Thank you very much, and good morning, everyone. If we can move to slide three in the deck. Today, I'm joined by Russell Clark, Chairman of Red 5, Mark Williams, Managing Director and Chief Executive Officer, and Richard Hay, Chief Operating Officer. In the interest of time, we'll move quickly through the slide deck to maximize our opportunities for Q&A at the end. I will now hand over to Mr. Mark Williams to commence the presentation.
Thank you, Matt. Good morning, everyone. Today, we're pleased to announce the transformational merger between Red 5 and Silver Lake Resources. This marks a key milestone in Red 5's journey. In October 2017, working with courage and being laser-focused on delivering shareholder value, Red 5 purchased two unloved assets, Darlot and King of the Hills gold mines. Some 6.5 years later, we've turned Red 5 into a 200,000-ounce+ gold producer with an amazing 14-year life of mine. In 2017, when we bought Darlot and King of the Hills, Red's market cap was circa AUD 50 million. Today, we have a market cap of circa AUD 1.1 billion. The merger between Red and Silver Lake is a logical and compelling next step on Red's journey.
With a combined production of circa 450,000 ounces, we will create a leading mid-tier gold producer with three strongly cashflow- generative operations, a leading balance sheet, and an excellent pathway for additional growth. Moving on to the next slide. The next slide, please. The merger between Red and Silver Lake is underpinned by the creation of a leading mid-tier gold company with diversified operations and growth opportunities. The transaction de-risks shareholder returns to each shareholder group that are not available on a standalone basis. The combination also provides a strong set of shareholders with the opportunity to participate in a stronger combined group that is well positioned for a value, for a valuation rerate. When we started this process, one of the key aspects I liked, in particular, that both companies had highly complementary assets.
The merged group will have a sector-leading cash and investment position in listed investments of some AUD 370 million, which includes Silver Lake's holding in Red 5. The merged group has three strong cash-generating mines, which over the last two quarters, each quarter, the September and December quarter, both companies generated before debt servicing, a cash flow of circa AUD 50 million collectively. So this cash position will continue to grow quite rapidly once the merger is completed. The merged entity will have strong leadership, with eight directors made up of four from Red 5 and four directors from Silver Lake, and will be chaired by Red's chairman, Mr. Russell Clark. The management will be led by Luke Tonkin, with Struan as the CFO and Richard as the COO. We move to the next slide about the transactional summary.
Essentially, the companies have entered into a binding Scheme of Implementation Deed , under which the companies will merge via a Silver Lake Scheme of Arrangement. Red 5 will acquire 100% of the shares in Silver Lake, and for every Silver Lake shareholder, they will receive 3.423 shares in Red. This will give the Red shareholders 51.7% interest in the merged entity, and Silver Lake shareholders, the balance of 48.3%. The combined entity will have a very strong platform for growth.
With the cash position that it currently has, plus the cash generation, it is well poised for strong growth, and this is both based on a organic brownfield potential at the three sites in Australia, plus the Sugar Zone in Canada. Secondly, it is well positioned for future growth with again additional driver of shareholder value. The other aspect for the merged entity will be the attractiveness of other shareholders that are not currently attracted within the Red 5 and shareholder universe. The combined entity will be attractive on an index basis and these are two larger shareholders.
If we move over to the immediate establishment, and if we move on again, as you can see, both companies have strong current positions of gold production of over 200,000 ounces. With the merged entity, will have an immediate establishment of a leading mid-tier producer of somewhere between 425,000-445,000 ounces on an annual basis, with strong growth to be able to exceed that in the future. If we move on to the next slide, I will hand over to Richard Hay, the Chief Operating Officer. He'll take us through the due diligence work that has been created to date.
Thank you, Mark. Looking at this slide shows that there are 4 mining hubs in Tier 1 jurisdictions, 3 in Western Australia and 1 in Canada. On the right-hand side of the slide, you can see that the diversity of production really de-risks the merged company with multiple operations. Three of those operations are currently cash generative, with the one in Canada is a development opportunity with lots of optionality. On the right-hand side there, you can see of the 4 mining hubs, the combined company will produce circa 445,000 ounces per annum. Key there is that there's 4 million ounces in reserves and a very large Mineral Resource of 12.4 million ounces. If we skip 2 slides to slide 11.
This slide just demonstrates the growth potential of the assets coming together with beefed- up drilling programs. The scale benefit is demonstrated by the fact that there's 12.4 million ounces in resources, and the reserves at 4 million shows there's a large growth potential between the four operations to grow over time. The opportunity to unlock value and enhance value across all four hubs in very similar fashion to what has been happening in recent times converting those large resource inventory into reserves. One of the opportunities is to convert a larger proportion of the 12.4 million ounces in resources into reserves, and translate that into the MergedC o's longer mine lives. I will talk a bit more about the DD process of the four hubs in short, and I'll now hand over to Russell Clark, the chairman.
Thank you, Richard. Go to the next slide, please. Just talking about the compelling logic for bringing these balance sheets together. I'm a relative newcomer to Red. As many of you would be aware, that we struggled in the early days. We have a single asset, we have decent amount of debt, we have hedges that aren't particularly helpful. So the combination of these balance sheets means that the company as a whole is de-risked significantly, going to multiple assets, going to a very strong cash position, and allowing us to deal with some of those encumbrances from the past. Silver Lake does have a significant shareholding in Red, valued at around AUD 136 million.
We have the opportunity to either cash that out, or cancel those shares, and that will be a decision taken sometime within the first year of the combination. So from Red 5's perspective, I think it's very positive. From Silver Lake's perspective, it gives us, gives them rather, a much longer- term asset. I think it moves the combined company into a different space from a gold production perspective, and puts us in a great position to be, you know, acquisitive in the future. And that's something we'll look at once we've bedded the company down. If we can go to the next slide, please. As Mark explained, the two boards will come together. I will chair the MergeCo .
Luke Tonkin will be the Chief Executive Officer, with Struan Richards as the CFO, and Richard Hay, Red 5's current COO, becomes COO of the new company. So with that, I'll just pass it back to Richard.
Thank you, Russell. Over the last 6-7 weeks, we've conducted due diligence across the Silver Lake assets. We know about the King of the Hills operation. It's a long, long life, modern, low-cost process plant, and it's an excellent hub to build the opportunity of bringing in further ore sources over time, both organic and inorganic. We visited the Sugar Zone mine in Canada before Christmas and spent two days having a look there. It's a solid mining hub there with huge potential upside. The key for us there is that a very, very large 93,000-meter drill program commenced, and is well into the progress of 47,000 meters drilled already.
Once all of that information has come in, we'll be able to assess what the go forward plan for Sugar Zone is. Coming back to the other Tier 1 jurisdiction of WA, at Mount Monger. Initially, when we were going into the DD, we weren't sure about the potential upside at Mount Monger and Deflector. I'm actually very pleased to say that as we dug into the detail, there is a lot more opportunity to build mine life and increase reserves over the next two years or so, with a lot of drilling to expand mine life at both Mount Monger and Deflector.
I think in summary, though, the three operating hubs are highly cash generative and very complementary to the MergeCo with a far more stabilized balance sheet, which positions the company for growth going forwards. I'm gonna hand back to Russell.
On slide 15. You can move on.
Okay. So I think, yeah, the real significance of this is that it just enhances the overall position of the two companies. We've become a major player in the gold space. We see plenty of opportunities in the next couple of years of mines being developed by some of the giants in the industry and providing a good opportunity for the likes of Red to expand further. Liquidity in the company will be increased significantly. We only see upside. We've been working with Silver Lake for the last three months. We've done our due diligence, they've done theirs. It's all been excellently done. Valuations have been done, and we've come across with a deal that makes sense and which provides a small premium to Red shareholders. So with that, I'll pass on to... It's still...
Sorry, I beg your pardon.
Just move to slide 17 for some closing remarks from Russell before we open up the Q&A.
Thank you for joining the call today. This is a merger of equals, which will create a leading mid-tier ASX gold company with 4 million ounces in reserves and about 12.5 million ounces in resources. The cash position of the company will be very healthy at around AUD 235 million, with a further 40-ish million of investments. It diversifies the production of Red 5, derisks it significantly, and strengthens its balance sheet, and provides great opportunity for growth into the future. We'll have four established mining hubs. The Silver Lake one in Ontario isn't currently in operation, but it has been, and three here in Western Australia, making it relatively easy to manage. The board and management of both companies are quite complementary.
They've both been delivering on their respective promises, and we look forward to working together with the Silver Lake team. So overall, a significant step up in market relevance from the perspective of both shareholder groups, enhanced financial strength within the companies, and there will be some G&A cost savings through the rationalization of the duplication of public company costs and two offices, et cetera, et cetera. So we see this as a very positive deal, and I look forward to your questions following this little presentation. Thank you.
Operator, if we can move forward 1 slide and move to the Q&A. Thank you.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Hayden Bairstow from Argonaut. Please go ahead.
Good morning, guys. Just interested in, in the thought process around, you know, the merger and, and the... I guess the, the metrics of it, with merger premium. We're just obviously, you know, having more than one operating asset is a de-risking factor. But when you've got, you know, as you say, like, 13, 14 years of stable production at 200,000 ounces versus Silver Lake, which, you know, has Deflector for a couple of years, and then that's where most of the cash generation is. Just trying to understand why you're happy to sort of take a 50/50 value split between the two, when the production certainty, I guess, for Red, particularly when you look at your reserve base, is far more there than for Silver Lake.
Is it, you know, just the Canadian asset and you're pretty confident there's a real upside story there? Can you just sort of flesh some of that out?
It's Russell Clark here. Firstly, there is a small premium to Red 5 shareholders. We have done extensive due diligence and valued their assets and ours, and the market actually reflects their respective values pretty well. The single asset company that Red 5 is at the moment is flying. And full credit to Mark and his team for making that happen. As you would be aware, Hayden, stuff happens sometimes, and whether it's the gold price falling or a failure in the you know the operation somewhere, you can move pretty quickly from having a happy time to a sad time. So de-risking the assets, de-risking the balance sheet is a significant part of this deal.
As Richard said, the due diligence has suggested that the Silver Lake mines actually have a better life than what they have been marketing. I think they've been quite conservative in the way that they've been talking up their assets. And we see potential there for an extension of the underground mines that they have. You would be familiar that in these little underground mines, it's difficult to get a see-through that goes on for many years unless you do a massive drill out. And, like Darlot, that's had a 3-year mine life for the last 20 years. That's what we're sort of seeing in their operations.
Yeah. Okay, great. And then just the second one then, just with that balance sheet de-risking, does that free up, King of the Hills to look at pushing that mill harder than trying to maintain that 5.5 sort of million tons and doing a bit of extra development? Is that some potential upside from the Red side of things?
Yeah. So again, to be decided by the board and the management, but certainly with that cash balance there, there is opportunity to fully realize the potential of cost, be it bringing one of the cutbacks slightly forward, be it expanding the mill. Those are all opportunities that can be looked at, rather than us, the way we sit at the moment, trying to manage the balance sheet, debt, hedges, and what have you, and looking forward to sort of three years' time when we might be able to do some of those things.
Yeah. If I can add, Russell. Morning, Hayden. So I think that with it, it's an opportunity for Red 5 and the MergeCo group to be able to accelerate the opportunities at King of the Hills, to be able to bring them fast forward. So it accelerates them maybe 12-24 months than what it would've been able to do as standalone companies. So I think that's a big advantage and opportunity for the go-forward company.
I also think that with the Australian assets and with Silver Lake, I think that as Richard's highlighted, there's a number of opportunities to be able to potentially bring forward that growth and additional mine life that the MergeCo company will be looking at once the deal has been concluded.
Yeah. Okay, great. I'll leave it there. Thanks, guys.
Thank you. Your next question comes from Tim McCormack from Canaccord. Please go ahead.
Hey, guys. How you doing? Just to hone in a little bit on the Silver Lake assets themselves and where you, in your DD, are seeing better things in the medium term. I think I understand and accept the Mount Monger stuff is one of those rolling three-year mine life type situations, like you've got at Darlot. But Deflector's spread a little bit different to the way I look at it, with the Central Zone sort of falling off at the end of this financial year. How do you think about, you know, replacing that grade profile that's likely to drop out there? And the rest of the reserve looks reasonably finite with term, in terms of mine life as well.
How are you thinking about that, and how should we be thinking beyond about three years?
Yeah. Thanks, Tim. It's Richard here. T he DD visits were actually very informative of other aspects that aren't necessarily out in the market. On Deflector itself, the South Zone is developing very nicely at the moment. They've got a very strong drill program underway at the moment there. They've also got the Spanish Galleon out to the west, and that's now subject to another drill program to extend that ore body's strike length. So we came away from the visit seeing some significant upside. And yes, whilst the Central Zone may finish up at the end of this year, they've got replacement coming on stream.
So again, it points to getting a long mine life in front of Deflector is very difficult, but that's the insights that we saw. Down the road at the other small mine, there's a new zone that in the hanging wall that hasn't been previously talked about, and also extensions at depth that also haven't been talked about in a great deal of marketing side of things. And they need to be drilled out, and that's where we saw a lot more potential. So we see extensions of mine life as being pretty solid, and it's just a matter of drilling it and then conveying it to the market.
I also, Tim, morning, it's Mark. I also think that in the short term, there's significant value with Deflector being very strongly cashflow positive, and that is a strong advantage.
Cool. Just to jump onto a different line of thinking, is there anything in the documents about, you know, protection against interlopers or things like that? We know that Genesis and Silver Lake like bidding for the same things. Is there any clauses that we should have in mind about?
Yes, maybe you know something we don't know. Yes, yes, there are. As the acquirer, we wouldn't normally have a fiduciary out, but that's something that the Red 5 board insisted on and took some time to get. So there is an opportunity, should someone decide to bid Red 5, they can do so. However, there is exclusivity. There's no talk, no shop, no due diligence clause within the documents. You know, we're focused on getting this deal done. We haven't done it to create, you know, noise in the market. We see the relative strength or the... We see the huge strength of this combination.
Okay, cool. And just finally, it's a bit more of a qualitative thing. I think it's a reasonable observation that Silver Lake's reputation in terms of market engagement isn't huge. Is there any impetus from your side to force, you know, I guess, the incumbent Silver Lake management that's coming in to make more of an effort on engaging with the market, particularly when they're digesting you guys in a merger?
Yes, we, and we've raised that with, when we've taken feedback from the market, we've raised it with the board at Silver Lake. There is some things to market here, and I think that you will see this deal being marketed well. And as we go forward into MergeCo , it's certainly a focus of the Red board that we perhaps, work harder at, at marketing the combined group.
Okay, great. That's good. That's all for me. I'll leave it there, guys. Thanks.
Thanks, Tim.
Thank you. Your next question comes from Brett McKay, from Petra Capital. Please go ahead.
Thank you. Good morning, team. Interesting deal. I just wondered if, w ell, obviously, once the deal is consummated, would you look to repay your existing debt outright and realize that net cash position, or would you be looking to retain some of that debt? I'm aware that you've been trying to refi that facility, so I'm just interested in what the liquidity of the business might be post-deal, and whether there would be some intention in the medium term to balance some of the growth you've talked about across the merged group. Obviously, the balance sheet, but also potentially looking at accelerating dividends. Any comments on that?
Look, I think, I think the combined balance sheet provides a lot of opportunity. You know, the debt and the hedge position that Red has had has been a bit of a millstone. It's getting easier to deal with. The combined entity will be in a position to remove a lot of that headache, if it so chooses. We've also got to look at the opportunities, for example, of bringing the cutback forward on at cost or developing the Sugar Zone deposit. We also have the choice about whether or not we sell the Red shares that Silver Lake have into the market, if we need to improve our cash position. It's effectively an equity raise, if that's what we need to do.
And we also recognize that there is some sense in being leveraged to debt, particularly if interest rates are coming down. So that... It's a good question. I don't, I don't have the right answer for you. I don't have an, an answer for you, but we're certainly aware of the position that we're putting ourselves into.
What about the hedge book? Would you look to do anything about that, in the nearer term, or would you let that run its course?
Well, well, again, you know, that's as and when the deal gets done, we can look at the hedge book. We've got some hedges that are at a higher price, I think next year sometime. So you might not liquidate the whole of the hedge book. You might just do some of it, and get the sort of lower prices out. But again, that's, that's a decision for the, for the new board to make.
Yeah, I think if I can just add, it's, I think they're really excellent questions, Brett. And really, I think it's up to the MergeCo board to make those decisions. But really, what this transaction does is give that MergeCo board the optionality to do all of the aspects that Russell has alluded to. I think that our Red 5's hedge position, there's a step up in from the September quarter onwards. So, there's two quarters, March and June, which were at the lower hedge price.
So, you know, if this transaction now gets completed in June, then that would have cleared out pretty much all of those lower hedge position hedges and really gives the optionality for the go-forward board to look at shareholder returns and balance that with the growth opportunities operationally together with the future value opportunities of expanding production with another potential asset in due course.
Thanks, Mark. And just moving quickly on to the growth that you've spoken about extensively today. When do you think the company, either the merged company or even the Reds or the Silver Lake companies in their own right over the next, you know, five months as the deal goes through, when would we be expected to see or be better informed of some of those growth aspirations? So, for example, would we see more information that could lead us to a decision on the Sugar Zone between now and when the deal goes through? Or would it be beyond that as to what the new board wants to do there? And the same goes for, say, the cutback at KOTH.
You know, would that be something that you'd be investigating, talking to, trying to get some more information in the market? I'm just trying to understand from a timeline perspective, how soon we can get our teeth into the growth profile of the company in terms of, you know, a timeline and obviously a cost to get to that point and then implement.
That's a good question. There's a lot of water to go under the bridge between now and June. And I think the big job between now and then and then for the next few months after is actually to bring the two companies together. Certainly from a technical perspective, we would be looking at the aspects that you've spoken to. I don't think, Richard, you might have a comment that we'd have a definitive view on Sugar Zone by the time that June is done. There's a big drilling program going on. All that information needs to be collected, assayed, and interpreted. The cutback at KOTH, you know, is an opportunity.
Again, we would need to work as a new board to work out when and if that should happen and what it looks like. So I think we've got to be careful and get the cart before the horse.
In my sense, Brett, is that I think the full focus over the next four months is really going to be on the integration of the two companies. And there's a huge amount of work to do to bring the different cultures of the company together to be able to maximize a single entity out of two different entities. So I really think over the next four months, that is gonna be front and center of the management teams. And I think that you need to give people... you need to give management time to be able to look at all the different opportunities in front of them, which will take longer, longer than the next four months.
Yep. Okay. All right. Thanks, guys.
Thank you. Your next question comes from Paul Hissey from Moelis. Please go ahead.
Oh, thanks, guys. Look, my question was just going to test the flexibility around the existing balance sheet constraints and the facility with Macquarie, but to be frank, I think you've probably covered it with Brett already. So yeah, I'm good, thanks.
Thanks, Paul.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone. Your next question comes from Paul Kaner from Ord Minnett. Please go ahead.
Yeah. Hi, gents. Thanks for taking my questions. Maybe first one, just digging a bit more into that due diligence for you, Richard, and specifically looking at Sugar Zone, what sort of gave you comfort there? And if you can say, when's the earliest you think that asset could potentially come back online?
Yeah, good question. Look, come back to the 93,000-meter drill program. As you know, Silver Lake took the decision last year to idle the operation, and from everything that I saw, that was the right thing to do at the time. You know, the Silver Lake team are very good mining operators, and a number of the changes that they have already made. They've got new gear. And the proposed changes going forward are all positive options. The key is getting that 93,000-meter and quite potentially, depending on the results, a chunk more drilling to really pull in the mine life plan into a stronger position.
But everything is being idled, if there is a go-forward decision to restart, it isn't in care and maintenance, and you know, it's in very good shape, ready to go, should a go-forward decision be made.
Yep, sure. Understood. And, and then maybe just in layman's terms, can you just explain what would cause Silver Lake's stake to be monetized or, or canceled? And I guess what happens in each scenario there?
So under the Corporations Act, we have 12 months post-completion to make that call. And that's where we are, to be frank. We can see that canceling the shares would enhance shareholder value, potentially. You know, removing some shares from the bigger pool, effectively a buyback. Alternatively, cashing them in would raise equity. So I think we really need to understand what the world looks like during that time. We're not in any screaming rush to get something done, and so we'll maintain that option going forward.
Yeah. Good stuff. That's, that's it for me. Thanks, guys.
Thanks, Paul.
Thank you. Your next question is from Paul Hissey, from Moelis. Please go ahead.
Paul, are you there?
Paul, your line is now live.
Sorry, everyone. C an you just take us through the rationale of putting Silver Lake into Red 5, and not vice versa, please?
Sure. So we've been talking to Silver Lake for a number of months, and during that period of time, the share prices and market caps have moved. We've been bigger than them, they've been bigger than us, but I think on balance, we've been bigger than them. Which made sense for us to be the acquirer. From a value creation perspective, from a tax perspective, it makes sense for Red to be the acquirer.
What about things like stamp duty and some of those kind of elements?
Well, those are the elements I'm talking about that just make sense for Red to be the acquirer. Silver Lake has assets overseas for which the likes of stamp duty won't need to be paid, whereas Red's assets are all here. So the stamp duty bill could have been bigger, and there are broader tax implications that we have looked at. So this is around making sure that we're not leaking value. We're not trying to avoid tax, but doing what makes sense.
Yeah. Thanks, Paul. In summary, the stamp duty and the carry forward tax losses of Red are stronger in this proposition.
Are you able to quantify those to the nearest, you know, whole tens of millions?
Yeah, not on this call, Paul, but we'll get back to you shortly.
Okay. Thanks.
Thank you. That does conclude our time for questions. I'll now hand back to Mr. Collins for closing remarks.
Thank you, everyone, for your time today, and thank you for the questions. Apologies to those we didn't get an opportunity to answer their questions. We've got a hard stop for additional meetings coming up. That ends the call. We appreciate your time. We're available for calls during the day, subject to other events happening. So thank you very much. That ends the call, operator.