly grow this as exploration continues,” wrote Petra Capital analyst Brett McKay.

McKay says King of the Hills is now the “largest gold development opportunity in Western Australia”, with a total of 76% (2.35Moz) of the resource in the indicated category and available for conversion to ore reserves in the upcoming PFS.

“The deposit remains open at depth, whilst the majority of the ‘damage zone’ on the granodiorite/ultramafic contact remains untested,” he said.

McKay says he now considers Gold Road to be a relevant comparison for Red 5 due to its 3.3Moz attributable resource and 1.96Moz attributable reserve at its 50% owned Gruyere project.

“The Gruyere resource of 2.89Moz (attributable) has assumed a A$1,850/oz gold price and 0.3g/t cut-off, with KOTH using A$1,800/oz and 0.4g/t cut-off to define the 2Moz in the open pit shell.

“Using the grade/cut-off chart, we can see the KOTH open pit increases to 2.3Moz at a 0.3g/t cut-off and approaching GOR’s 2.89Moz share of Gruyere.

“We note, however, Red 5’s potential to extract the deeper resources via the underground at an earlier stage of the mine life relative to GOR, who may require a large open pit cut-back to realise these deeper ounces.”

Petra goes on to note GOR’s current enterprise value of $871 million, placing it on a $264/oz EV/resource metric.

“This compares to RED on $48/oz using KOTH resources alone. However, given GOR is fully-funded and in the ramp-up phase of the Gruyere operation, we would expect a premium valuation.”

After adjusting Red 5’s valuation to a fully-funded EV basis, with a nominal $180 million in CAPEX applied to a $151 million market capitalisation, this provides $108/oz fully-funded EV/resource – implying a 2.4 times EV upside for RED to trade in-line with GOR.

“While we do not expect this to occur quickly, we believe this uplift can be delivered over time.”

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