18-May-2012
RED 5, PAPILLION RESOURCES
Red 5 is hot but it may be too hot for some
ASX Code RED, PIR
AT THE start of the month, investors in the wannabe gold producer Red 5 (ASX: RED) had a right to feel good.

At $2.34, its shares had climbed 53 per cent in the previous month and it released a bullish production and cost guidance on March 1 for its Siana goldmine in the southern Philippines. Investors expected the next announcement would be that production had begun at the 850,000-ounce mine and would earn Red 5 in excess of $100 million a year from the next financial year onwards.

But in the world of mining, things are never that simple.


Instead, Red 5's next announcement, on March 15, was that it wanted $25 million from institutions at $2.12 a share in a placement being handled by Casimir Capital, a no-frills US broker. This led to many investors hitting the sell button, prompting a 16 per cent fall in its share price in the past two weeks.

This was news because Red 5 managing director Greg Edwards had told Radar a year earlier that it had a $US8 million credit facility with the Sprott Group, a leading player in the sector and a substantial shareholder.

In any event, last Tuesday Red 5 announced it had only raised $15 million. Its shares now trade at $1.81 and you would not be remiss for asking if there is a $10 million black hole.

Red 5 remains a big opportunity. Commercial production is due to start in April and valuations of the stock have skyrocketed in recent months to $4-plus. But this latest development prompts some questions: first, why a broker that does very little due diligence is favoured by Australian resource companies for raising capital; and second, what is the value of cost-of-production figures? Red 5's cost of production is among the lowest in the sector, which is very impressive. This may not be the case if you include costs left out because they are capitalised on its balance sheet.

Red 5 may be one of the hottest prospects around, but it's finding that taking advantage of a big share price to raise capital is costly.

 
Papillon's Mali experience

SINCE last week's Radar, when we spoke about what a great place for investing West Africa is, soldiers in one country in the region have overthrown an elected government. That country is Mali.

It is also the country that contains the gold miner Papillon Resources' (ASX: PIR) flagship Fekola prospect, responsible for its shares more than doubling in the past six months — even after their 20 per cent fall in the past few days.

One fund manager we spoke to who has invested in West Africa for several years says he was not one of those investors selling.

"It's not ideal, but these things happen quite often," he says, pointing to Ivory Coast's civil war last year as evidence. "In any case, the insurgency is up in the north, and Papillon's operations are in the south."

It's easy to be rational when you live more than 10,000 kilometres away.

 

SOURCE: FAIRFAX

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