Analysis - RED - Red 5

A previous post "Valuation of Gold Mining Companies" (http://ozstock.blogspot.com.au/2012/05/valuation-of-gold-mining-companies.html) had proposed a way to measure gold mining companies. This post will apply that valuation technique to a gold mining company as an example. That company is called Red 5 (ASX: RED).

1. Mine life. RED is estimated to have a mine life of more than 10 years.
Rating = 2.0

2. Reserves. RED is estimated to have gold reserves of 850,000 ounces.
Rating = 0.85

3. Time to Production. RED is actually expected to produce its first lot of gold in 2012 of 18,000 ounces. In 2013, it is expected to produce 75,000 and increasing thereafter.
Rating = 0.75

4. Cash Generation. Although RED is scheduled for production this year and cashflow will be incoming, it is still not cashflow positive at this moment. Hence the rating will be more conservative here.
Rating = 0.0

The Master rating will be the average of the 4 ratings and if it is above 1.0, it should be deemed favourable.

The Master rating is (2.0 + 0.85 + 0.75 + 0.0)/4
                     = 3.6 / 4
    = 0.9

With a Master rating of 0.9, it is very close to the point of being favourable, 1.0. Rather than buying into RED now, the rating suggest this is a company with very good potential and may be a good buying opportunity in the near future. Something to keep an eye on.