Interview with Paul Huet, CEO of gold producer Karora Resources (TSX: KRR). This years turnaround story putting together a mining plan that accelerates high-grade projects and brings course gold to fore.
Mill extensions and ore sorters to add capacity but it’s clear that a second mill is going to be needed. Huet talks us through his thoughts for 2021.
Matthew Gordon: So Spargos, I saw the drill results over significant grades and significant widths. What's happening there? What can you tell us?
Paul Huet: Yeah, look, I've got to tell you, the strategy to buy Spargos was very intentional. We bought Spargos initially because we love the asset, it was near the mill, it was another feed for the mill, it provided us optionality to fill our mill, and that was Spargos. Look, we paid CAD$4M for this, but they used our mill as a milling solution and once we’d acquired the mill from Wesco, we could no longer offer that milling solution to them. So, we really got this thing at an amazing price. As you mentioned, the results were outstanding. They exceeded our own expectations. Look, we had 29.8g/t across 19m; 27.3g/t across 15m. These are some big, big intercepts here and this is in the pit, extending it down to the south. And look, let me tell you, we've been known about in 12-months. We've only been at this for 12-months. People sometimes forget this is our maiden year. It's year 1 for us here, but we took that same approach, that same disciplined approach that we had at Beta Hunt, and Higginsville, we did that same disciplined approach at Spargos. We looked at the Royalties that were there. There was a 3% Royalty there. So, we ended up buying that Royalty back. We paid CAD$3M. Look, we wanted to write a cheque for it. Hands down, I said, 'Write them a cheque, we don't need the dilution.' But there's somebody on the other end when you're negotiating. So, they wanted to make sure that they could participate in some upside. So we ended up negotiating to CAD$2M to CAD$1M. We gave them CAD$2M in cash, then CAD$1M in shares. They get to participate in the upside, so they don't look bad in front of their shareholders, and you see the results. We eliminated that 3% Royalty in. We've been talking about Royalties for how long, Matt? Since the day I met you. It was Morgan Stanley; it was Maverick. It's now Rimilia. Now, they're done. They're done. We've got a foundation set in front of ourselves, and all 3 operations now. Now it's the time to get serious and start the drilling, and we've certainly done that.
Matthew Gordon: You've got a 12,000m program, which you had initially allocated against Spargos. Having seen these grades, does that change? You've got cash.
Paul Huet: It changes. You're right. There's no doubt it changes. First, it changed with step 1 and the Royalty. In step 2, we're being more aggressive. We're adding a second drill there. The exciting stuff about Spargos is that it's so near-surface, we'd always planned to be mining that in 2021 but at this point, we're going to have a new resource at the reserve this year, we can talk about that afterward. We won't be able to include all that drilling from the recent stuff in Spargos. We have to get it into a mining plan. We will likely be mining. This is where I'm heading. We are likely going to be mining in Spargos as soon as Q2 of 2021. Think about that. That's really quick. We bought it. We paid CAD$4M in cash. We negotiated a Royalty. We just started a drilling program and let's not forget; we were down for 5-months of the year here. We could not drill for 5-months of the year. While we were running under Covid, we had strict measurements to make sure that we didn't infect people. We couldn't have a drill onsite for 5-months. That delayed us quite a bit. So we're playing catch-up here and we're really increasing the drilling. So to your point, we have 2 drills. We're going to add a second drill at Spargos and we're going to drill as much as we can. We're going to be mining it likely in Q2 of 2021. That's right around the corner here. That's not far ahead of us.
Matthew Gordon: No, I get that.
Paul Huet: One more point. One more point. Hang on there young man. The grade. There's a very good potential that this grade is higher-grade than our underground mine. You think about that now. Come on man. Wow. We could have a grade that is in excess of our underground mine from an open pit. Wow. Come on, man, I've not seen that in the micro, never mind all over Canada, the US. You're mining an open-pit that's higher-grade than an underground? This is pretty outstanding stuff here that we've got in front of ourselves here.
Matthew Gordon: Can we talk about the Lake Cowan drilling? What's happening there?
Paul Huet: Oh, look, everybody knows Graeme. He's an amazing man. Graeme Sloan has done nothing but be a great person in our company. If you sit with Graeme Sloan and you have an interview with Graham, and I suggest that you probably do that in the near future, he will tell you personally of all the areas he's excited about, and being from Australia and running Australia for us, he's most excited about drilling in the Salt Lake system. Look, in the last couple of years, Gold Fields has perfected a way to drill under these salt-lake systems. It wasn't for a long time that people could do this. It has recently been perfected. We're following on their success. Let's just talk about what they have. Invincible has got about 1.3Moz. Revenge has about 3.5Moz. What's the other one? Victory has about 3.7Moz. You know we're talking seven, 8Moz of resource in this Salt Lake that's our very own Baloo, that Wesco bought, that we acquired and inherited as part of the acquisition, is in a Salt Lake system. So the fact that we're out there drilling in these salt lakes, it's never been tested at Higginsville or that district that we're in. 18km2, Royalties removed, a whole system to drill here. We have the opportunity to discover something pretty impressive. Our neighbours have certainly found some impressive stuff. We're drilling on it now. We've got the dollars to do it, as you pointed out. We ended, what, CAD$67M in cash. 12-months ago, I was looking at the balance sheet. We had CAD$8.7M working capital, CAD$800,000 in cash. We were in a tough situation before we had this mill, so I've got to tell you I’m extremely happy, pleased with the success of what's we've done, happy about where we're heading, and there's a lot more to come. There's a lot more to come. This is year 1 again.
Matthew Gordon: Let's just finish off trying to understand, with regards to the Larkin Gold zone, I'd like to understand the Western Flanks of the north extension, can you fill us in there?
Paul Huet: Let me try to put it into a really simple process here. I'll get to Larkin in 30-seconds. Let me just talk, I forgot to mention something about drilling on the salt lakes and Higginsville as a whole. When we bought Higginsville, Matt, it was a distressed asset. It wasn't an asset that we were buying that had a lot of drilling in front of it. It had a lot of mine planning. We had to really do some grade-control drilling. We had to do some resource definition. Reserve definition. While we've been mining, and think about this alright, if we were down for 5-months this year, how do we do grade control? How do you do the resource? We've managed to successfully deliver our plan while we're doing these things and doing mine planning. So it is not a simple task to try to do this mine planning while you have a big gap in grade control and drilling. So all these things that we're doing, we're trying to balance a very fundamental part of the mine planning and sequencing to get those tonnes to the mill, to get them into doré Gold bars. So I just wanted to explain. I think sometimes, people might rationalise it and say, 'Well why aren't they doing this? Why aren't they doing that?'
They sometimes forget that with a gap of 5-months in drilling, and the fact that we bought Higginsville and it wasn't perfect and ready to mine makes you go, that makes sense, that's actually true, they didn't buy a perfect asset. They bought a distressed asset. That's why we got it for 50M. Let's face it. We got that asset at a bargain price. Look, CAD$25M for CAD$100M mill. CAD$25M for 1.9Moz, that's seventeen dollars an ounce. You look at an acquisition in 2020, you're looking anywhere from CAD$170oz – CAD$350oz, so we got a really good deal for our shareholders. Sometimes, I think people underestimate the amount of effort that we put in, to get this into a mine plan and the work we've got to get from where t was to where we are, and into doré Gold bars. Look, I’m an operator. I've been an operator my whole life. I've been a CEO second. I'm a raised miner. If you asked my father, I'm a raised miner gone bad, he'll say. He was a great miner, and something went wrong in his head at some point in his career, but when I think about the operations and the amount of effort we've done to overcome while so many other people in 2020 have dropped their guidance into half, and it's our first year, we're maintaining it, we're nailing the guidance, we're reducing the costs at our level. What more can you ask for us? What more can you ask? It's about delivering and us following through with what we told our shareholders we would do.
Matthew Gordon: How do you plan for growth from this point. That's why you're paid the big bucks, right? You've got to work out how you move to the next phase. So how do you move to the next phase?
Paul Huet: So let's talk about one of the questions that I didn't answer. You asked about Larkin. There's a perfect example. How do you increase growth? How do you increase production? Well, look at Larkin here. We're currently mining at Beta Hunt on 0.5km between Western Flanks and the A zone. That's it. The district is 4km in length. We're only mining a shoestring. Now that we've renegotiated, we're going to really start to open up this mine. We're going to start to take advantage of this system that exists. There's so much infrastructure here. There is 400km of tunnels in this mine. Every year in my career, I have spent, or the last 20-years of my life, I spent anywhere from CAD$12M to CAD$18M every year in sustaining capital for waste development. We're going to spend half of that at this operation to produce the same number of ounces because so much infrastructure exists. Here's where I'm going. Your question. Where do you grow? Well, let's talk about Larkin. Larkin was discovered in a drift that was there for 20+ years. I'm going off memory here, it was 2.6m of 20g/t and it was 14m of 5g/t. That I remember perfectly. We flipped the drills. This is a sample off the wall of a drift, here. We're starting to re-assay all these drifts. We haven't even done 30% of them.
There are so many of them that don't have ventilation in them, so we've got to get ventilation into these areas, and then we're going to start mining them. So what you're going to see is the Larkin area, again, we saw, we showed you that, here is the level, we drilled above our heads, and we hit the widths that are probably twice as wide as we're presently mining today, at almost double the grade, Matt. We're mining about 2.6g/t to 2.8g/t underground at Beta Hunt today. The Larkin zone was 14m of 5g/t. That is twice as wide with 5g/t compared to 2.8g/t. That's almost double the grade here, so if we can start injecting this into our other system, opening up the mine, where's our bottleneck? The mill. And look, from the first day we started, I know that people might've been getting fed up with hearing, okay halts to order, we heard it before. Well, it's true. The truth is we brought them in, Covid hit, we had to take them out. We're bringing them back. In the first month that I became CEO after buying that mill, it wasn't 6-months later, it wasn't 9-months later. It was the first month. We started. I led an initiative with Graeme to start looking at mill expansion because we anticipated in a year from now, we would've had too much feed. We haven't been sitting on our hands here, doing nothing. We know we need another mill or a mill expansion or something else. We get that. It's a technical problem. We will overcome it. We will always be able to overcome technical solutions.
Some other things that are out of our control, they're more challenging, but in our case our growth profile, we're going to put out a resource and reserve this month, Matt. In the first quarter of 2021, we're going to put out a growth plan for the first time ever. This company has never demonstrated, never put one out. We will put one out for our shareholders in 2021 that'll lay out a plan showing how we grow from where we are. We'll see some good movement. We'll get good credit for that. We have yet to do it. Again, look it's our first year. Give us credit for what we've done. We're all hands-on deck, still going forward, we'll get something out in Q1 of 2021 that will be exciting for people. The good part about this is that we can fund it. We've got CAD$70M in cash, we'll end the year stronger. I've never once in my career been penalised for having too much cash. I've been harmed by not having enough cash. We're thinking of what the right thing to do for our shareholders is, absolutely, to create value for them every step of the way.
Matthew Gordon: You're quite positive, which is pretty good because you found some coarse Gold recently but didn't really talk about it. So you're not a coarse Gold company anymore, apparently.
Paul Huet: Look, nobody's more excited about finding coarse Gold than us, I'll tell you that. Now, look, we are mining in the areas where that sediment exists, where Father’s Day exists. We're mining in those areas. We were not mining actively in the past in those areas. We wanted to make sure the Royalty was renegotiated. Let's face it, we make more money for our shareholders. It's CAD$50oz, it's CAD$46oz for every ounce now. That payback for that was just on the ounces that we had for that Royalty, and Maverick’s decision was so strategic and critical, it's what brought Eric Sprott in, it brought in a lot of others, but now every ounce that we find going forward, let's make an assumption here. We've got 1.2Moz total resource. If Beta Hunt gets to 2.4Moz, is it double something unrealistic? That's not unrealistic. Every ounce you go forward, you're saving that CAD$46oz. There are tremendous savings here. If you grow it to 3M, there's a lot of room here for what we've done here.
Matthew Gordon: What do you say to people who, you got a lot of grief initially because your mine plan didn't involve chasing coarse Gold. Would you say you've made the right decision?
Paul Huet: Yeah, there's no doubt we've made the right decision. Come on, man. So we announced 2,000oz. I think I said this on the quarterly call, I believe I was asked this question. We announced 2,000oz. We've already increased it by 20%, 25% to 2,500oz. Just imagine if we could have 2,500oz on a go-forward basis almost every quarter. That would be pretty phenomenal because that goes straight to the bottom line for us. We managed, in the first 3 quarters of 2020, to demonstrate to the world, to everybody, that Beta Hunt is successful, and it does make money at the average grade. Look, that's what got the institutions in. We were all pleading, why aren't institutions in the story? I don't get it. I don’t understand. I'll tell you why. They told us why. Because of the coarse Gold. Unpredictable. Unreliable. We don't believe you could make money without it, Paul Huet. We don't think Beta Hunt is economic without it. Well, they're wrong. Beta Hunt is economic without it. We've proved it. 3 quarters in a row, we mined at Beta Hunt, economically, because we have the mill now. Our milling costs were CAD$45t-CAD$50t. We're down below CAD$22t. Our recoveries have improved. We renegotiated contracts with all our vendors, Matt. That shaved about CAD$40oz. We shaved CAD$46oz from the Royalties. We reduced G&A. Toronto had 18 people. Toronto's left with 3 people. We sublet the office, even, because we had a contract. We've got a law firm working in our office. We've reduced costs like we promised our shareholders, to ensure that our mine could be economic with the average grade.
Now, bring in the coarse Gold and add that in? Nobody's clapping more than us. We're thrilled about it because we know that that one’s straight to the bottom-line. I'll tell you, if we can consistently do 2,500oz every quarter, at 10,000oz a year or something like that, that's a huge, huge increase to the bottom-line. And these are assumptions. I'm making assumptions here, but I don't think they're totally unrealistic considering we're mining in these areas and we're starting to open up more of the mine. We’re starting to open up more of the workings. When we took over the Beta Hunt mine, we were mining 40,000t and I know that's the tonnage and we're mining ounces, but it's important to know that the mine was able to do 40,000t in the beginning. We're pushing 65,000t. We're going to increase that by adding more working areas and we're already seeing some of the better grades that we're drilling into. Those will be added to our mine plan. Look, let's not forget the competition we're going to have with our little Spargos down the road here, across the street from us. It's going to throw some big competition to our own Beta Hunt mine here on displacing grade.
Matthew Gordon: We've seen the ASIC coming down. It's getting near that CAD$1,000 mark. I want to talk to you about the mill component here because you can-, oh there's more.
Paul Huet: Wait, wait, wait. Hang on Matt. I'm not letting you walk away with that, man. There's no way I’m letting you walk on that one.
Matthew Gordon: Come on then.
Paul Huet: So ASIC, look, let's talk about it. It started at 1,183, or CAD$1,200oz. The last quarter, we were 1,044. That, Matt, included CAD$84oz that was uncontrollable by us. CAD$84 from the FX. Just the change in the exchange rate. So if you mapped this out in Australian dollars, we were well below $1,000. All we're looking at is, the FX kicked this up to CAD$1,040. We were CAD$960oz, by the way. CAD$960oz. That's where we were. The exchange on the FX doesn't matter to us, we report there for convenience. We don't shift all our dollars into US anyhow. We pay our people in Australian. We pay our vendors. 95% of everything we do is in Australian dollars. If you trended that on a downward scale, you would see, wow, they really nailed it. We said we'd get below $1,000; we were nearly $960oz if you exclude that FX. So we’re not going to be able to control the FX in what it does, but we're not always taking $20M and bringing it into US dollars and losing on it. It's just a measurement that we use for ease, for analysts, for the rest of the market, to understand and compare us on a US dollar metric.
Matthew Gordon: I get it for a point. So that begs the next question. Is an ASX listing on the cards?
Paul Huet: Yeah, look, we'd hoped for one this year. We had other things happen. The Covid impacted that. Whether people believe that or not, it's actually true. The ability to travel there, the ability to meet with the right people to get this done, was not on the table for 2020. Now, in 2021, certainly it's going to come back to the forefront. We haven’t' forgotten about it. We've not forgotten about it. We've said earlier on we believed it made a lot of sense. We still believe it makes a lot of sense. So if we can all get through this Covid situation, I think you're going to see us making that a very strong objective for ourselves in 2021.
Matthew Gordon: People can see you've got money. It reduces your negotiation stance a little bit, doesn't it? So are there mills available?
Paul Huet: Wow, okay. Maybe, I don't know, is the air different where you're at than where I'm at because I think that that actually gives me more leverage. If people can see that I have the ability to pay, if I'm walking around, looking, I bought a mill in 2011 from Newmont and I had CAD$2M in cash, and I almost didn't get that mill because the guy who was betting against me had CAD$700M. That's a true story. I lived through it. Newmont said look, Paul, we want you to get the mill but you've got CAD$2M. So they were leaning, and in fact, they signed an LOI with those other guys because they had a strong cash balance. They said, 'We're going to, unfortunately, sign with these other guys, Paul because you don't have cash.' Having a better balance sheet improves it. It doesn't harm us. It actually puts us in a stronger position to negotiate on anything we're doing. Now, mill expansion's always been something we've work-, we're so far down the road now, we're looking at it and that could be funded from our own balance sheet. Don't discount the ore stories yet. Please don't do that. Look, we know we've been talking about it but they've only been pushed aside and delayed because of Covid. We've been pretty blessed here, though.
We're at least still producing our ounces where most people are looking at their shareholders and saying, 'Covid doesn't just displace a study I wanted to do, an increase, it shut my production down. So in all fairness, our production has survived. Some of the projects that we wanted to get done were delayed by Covid, we're willing to accept that but we haven't thrown them out. In the meantime, in parallel, we're certainly looking at milling alternates in. My career has been, I can't tell you how many times in my lifetime that I've been a general manager, a COO, a CEO, or a mine manager where somebody picks up the phone calls at 2 in the morning or in the middle of the day and says, 'Paul, we're out of ore. We've got no ore.' We're frustrated and we've got no ore for 3 or 4-days. We advance schedules in the mill, EMs, we do cleanouts. In our case, this is a great problem to have. Having too much ore for a mill will displace the higher-grade in the beginning. When we find that milling solution, we'll be able to-, we're not throwing away the grade. We're having this as a reserve stockpile, so we're being very smart about every step of the way. We recognise that we need more capacity.
Matthew Gordon: Does the cost of money change for a company of your position, in terms of not just the cash in hand but the ability to continually produce free cash flow, because it's a big outlay and you don't want to dilute shareholders, do you?
Paul Huet: The cost of capital changes. Certainly. Let's just think of Karora a year ago, Matt, and think of it today. A year ago, Karora bought the HGO mill. We had to incur some debt. We paid 10% on that debt. Today, if we were to buy something similar or build something for CAD$70M and we didn't want to dilute shareholders, we wanted to use cash and some debt, we would certainly get debt at a much-reduced rate from where we are today. That's because the company has a strong balance sheet because we have a history of proving our consistent number of ounces. We have future cash flow in front of ourselves. So our average cost of capital, our whack, our weighted average cost of capital will certainly reduce, providing us with more optionality to do things. Sometimes people forget when you're-, you know, we look at several things. We're not sitting on our hands. We're looking at all kinds of things that are accretive. That makes sense, but there's always someone on the other end negotiating with us. We don't get to call all the shots, as much as we'd like to. Someone else is on the other end negotiating, saying, 'Hang on, now.' Just like the Royalty, I said, 'No way, we're not issuing shares, not a chance. It's all CAD$3M in cash. I'm not giving him a share.' It was like, well you either do something and help us so that we don't look like shmucks and we don't look bad, so you issue a bit. The compromise was to give them CAD$1M in shares. Anyhow, there's always someone on the other end. It's not a 1-way negotiation.
Matthew Gordon: Do they go, 'Because they've got cash, I think I'll charge them a little bit more. Because it's integral to their plans, I'll charge them a little bit more.' Does that not happen?
Paul Huet: I'll tell you, Matt, if you worked for me, I'd drug test you. I think that's nuts. No way. There's absolutely no way. Why would you say that? Do you think Newmont says, 'Hey because we have more money, we're willing to pay more.' They do the work, and they pay what's fair and we use every piece of leverage that we can to negotiate what's more accretive for our shareholders. I hear what you're saying. I respectfully disagree.
Matthew Gordon: Okay. Paul, thanks so much for coming on, man. I know you're busy as anything at the moment but what a year. Well done. I suspect we're going to see more of the same with the end of year report, here. This is a 100,000oz company. Who'd have thought it in January?
Paul Huet: Yeah. Well, look, Matt, it's always a pleasure. I enjoy talking to you. I love getting up there, and a message to my shareholders. We've got some of the best shareholders you can find in the world. They're not going to be disappointed. We've had some really good additions, some institutional buying. I'm thrilled about where we're headed. There’s nothing but good stuff in front of us. Thanks a lot, Matt.
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