Red 5 Ltd

ASX:RED

Thank you for standing by, and welcome to the Red 5 March 2024 Quarterly Activities Report Investor Call. [Operator Instructions]

I would now like to hand the conference over to Mathew Collings, Corporate Development Manager. Please go ahead, Mathew.

Thank you, Kaylee, and good morning, and thanks to everyone for dialing in today.

On the call today here, we have Mark Williams, Red 5's Managing Director; along with Chief Operating Officer, Richard Hay; and Chief Financial Officer, David Coyne. We'll be presenting Red's third quarter results for FY '24. We'll be referencing the slide deck that was released to market this morning alongside the quarterly report. And as outlined by the operator, we will have time for Q&A at the end of presentations.

But for now, I'll hand over to Red 5's MD, Mark Williams, for opening remarks on our Q3 results. Thank you.

Thank you, Mathew. Good morning, everyone. Red 5 has 3 active mines, namely King of the Hills open pit, King of the Hills underground and Darlot underground, with ore being centrally processed at the King of the Hills processing plant, a large, efficient and modern facility, which produced its first gold bar less than 2 years ago.

The March quarter saw Red included in the ASX 200 recognition of production, scale and maturity of Red. This follows inclusion in the VanEck GDX ETF during the December quarter last year.

It's worthwhile taking a minute to refresh memories that Red bought King of the Hills and Darlot for $34.5 million in a unique business transaction. And after viewing King of the Hills differently, and acting with courage, 6.5 years later, Red has a market cap exceeding $1.4 billion.

Red also owns a 3.25% royalty from the Siana gold project in the Philippines, which we pivoted out of in 2017. The project owners have stated publicly that they have commenced mining and processing of Siana during the March quarter after securing their debt earlier within the year.

Next slide, please. It's pleasing to see the continued trend downward of the TRIFR which, over the past 12 months, has reduced from 9 to 3.1. However, the LTIFR has increased from 0 to 1, showing that there is always more work to do in this area. The strong field-led focus and presence by the site operations team will continue.

The March quarter showed the fourth time the team have produced over 50,000 ounces in a quarter, a great result. Details being 50,132 ounces produced at an all-in sustaining cost of $1,926 per ounce. With 158,000 ounces produced by the end of March, and with the continued strong production from the 3 mines, and the King of the Hills' processing plant performing well, we're targeting to achieve the top end of guidance for the year regarding our ounce production and within guidance for the all-in sustaining cost.

The strong production has underpinned the decision to accelerate waste stripping of King of the Hills open pit in Stage 2, which will further derisk ore production in FY '25. As a consequence, the growth capital forecast has been revised upwards to $50 million to $53 million for the year.

Next slide, please. The proposed merger between Red and Silver Lake is progressing well, with the first court hearing for the scheme scheduled for today. Additional progress updates will be issued in the near future. The scheme implementation remains on track and, subject to our approval, is expected to be complete during the month of June. Subject to a successful completion, it will create a leading mid-tier gold company with a combined FY '24 guidance production of up to 445,000 ounces. It will have a sector-leading balance sheet with strong near-term cash generation and also have a very strong platform poised for organic and organic growth.

I will now pass over to Richard who will take us through the operations in more detail. Over to you, Richard.

Thanks, Mark. Again, it's been very pleasing to see that the TRIFR continues to reduce, reflecting the efforts of the operation team's focus in the field of safety leadership activities.

We begin with the KOTH open pit, which continued its solid performance in the March quarter, achieving a total movement of 3.4 million BCM from Stages 1 and 2. A total of 1.8 million tonnes of ore was mined at an overall rate of 0.8 grams per tonne, which included 1.3 million tonnes of run-of-mine ore at 1 gram per tonne, predominantly sourced from Stage 1. This ore tonnage result was significantly higher than the prior quarter and an excellent result given the rainfall events experienced during the quarter. As a result, ROM pad stocks have increased to levels that ensure the company can withstand significant wet weather interruptions to mining that may occur in the future.

The floor of Stage 1 in the southern end of the pit is now wall-to-wall mineralization, whilst the destacking of the northern end of the Stage 1 pit is due to expose increasing quantities of ore over the coming months.

Mining in Stage 2, as Mark said, is ahead of schedule, with consistently good digging conditions being experienced in the upper benches. Notably, the bringing forward of Stage 2 stripping has further derisked the FY 2025 production plan, consistent with our plan to deploy surplus cash to reducing debt and, where feasible, accelerate open pit movements.

Moving on to the KOTH underground mine where we achieved another sound quarter mining 227,000 tonnes at 2.1 grams per tonne. The mine grade was higher than the prior quarter, offsetting the slightly lower tonnes mined. A combination of poor loader fleet availability and delayed production due to ingress of water to several mining areas resulted in a reduced ore tonnage for the quarter. Both of these issues were resolved during the quarter, so an improved performance is expected in the June quarter.

Ore production continued in the west, Regal, east and central mining areas. Key stopes that were mined during the quarter highlight the KOTH underground mine achievements this financial year. These were a multi-lift stope in the Regal zone that contained 91,000 tonnes at 2 grams per tonne and a stope in the west mining zone containing 17,000 tonnes at 2.8 grams per tonne.

From the Darlot mine, a total of 136,000 tonnes of ore at 2.8 grams per tonne was mined for the quarter. The reduction in ore tonnage and grade from the prior quarter was due to a focus on capital development and sequencing constraints while setting up high-grade stopes scheduled to be mined in the June quarter.

Of note, the new mining front in the Dar-Cent area contributed the majority of the development ore tonnes for the quarter and will contribute stope production over the coming year. Airleg mining continued, contributing a total of 15,000 tonnes at 3.4 grams per tonne. Darlot continues to demonstrate the benefits of the rightsizing improvements completed in 2023, maintaining strong profitability. This has justified the commencement of a targeted capital investment into new unmined areas, such as the Dar-Cent zone.

Cost processing plant hit a new crush tonnes record of 1.2 million tonnes in the March quarter. Milling of just over 1.1 million tonnes at 1.5 grams per tonne resulted in gold production of 50,132 ounces for the quarter.

There were 2 mill shutdowns during the March quarter with 1 planned and 1 unplanned. The unplanned mill outage in February resulted from a lube system failure. The planned mill reline in March was to complete a full SAG mill reline with a new liner design that will extend the period between future relines by almost 2 months. A multifaceted project to improve maintenance systems and processes is underway to prevent recurrence of the lube system failure or similar downtime in the future.

The quarter also saw several minor interruptions to the processing operations due to extreme heat and wet weather events, however, an overall very strong performance by the mill.

Recoveries for the quarter improved to 92.3% as compared to the December quarter. This was a result of the remedial actions implemented, leading to a recovery of 94.3% in March.

I will now hand over to David Coyne.

Thanks, Richard. The March quarter was a solid quarter from a financial and cash generation perspective. 49,726 ounces sold at an average realized price of $2,719 per ounce yielded almost $140 million in sale proceeds, with the average realized price up $100 per ounce compared to the December quarter.

Total OpEx and CapEx expenditure for the quarter has increased from the prior December quarter from $117 million to $122 million, and the resulting free cash flow for the quarter was $15 million.

Expenditure increase in the March quarter was largely driven by 2 key factors: increased tonnes mined in the KOTH open pit and, as Richard referenced previously, increased mill maintenance costs.

Processing costs in the June quarter are expected to be less in the March quarter as we will not be needing to do a full mill reline in the June quarter.

Strong cash generation year-to-date and confidence in the June quarter production and revenue generation forecast have enabled Red to increase the full year growth capital investment between $50 million and $53 million, as both Richard and Mark touched on earlier.

As we noted on the conference call following the release of the December quarterly activities report, we are increasingly turning our attention to improve efficiencies and cost optimization activities. Our recent improvement on reducing diesel usage per tonne mined continued in the March quarter, and we are stepping up our supply chain capabilities to improve our purchasing of tractors in the months ahead.

With the recent announcement of the proposed merger with Silver Lake, we have decided to place the debt facility refinance on hold until we know the outcome of the Silver Lake shareholder vote in late May.

I'll now hand back to Mathew for some concluding remarks before we go to Q&A.

Thank you, David. Look, it's been a great run share price-wise for Red recently and certainly, the sector in general, with our share price strengthening on our operational performance as well as events touched on by Mark, such as inclusion in the S&P/ASX 200 Index during March.

We're closing in on some of our peers where Gold Road and Capricorn have been our case studies in the past, but we still see room to grow. The proposed merger with Silver Lake Resources really presented the company with this opportunity to build its market profile further and continue to improve its valuation relative to peers through both organic and inorganic growth opportunities that the company will be able to pursue.

Let's move on to the next slide, please, which is our final slide for today. Before I pass back to our operator for Q&A, I'd just like to remind everyone again, you can subscribe to our mailing list via the Red 5 website or follow us on LinkedIn for regular insights into what is happening at the company and the operations.

I'll now hand back to the operator for Q&A. Thank you, Kaylee.

[Operator Instructions] Your first telephone question comes from Brett McKay with Petra Capital.

A couple of quick ones from me, just on the mining side. The ore mined tonnages from the open pit in the quarter, obviously, pretty impressive and a big step-up on prior quarters. Maybe Richard, can you give us a bit of insight as to how that looks going forward. Are we expecting it to stay up at these sorts of elevated tonnage levels? Or will it pull back at all going forward?

Yes. Thanks, Brett. We aim to keep it steady going forward. And in June, you'll probably see a slight drop from the prior quarter. We actually used the March quarter to build up our insured stocks, if you like. And as I said in the discussion that the Stage 1 southern end of the pit is wall-to-wall mineralization, so we're scheduling that on an as-required basis to keep the best grade fed to the mill and managing our stocks that way.

Yes. Okay. That makes sense. And just relating your tonnage movements across the Stage 2 and that increase in expenditure being incurred this year, how does that impact future years? Would we expect to see lower CapEx into FY '25 because that amount is being brought forward? Or would it translate into lower strip ratio because you've moved more of the overburden that might have otherwise been classified as waste in future years? Can you help us sort of quantify the costs that you're incurring now as to what the benefits might be in the medium term?

Brett, it's Mark. I think that we're still going through the budget process, and it's really too early to make any specific calls on that. As you know, we're right in the thick of it between April, May, and we'll come out in June. And then if the merge goes ahead, which we expect, then there's going to be a joint meeting of the budget process. So it will probably be extended compared to normal years. So really, we have made the decision to spend the additional capital to derisk and take some of the lifting of next year's plan, but it's too early to be able to say the impact of what that will be as we're still going through the budget process.

Yes. I'm just keen to sort of understand, I guess, the fact that, at the end of the March call, you spent basically your full FY '24 capital budget of $42.5 million. Is it a function of the fact that things are just moving more material relative to what you were anticipating? Or has there been a conscious decision to accelerate those movements? Or is it just simply costing more?

It was a conscious decision, Brett, to actually move more in Stage 2. There was an opportunity there, the opportunity to derisk FY 2025 ore supply and the switchover in the future between Stage 1 and Stage 2 ore supply. We always had our eye on taking that opportunity, and we've been able to do that.

Sure. And just going in a bit more detail, the contract that we have with [ MaBandt ], which we have discussed, gives us flexibility of 90% to 120% of the mine schedule, so that means that we can dial it up or dial it down within a band. And we saw the opportunity to consciously move more dirt because of the current situation in that, and that we believe is a prudent approach.

And especially because we've secured our ore supply on the ROM pad. That was the opportunity there.

Yes, those ROM stocks are getting pretty big, obviously. Just quickly on Darlot moving into that Dar-Cent area. I note that the development meters kicked up as you did that. Can you give us a better sense of what that means for Darlot moving into the June quarter, maybe from a growth point of view? Or you expected just to maintain that fairly steady grade, what we've been seeing, in the high 2s, low 3s going forward, just getting a better sense for that opportunity you've taken to move into that new area.

Yes. I think you can expect similar tonnages and similar grade profile, and that's the focus that we have at Darlot. We've got an additional jumbo that started in January, and that's why you saw the development meters increase. And as we said, it's our moderate level of investment to move forward and keep Darlot with 3 mining areas consistently and opening up 1 new area at a time. And Dar-Cent is definitely showing some very good signs of seeing increased tonnages in the area as we open it up, and the grade is holding pretty nicely as well.

All right. Sorry, just a final one, on the crushing back at Darlot, you achieved that record of 1.2 million tonnes for the quarter, which annualizes at a 4.8 million tonne run rate. We know that crusher sort of has a maximum, let's say, nameplate capacity of 6 million tonnes, and that has been previously identified as the potential bottleneck to taking the mill throughput higher. Just given the amount of ore you're mining and stockpiling, what do you think you need to do to get that crushing rate up towards that 6 million? It would obviously allow you to put more of that lower-grade material through the mill rather than on the stockpile.

Yes. So as I mentioned, we have a very focused maintenance, multifaceted approach to working through all of the challenges that we've identified. We do have a mobile crusher that we've purchased last quarter, in the December quarter, as a buffer. And it gives us the opportunity to maintain the 6 million tonne per annum crusher. Noting the close-sized setting, we're actually crushing finer, which actually helps the throughput through the mill as well. So it's a combination of those two aspects that we are working through the maintenance regime to improve that performance. We're very positive that we'll get to that 6 million capacity in the crushing circuit.

Brett, I don't know if it's chicken-and-egg, but when we have 2 major SAG mill shutdowns occur during the quarter as well, we hit a point where the crushed stockpile is full, and we've got no capacity to crush any further as well. So in some instances, our crushing capacity is constrained by the milling performance as well. So there's a little bit of both.

Your next question comes from Hayden Bairstow with Argonaut.

Yes, just a question on the front end of the mill. I mean, obviously, it's been a constraint in the past, just sort of trying to understand what you're doing on the front. I mean, obviously, there's capacity in the mill itself, so just the front-end crushing and sort of the work you've done there. And can we start seeing further creep in throughput through the mill?

Hayden, Richard here. Yes, we're certainly working on all of the key bottlenecks that we know to get consistency in each of the area. The approach we're taking is a steady, steady throughput, as we speak. And we know where the 2 key bottlenecks are in the plant, which is [ CV4 ] mill feed into the feed shoot. And at times, our pebble crusher is also the bottleneck. We've now debottlenecked the crushing side of things. We actually have a buffer of 110,000 tonnes of crushed ore stocks on the course of the stockpile, which we've not had before. So we have those buffers in between, and we are steadily creeping up the performance of the throughput. I think we'll see a far better throughput in the June quarter as a result of all that work.

Okay. And just on the accelerated strip, I'm just trying to locate exactly where that is, is that going to open up potential to do some of that drilling below the southern end of the pit that's sort of hasn't ever been done?

Yes, we'll open up some opportunities, Hayden. We've done some drilling and there's been some results that will come through in this quarter at some point with Mathew and co. There's a number of other opportunities as well. We're also looking at the potential for underground on the east of the contact in the Stage 1 that we've never been able to drill before because of water in the original pit and not being able to get access. So we should get some drill platforms at the base of Stage 1 to test a number of those targets as well.

Your next question comes from Paul Kaner with Ord Minnett.

Maybe just following on from Hayden's question on exploration spend. Obviously, that's been hamstrung historically. Given the balance sheet now with cash flows improving and the merger will bring a lot of cash as well, assuming that exploration budget goes up, where would you want to see that spend? Is that sort of King of the Hills underground? I guess, what I'm really asking is where do you see the most growth potential?

Yes. Thanks, Paul. Again, it's still a work in progress. We're going through the budget process for Red, and Silver Lake is doing the same. And then assuming that the merger comes together, there will need to be a unification of the budget and there needs to be some jostling for capital spend and exploration dollars. And it will be justified on the best bang for the buck. I'm sure the best bang, the targets that we have discussed previously are underground at both Darlot and King of the Hills, so I believe that there'll be a strong focus going forward. Both are open in all areas. Both, I have a strong confidence, will continue for many years to come. And it's a matter of investing the dollars. And so I think that there'll be a good amount of spend for next year, particularly targeting the 2 undergrounds.

I will now hand over to Mathew Collings for webcast questions.

Thank you. We have two questions on the webcast along a similar line, so I'll merge them into one. Who took the initiative to merge, Silver Lake or Red? And what was the driver and motivation for it? And also, given Luke Tonkin will become the managing director of the combined group, will Silver Lake be taking a driving seat as the dominant player under MergeCo? I'll hand back to Mark.

Thanks, Mathew. I think that the timing of events was in September 2023 when Silver Lake bought the 11-plus-percent stock in Red, so really, that was a public catalyst for the merger to commence discussions we've had shortly afterwards by the 2 chairs of the companies. And then due diligence, as we've discussed, took place in December onwards. Really, in the discussions between the 2 chairs, it's agreed that it would be treated as a merger, and both companies will provide equal management and chair position. So Red 5 has put forward the Chair being Russell and the Chief Operating Officer being Richard. Silver Lake had put forward the MD being Luke and the Chief Financial Officer being Struan, and equal number of [ MDs ]. Hopefully, that answers your question. I hope that answers your question in a general way.

Okay. That closes out the questions from the webcast as well. So on behalf of the management team, I'd just like to say thanks to everyone who has dialed in for today's call, and we look forward to keeping the market informed on our operational progress and the progress of our merger of equals with Silver Lake Resources throughout the quarter.

Operator, that ends today's call.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.