K92 Mining (KNT) - Phase 3 Expansion: High Margin 500,000oz Gold PA

October 23 2020, 18:28 GMT+01:00

K92 Mining Inc.

  • TSX-V: KNT
  • Shares Outstanding: 213.04M
  • Share price C$7.36 (23.10.2020)
  • Market Cap: C$1.57Bn

K92 Mining is a gold developer and producer that was founded in 2010. It has a flagship gold project in the Eastern Highlands Province of Papua New Guinea: Kainantu. It is a high-grade, underground operation. We interviewed the company recently; make sure you check it out. Find more gold content on our website here. K92 Mining's share price rose from C$2.98 to a peak of C$8.40 in September, regressing back to C$7.36 today.
The company started on its upward growth trajectory in 2017 when it made the high-grade, near-mine discovery, Kora North, which was an extension to its existing deposit. Some investors have already made money, and the unprecedented gold bull environment certainly has a lot to do with this, but what sort of growth can investors who make their entry now expect to experience?

K92 Mining operates an organic growth model; and has been self-funded since 2018. Its current annual production, around 100,000oz gold equivalent, is edging the company towards the status of a mid-tier gold producer. It appears that the company has a plan to drive these production levels up over the next 3 years by pushing its throughput up from 300,000t ore pa to 1Mt ore pa. This phased approach means that by next year, K92 Mining could be producing 140,000oz gold equivalent pa: solid mid-tier production levels. Moreover, inside 3 years, the company is targeting 300,000oz pa. 

Away from the promise of increased gold production, there are more elements to this story that investors might find encouraging. The cost profile of K92 Mining places it in the bottom quartile amongst gold producers, with an AISC below US$500/oz. Gold producers with an AISC well over US$1,000/oz are turning a solid profit in the current bull environment, so K92 will aim to leverage the economics of Kainantu to produce strong results. The management team also claims that the cash cost is "ridiculously low," and that in Kainantu it is developing a "Tier-1 asset." CEO, John Lewins, recently took part in an interview with Crux Investor, and he reinforced the company's credentials. Perhaps most notably, he stated that K92 Mining has the "3rd-highest grade underground resource in the world today in a list of companies."

Having "drilled about 20% of the high-grade veins" within the company's mining lease, the company believes the remaining 80% could offer significant growth. Continuing with the theme of growth, the wider land package that isn't covered by the mining lease is 700km2, and there could be more high-grade vein systems. Thus far, the vast majority of development has been financed via cash flow, and the financing strategy for the expansion project will continue in the same vain. For some context, let's take a quick look at some of the highlights from the Stage 3 Expansion PEA for Kora (all figures in USD):

  • After-tax NPV5%: $1.5Bn (at $1,500 per ounce gold). However, with a more favourable gold price of $1,900/oz, it will increase to $2Bn.
  • Average annual production: 318,000oz gold eq. pa, commencing in late-2023. This represents a 165% increase from the company's Stage 2 Expansion.
  • Life-of-mine average cash costs: $353/oz gold eq.
  • AISC: $489/oz gold equivalent. This makes K92 one of the lowest-cost gold producers in the world.
  • Cash costs: $202/oz gold.
  • AISC costs: $363/oz gold net of by-product credits.
  • Pre-expansion capital cost: $125M.
  • Life-of-mine sustaining capital cost: $341M. All capital costs are fully funded by existing cash flow from Stage 2 Kainantu.
  • Mine life: 12 years. Around 3 of these years will be at Stage 2 production levels.

Based on these results, K92 Mining will now proceed towards a DFS. With a net income for Q2/20 of US$16.9M or US$0.08 per share, a cash position of US$34.7M with US$9.1M in debt (as of June 30th), and with record quarterly revenue (US$47.9M) and operating cash flow (US$30.3M), it appears well-financed to accomplish this.

During our interview, we were interested to learn why the company went into Papua New Guinea in the first place; it is not a well-known mining jurisdiction. Alluvial gold was discovered near Kainantu in around 1930 by E. Ubank and N. Rowlands, who were the first Europeans in the area. What followed was inconsistent development. However, in March 2004, Highland began the construction of the mine. It was quite small to start off with, producing only 50,000oz-60,000oz pa. In 2007, Highland made the decision to sell Kainantu to a subsidiary of Barrick Gold, called Placer Dome Oceania, for US$141.5M. According to K92 Mining, Barrick Gold was buying into copper-gold exploration potential. In December 2008, the decision was made to place the asset on care and maintenance. In 2014, Barrick Gold made a strategic decision to sell all of Kainantu and 50% of its interest in Kora. Lewins was keen to explain that Barrick did not sell the asset because of a loss of faith in its potential. Instead, he argues that this decision formed part of a wider strategy for the company's exit from Papua New Guinea.

Kainantu was acquired for an upfront payment of US$2M and a contingent payment of up to US$16M dependent on how many ounces were produced and discovered. K92 Mining wrapped up this debt last year with a US$12M one-off payment. Having been on care and maintenance for 7 years, Kainantu was now 100% in the grip of K92. The company set about refurbishing it and bringing it back into production. Certain aspects of the project were geologically challenging. Whilst the ore body was high grade, it was narrow and featured geotechnical difficulties. The company quickly identified the potential of a second orebody, some 600m along the strike of Kora. Kora had a resource of 1.6Moz at just over 7g/t gold and 2% copper, resulting in a combined 10-11g/t gold eq. There were 2 veins that were three to 6m wide with "very good continuity of mineralisation." K92 recognised that it needed to start producing gold at Irumafimpa in order to bankroll the development of Kora. When Lewins first joined the company, the team quickly realised there was a good chance that Kora actually extended 500m-600m further to the north, and almost joined Irumafimpa, making the company's investment in infrastructure more economic.

In April/May 2017, an underground drill programme proved this hypothesis. The team's geologists expected to hit one of the Kora veins at 200m depth, and they did, bringing up samples containing over 5m at more than 11g/t gold and 1% copper. It quickly became obvious that this wasn't Irumafimpa; this was Kora. The company set about creating a crosscut whilst continuing drilling. A bulk sample followed this drill programme in October 2017, and K92 achieved recovery rates of 90% gold and 90% copper. Having reached this milestone, the company has already drilled a year of resources ahead of itself.

K92 committed to developing Kora and by the end of January 2018, just 4 months after taking a bulk sample, the company declared commercial production. Kora has been the only area mined since then. Mining operations are totally focussed on the Kora-Irumafimpa High-Grade Vein System. There has been steady, accretive growth to production volumes: 47,000oz gold eq. in 2018, 82,000oz gold eq. in 2019 and now around 100,000oz with a view to more growth next year.

Lewins has worked hard to progress the company. He came in just after the Barrick deal as a COO. The main issue for K92 was the lack of available capital in a bear environment, so Lewins had to spend much of his first 9 months as a consultant, giving K92 50% of his time at no cost and being offered shares as a reward. He feels this indicates the belief he has in the project.

His initial belief was derived from Barrick's drill data, but it was soon reinforced by a growing resource, reaching 3.7Moz inferred and 1.1Moz measured and indicated while depleting it by 200,000oz. If K92 can successful re-categorise its M&I resources, it would hit that 5Moz figure. Interestingly, because K92 is drilling horizontally into a mountain, Lewins doesn't believe the company has got to a point it would regard as at depth yet.

K92 has a good relationship with the Papua New Guinea government, and this has been aided by the company's turnaround of a mine that had never made money into a profitable one. The country has been independent for around 45 years and has never experienced a coup. It is a democratic country with a "Westminster-style" government and 111 members of parliament. With c. 8.5M people and 850 languages, it is an extremely diverse area.

Royalties are generally unusual in Papua New Guinea, and 70% of K92's royalty goes to the communities with the remaining 30% going to local level government and provincial government. It is a "relatively low" 2% royalty, and with a 30% corporate tax rate across the country, Lewins believes this is a favourable region to mine and do business. With the "best safety record in Papua New Guinea and one of the best in Australasia," K92 believes it is a good company to work for.

Within this ~725km2 land package (~925km2 with contiguous land under application), there is more exploration potential to add into this mix. There are numerous epithermal targets/deposits, such as the Irumafimpa Extension (Kokomo), Kora, Judd, Karempe, Maniape, Arakompa, Mati and Mesoan. There are also porphyry targets: Tankaunan, Kokofimpa, Timpa, A1 (Headwaters), Blue Lake, Efontera, Kathnell, Yompossa (Yanabo), Aifunka, Yonki (skarn & porphyry). While Kora has been the main focus so far, Judd is the next priority on the list. K92 believes it has the grade and continuity to produce results. Another drill rig could be working on Judd by Q4/20 at the earliest. The company's underground development is taking material out of Judd, and it could well add ounces to K92's bottom line soon. Over at Blue Lake, two brand new rigs are undergoing commissioning over the next couple of weeks and they will then be used for the company's second drill programme there. The company feels these additional deposits have the potential to turn K92 into a 500,000oz pa company.

A multi-asset company will almost always receive a better valuation, and Lewins is cognisant of this. This is why M&A is a part of the company's strategy, and some of the cash flow could be allocated to this. It is on the lookout for 100,000oz pa assets with a long mine life. Australasia, North America and the Asian Pacific are target jurisdictions. To date, the company's cost of adding an ounce has been around US$5. It will hope to continue or improve on this figure, and considering that Lewins has now built 3 gold mines in Australia, investors may feel confident in his ability to hit deliverables. Having just expanded the company's 400,000tpa plant, could K92 be primed for more growth? 

For more on K92 Mining, check out the company's website

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