We have followed Red 5 Ltd for about 10 years now. The attraction of this company was for a long time the geology. The company has some very prospective geological terrain in the Philippines. The drilling has demonstrated some exceptionally wide zones of gold mineralisation with good grades, not to mention deeper ore zones with zinc and silver from memory.
My initial interest was also sparked by the possibility of a large porphyry copper/gold mine, i.e. a repetition to the nearby AngloGold project. Instead they came up with wide intersections of sub-economic gold grades. It highlighted the plausibility, but not the likelihood of a large tonnage mine which would instigate the involvement of global majors. So the focus shifted back to the Siana pit, and our interest became long term.
The problem in the Philippines is the slow pace at which their government approves projects. They move at a very slow pace. This is in response to a number of mine spills by foreign companies. Having secured final approval, its worth looking at the economic merits of the company.
According to Google Finance, the company is capitalised at $122 million, yet based on my basic calculations, I get a value of their gold mining pre-tax cashflows of $560mil. This values the company 3-5 times high. Basically its trading at a PER of 1x. This of course ignores:
1. Project financing costs - low because they have already raised $35 mil in equity
2. Higher gold price - I have ratios suggesting gold is going to $2400/oz, so giving the company a valuation of closer to $750 million. Essentially the escalation in gold prices is going to offset the discounting of those future earnings, so it becomes basically $75mil x 10 years
3. Increase in reserves - There is the prospect of mine life increasing by 30-50% I'd say, as they shift to UG mining.
4. Increased production - An increase in reserves will allow for an increase in mine life, or more likely an expanded production, as the company moves to take advantage of higher gold prices.
Of course this is just an example of the power of 'positive thinking'. Well I call it Romantic Realism - applied to the mining industry. Anyway, this is what recreates mining millionaires when there is no prospect in the current market of being a real estate millionaire. If you look at the proportion of millionaires in Australia, most do it from real estate and mining. That is why there are more millionaires in Perth per unit population compared to any other place in the world. Basically its the centre of excellence in mining and they are now exploiting wealth around the world. I think you should learn how 'money makes money', or how to make money from mining. You should also read up about a nickel stock called Poseidon to understand the impact of speculation. Se our Mining Fundamentals book.
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Andrew Sheldon www.sheldonthinks.com
My initial interest was also sparked by the possibility of a large porphyry copper/gold mine, i.e. a repetition to the nearby AngloGold project. Instead they came up with wide intersections of sub-economic gold grades. It highlighted the plausibility, but not the likelihood of a large tonnage mine which would instigate the involvement of global majors. So the focus shifted back to the Siana pit, and our interest became long term.
The problem in the Philippines is the slow pace at which their government approves projects. They move at a very slow pace. This is in response to a number of mine spills by foreign companies. Having secured final approval, its worth looking at the economic merits of the company.
According to Google Finance, the company is capitalised at $122 million, yet based on my basic calculations, I get a value of their gold mining pre-tax cashflows of $560mil. This values the company 3-5 times high. Basically its trading at a PER of 1x. This of course ignores:
1. Project financing costs - low because they have already raised $35 mil in equity
2. Higher gold price - I have ratios suggesting gold is going to $2400/oz, so giving the company a valuation of closer to $750 million. Essentially the escalation in gold prices is going to offset the discounting of those future earnings, so it becomes basically $75mil x 10 years
3. Increase in reserves - There is the prospect of mine life increasing by 30-50% I'd say, as they shift to UG mining.
4. Increased production - An increase in reserves will allow for an increase in mine life, or more likely an expanded production, as the company moves to take advantage of higher gold prices.
Of course this is just an example of the power of 'positive thinking'. Well I call it Romantic Realism - applied to the mining industry. Anyway, this is what recreates mining millionaires when there is no prospect in the current market of being a real estate millionaire. If you look at the proportion of millionaires in Australia, most do it from real estate and mining. That is why there are more millionaires in Perth per unit population compared to any other place in the world. Basically its the centre of excellence in mining and they are now exploiting wealth around the world. I think you should learn how 'money makes money', or how to make money from mining. You should also read up about a nickel stock called Poseidon to understand the impact of speculation. Se our Mining Fundamentals book.
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Andrew Sheldon www.sheldonthinks.com
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