It’s an interesting one… both Cos shareholders on HC feel ripped off, as they consider their positives- and the other Cos negatives.
Heres a view from Petra- who obviously feel that Red has more to offer their investors…
Red 5 Limited (RED) - Hold on, there’s a better deal coming (Petra 6/2/24)
RED and SLR have agreed to merge via a Scheme of Arrangement (3.434:1 RED:SLR), with implementation in June 2024, upon a positive vote by SLR holders. The combined company will have a proforma EV of c.A$2bn and FY24 gold output of 405-445koz at $1,850-2,074/oz AISC. Clearly, this creates a new, diversified mid-tier gold producer with a strong balance sheet and cash flow, increasing investor appeal. However, with no operational synergies, the investment thesis for RED is now materially different.
After a difficult few years,RED is well positioned to rapidly deleverage and open a pathway to dividends; holders are being asked to trade this outlook for the inherent uncertainties which come with the short-life and redevelopment assets in SLR’s portfolio.
Cash/time/expertise needs to be invested in SLR, with uncertain outcomes.
RED’s re-rating pathway becomes more complex with this deal.
However, RED is now clearly “in play” & this process will draw attention to its unique, long life, low cost and expandable assets which should be at the heart of a consolidated Leonora region. With extensive operational insights and strong investor backing, GMD must move now, in our view.
Maintain BUY, PT of A$0.43/sh (unchanged). Spot valuation is A$0.61/sh
Bull case of the RED/SLR deal:
- Asset diversification from three operating gold centres
- Increased scale – larger gold output, index upweighting, potential ASX200 inclusion, improved trading liquidity
- Acquiring SLR at a cheaper multiple, delivering near-term earnings and cash flow accretion to RED
- Diluting RED’s out-of-the-money hedgebook
- Accelerating KOTH growth to better utilise the large mill
Bear case of the RED/SLR deal:
- Exposure to SLR’s short-life assets, requiring significant effort to extend mine lives, thus increasing RED holders’ exposure to cost and timeline uncertainties
- Multiple undervalues RED– implies a value of $0.37/sh for RED vs our $0.43/sh PT or A$0.61/sh at spot
Our view – a better deal is coming
- RED’s asset base is unique in the domestic gold sector
- Whilst this deal allows growth to be accelerated,RED is overpaying for growth that could be organically funded, with any residual cash returned to holders in 1-2 years
- RED is too unique and valuable in its current form, with a likely bid coming from GMD given its detailed understanding of RED’s assets. Without the ability to undertake DD, other bidders are unlikely to emerge
I wonder what the shareprice of the new entity will get to… solid cash reserves, strong production at mines, free cashflow, great potential expansion, drilling results shortly, room for expansion, etc.
(20min delay)
