K92 Mining Inc. (KNT) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the K92 Mining First Quarter 2021 Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to David Medilek, Vice President, Business Development and Investor Relations. Please go ahead.

Thank you, Operator, and thanks, everyone, for attending K92 Mining's first quarter 2021 conference call. We hope you and your families are doing well. In addition to myself, we have on the line John Lewins, Chief Executive Officer and Director; and Justin Blanchet, Chief Financial Officer. I would also like to remind everyone that after the remarks from management, the call will be followed by a Q&A session. As we will be making forward-looking statements during the call, please refer to the cautionary notes and risk disclosure in our MD&A and Slide 2 of the webcast presentation. Also bear in mind that all dollar amounts mentioned in the conference call are in United States dollars unless otherwise noted. Now I'll turn it over to John to provide you with an overview.

Well, thank you, Dave, and welcome, everyone. The first quarter, the company made considerable progress operationally, financially and, importantly, on the exploration front. And this was achieved despite multiple short-term challenges, which were somewhat unexpected. But I'm pleased to report that we've been able to deal with all of these challenges, thanks primarily to the efforts of our people on the ground. Operationally, we see performance strengthening through the second quarter and then into the second half of the year. When we look, first of all, at our safety, we had 1 lost time injury in 2020, and that sees K92 continuing to operate with one of the best safety records in the Australasian region since we started operations. Our focus, I believe, has been relentless in terms of occupational health and safety, and we continually look to improve. A large focus, as you would expect during this time, has been on the many challenges that are caused by the COVID-19 pandemic, and I believe that we have been particularly successful in addressing some of those challenges. When we look on the production front, we delivered 18,654 gold equivalent ounces, with the operation delivering a record mill throughput, 73,221 tonnes processed, while we had a reduced head grade of 8.5 grams per tonne. Grade reduction was due to treating significantly higher portion of low-grade stockpile than we had budgeted, and that was a result of the challenges that I referred to previously: COVID-19, backfilling and a temporary shortage of bulk emulsion. All of which, as I've said, have been resolved. So when we compare to first quarter 2020, gold equivalent production decreased by 6%, while our throughput increased by 54%. Importantly, I think, despite the operational challenges in Q1, we saw a 6% increase in mill throughput and a marginal increase in our total material moved in comparison with the previous record quarter. Underground development, however, is comparable with the first quarter of 2020, but 18% down on that record quarter of Q4, with the majority of the meters that were reduced coming from a reduction in the work undertaken on the twin incline, and that was very much a decision taken so that we could focus on the operational side and production side during the challenges that we faced. When we look at the performance of the Stage 2 process plant in the first quarter, I think that has been particularly encouraging. The plant expansion, as you may recall, was commissioned late in the third quarter 2020. Nameplate capacity: 400,000 tonnes per annum; 1,100 tonnes per day. So it was a doubling of capacity. January and February, we saw 6 consecutive weeks where the throughput averaged 1,100 tonnes a day; 18 days, the average was actually above 1,100 tonnes per day; and in 8 days, above 1,200 tonnes per day. We also recorded a new daily record of 1,315 tonnes through the plant. So that certainly indicates that there is potential for the process plant to consistently deliver significantly higher throughput than the nameplate, and that obviously has significant implications going forward in terms of our production capacity. Also during the quarter, we saw that when we look at our reconciliation of resource and grade control models, again we produce more ounces than we predicted, being driven largely by grade. So this has been a consistent theme, both in the original model and in the April 2020 model. And so, again, producing more ounces than [ we call for ]. Looking at those challenges that we spoke about during the first quarter, bulk emulsion explosives, logistical issues associated with bringing explosives into PNG due to a number of issues, a major one being the explosion that many people may have seen in Beirut, which made the movement of explosives more controlled. Pleased to report that we've overcome that issue, working with the supplier, who has now almost completed a facility in Lae. So we'll now have a domestic facility supplying our bulk emulsion to the mine, and that's only 200-and-something kilometers away. In addition, we had a loader incident which impacted our stoping backfilling activities for approximately 3 weeks during the period. We've completed the investigation with the Department of Mines and put in place some additional procedures, and what have you. That's all been resolved, and we're back to our long hole stoping and backfilling. And then in early March, the Australian government announced a temporary suspension of travel of FIFO expatriate workers in and out of Australia to PNG. We've worked with the Australian government through the PNG Chamber of Mines and Petroleum to resolve that issue. We've enhanced some of the protocols that we use as an industry. And as a result, I'm happy to say that just last week we had approval to recommence our FIFO operations, and in fact, we've flown our first set of people into country. And so we've seen that particular issue resolved as well. So with that, I'll now hand you over to our Chief Financial Officer, Justin Blanchet, to discuss the financial results in the quarter. Thank you.

Thank you, John, and hello, everyone. During the first quarter, we had revenue of $29.5 million, a 7% increase from 2020. The increase in revenue was attributable to an increase in production and an increase in the realized selling gold price of $1,735 per ounce compared to $1,502 per ounce in 2020, offset by negative adjustments to the fair value of settlement receivables from previous periods. As of March 31, 2021, there are 2,379 ounces of gold and concentrate inventory, a decrease of 3,072 gold ounces when compared to December 31, due to the timing of sales. In the first quarter, cost of sales was $20.9 million, compared to $15.2 million in 2020. The higher costs were primarily due to increased operational activity, as illustrated by the significant increase in ore processed. In addition, the company incurred costs related to the COVID-19 pandemic, including additional pay for employees completing longer rosters at site, additional costs related to the move-in of personnel and supplies and additional safety- and medical-related costs. Quarterly cash flow from operating activities before changes in working capital was $7.7 million, compared to $12.5 million in Q1 2020. As at March 31, we had a record $66.2 million in cash and cash equivalents, while spending $4.7 million in expansion capital for the quarter. The company fully repaid the outstanding loan from Trafigura during the quarter, leaving the company with no debt. As John mentioned, for the quarter, the K92 gold operations produced 17,774 ounces of gold, 426,153 pounds of copper and 7,925 ounces of silver, or 18,654 ounces of gold equivalent, which is a 6% decrease from 2020. We sold 21,879 ounces of gold, 394,635 pounds of copper and 7,463 ounces of silver. We incurred a cash costs of $745 and an all-in sustaining cost of $1,038 per ounce, which was significantly below our realized gold selling price of $1,735 per ounce. Our Q1 2021 cash costs per ounce decreased to $745, versus $752 in 2020. The decrease in cash costs was due to higher amounts of gold sold during the quarter versus the prior period and a successful ramp-up of the 400,000 expansion, allowing the company to achieve better economies of scale. These were offset by lower production due to the reasons outlined above. In addition, the company incurred costs related to the COVID-19 pandemic. It is important to note that after commissioning the Stage 2 plant expansion in late Q3 2020, we have seen a significant compression in our total unit costs per tonne processed, approaching $24 a tonne. We continue to see downward pressure on costs via economies of scale as operations ramp up. I will now turn the call back to John to continue with the rest of the presentation.

Well, thank you, Justin. Moving on to the twin incline. During the quarter, in the first 2 months we saw considerable progress being made, very strong development advance rates, with the further of the 2 inclines at approximately 370 meters. However, during March, we cut back significantly on work on the twin incline to focus primarily on production as a result of the aforementioned challenges, primarily being restriction in FIFO workers. That has obviously continued through into the first half of the second quarter. But with the lifting of the travel restrictions, we're now picking up again in terms of our development on the twin incline. When we look on the exploration front, I think it would be fair to say that we've been very pleased with the progress, both in the high-grade vein systems at Kora and Judd and also in our main porphyry target at Blue Lake. Looking at Kora, mid-February, I think we announced results from another 35 holes, which were both infill and step-out drilling, step-out drilling being to the [ site ]. And this is all for our updated resource, which will be feeding into our feasibility study, looking at completion in Q4. The results delivered multiple high-grade intersections, the best of which I think was 7.2 meters, 65 grams per tonne gold equivalent, with a very high hit rate. So 25 of those intersections exceeded 10 grams per tonne gold equivalent. Results also featured a number of veins that are currently not in our existing resource. That includes 7.8 meters at 21 grams per tonne gold equivalent in the K2 Hanging Wall and just over 3 meters at 15 grams per tonne in what we designate the K3 vein. Now in September of 2020, we announced the first significant exploration undertaken by K92 on Judd. We had over 108 meters development that we reported on the 1235 Level and that we'd also taken a bulk sample. January, at the end of January of this year, we updated that, that we took out 288 meters along strike, with the additional 175 meters having averaged 3.7-meter vein thickness, 15.4 gram per tonne gold equivalent; and the last 65 meters of that had actually averaged 3.8 meters at 18.7 grams per tonne gold equivalent. So over the entire almost 300-meter development that we'd done to that point in time, the J1 vein had averaged about 3.5 meters at over 10 grams per tonne gold equivalent. Now as a result of those outstanding results from that development, we undertook a very limited drilling program, because our drilling is really focused on Kora and that resource update, but we undertook a limited drilling program, and results from that I think were extremely encouraging. They included JDD 0006, which gave results of 7.25 meters at 256 grams per tonne gold, and that was approximately 50 meters above the development. So when we look at that development, I think to date we've seen strong continuity and high grade, including in the faces, as you can see here, 5.5 meters at almost 110 grams per tonne gold equivalent. And from a geological perspective, very similar to Kora, but with probably better geotechnical characteristics thus far. To say we are encouraged by the results at Judd is probably an understatement. We've got multiple veins intersected. The geology, as I said, very similar to Kora. It high grade. It's underexplored. [ The strike length at ] 2.5 kilometers. So it offers tremendous upside potential. We'll be targeting Judd with far more aggressive drilling as we reach the completion of the Kora resource update. So look towards the end of this year to see us aggressively drilling at Judd. Finally, in terms of our porphyry target, the Phase 2 drill program for the copper-gold Blue Lake porphyry target, shallow vector drilling part of the program is now almost complete. And the next step is to evaluate that potassic core, which we'd obviously expect to be the higher-grade portion of the system. We've currently got 2 drill rigs working at Blue Lake. And at this point in time, we anticipate in the second half of the year we will start the deeper drilling, targeting that potassic core. So I think the results, both from the high-grade vein field and from the porphyry drilling, have been, from our perspective, exciting, highlight the significant near-term potential as well as the big system upside of the porphyries at K92. With only approximately 20% of our vein field strike length being drilled so far, I think we still have an enormous amount of drilling and an enormous amount of potential, both along strike and at depth. Similarly, when we look at our porphyry, I think we've drilled 2 or 3 of the dozen targets to date. So again, still an enormous amount of work to be done and an enormous amount of upside. So with that, Operator, I think if we could commence the Q&A session? Thank you.

[Operator Instructions] Our first question comes from Tom Gallo of Canaccord Genuity.

John, I've actually got 2 questions on sort of the exploration and the drilling. You mentioned a resource update coming here with Kora. Are we to expect any part of Judd, the stuff that you've done the development on and some of the drilling on, to be incorporated in that resource or any of the other sort of veins peripheral to the mine to be included in that resource? Or is it just a Kora resource update?

Tom, thanks for that. In terms of the resource update, we do expect to have some Judd in that resource. I think it will be limited because there would be only a limited drilling program completed prior to the resource update. But certainly, in and around the development which, as we flagged, is something over 300 meters in strike length, we will put a resource around that. However, it's really post getting that resource [indiscernible] that we anticipate really getting aggressively into drilling Judd. We've got the now 6 rigs that are underground, and we'd expect post the Kora resource 3 of those, at least, will be focusing on drilling Judd and bringing Judd into resource and 3 of them will continue with Kora pushing to the site and also expanding Measured and Indicated and potentially [indiscernible] as well?

Okay. Very good. Just one other question, on the porphyries. You mentioned toward the end of -- the back half of this year to do your deep drilling at Blue Lake. The first question on Blue Lake, have you guys sort of decided where you're going to drill? Like, did Phase 2 kind of give you enough evidence? And then more regionally, are you going to look to apply this same sort of model where you do the vectoring and stuff to, say, A1, for example?

Okay. In terms of Blue Lake, we did the first program, as you're aware, last year, finished the program last year. And that gave us a certain vectoring into where that potential potassic core was, but it also highlighted that we needed additional drilling to really give us a full 3-dimensional model. We certainly believe that with the drilling that we're busy completing now it will give us very strong vectoring in terms of where to target that potassic core. And I think we very much said that we anticipate drilling it second half of this year, putting in deeper holes that will be up to 1,000 meters deep, and that very much is where we're sitting at this point in time. I think we will have some update of drilling results out in the near future. I would say that while we've continued with our exploration program we certainly, because of the restrictions that we've had in terms of personnel, COVID and movement of people, we're somewhat behind where we wanted to be in terms of actually doing the assaying of all the results that we've got in doing some of that, some of the other work on the core. So although the drilling has gone ahead, we're behind where we wanted to be in terms of just logging and assaying. In terms of applying that to some of the regional targets, such as A1 headwater, certainly, the overall model of drilling, putting together a 3D model, which then allows us to vector in towards that potassic core, is very much the way that we would see ourselves approaching it.

Do you have a timing on when you'd maybe look to step to your next porphyry target? Obviously, you're going to be doing your deep drilling at Blue Lake, but is there back half of this year or maybe next year to look to do some of the more, some of that shallow drilling at A1 or another porphyry target?

I think at this point in time, we'd be saying next year, looking at where we sit with things like COVID and all the rest of it and making sure that we've got a tight program that we can maintain. certainly, as I think many people are aware, we operate the mine as, effectively, a COVID bubble. So anyone coming to site needs to quarantine for a week. When it comes to exploration, the exploration people actually don't come to site, and we try and operate the drill sites that we're running as bubbles themselves, which is somewhat more challenging, obviously, because they're smaller areas and there is interaction with locals. So it is more difficult to maintain the same sort of COVID protocols that we're using at the main operating site. There's interaction through helicopters and various other things. So we're very cognizant of those sort of issues when we look at our exploration process.

Our next question comes from Alex Terentiew of Stifel.

So just 2 questions for me. First, with the travel ban between PNG and Australia now lifted, how long before you get back to, I guess, what you could say, full development plans on the twin incline and exploration activities? I understand, I appreciate it takes a bit of time, but how long, I guess, before you get back to plan? And then the second question is a question maybe a little bit more for Justin. You mentioned 2,300, I think, ounces or so in inventory, but can you give any guidance on the number of ounces that are provisionally priced at quarter-end and any details on that provisional pricing?

Thanks, Alex. Look, in terms of ramping up to where we were previously both in terms of development projects, et cetera, and also in terms of exploration, it will take us about 3 weeks of movement of people to get our people back into a balance. We've effectively had a number of people who've been on site or something like almost 3 months in some cases as a result of that suspension of FIFO and the agreement that we've reached with the Australian government. So that was done as an industry through the Chamber of Mines and Petroleum of which I'm one of the council, so I've been one of the people that's been involved in the engagement with the Australian government, the Queensland government, the PNG government. We're now moving people basically primarily through a charter. We, as an industry, move about 100 people a week, and we have approval from the government to move -- Australian government to move on to people a week as an industry. That's beyond the number that, if we look at our operations, we actually need as an industry to move on a weekly basis. But obviously, we've all got to operate within that constraint. We'd all like to immediately change out all of our people, which wouldn't be possible within those most constraints. And that 100 people is on top of what the government normally allow for movements of people. So we are provided with a guarantee of movement of people from the Australian government, which is obviously very positive in our context. So given that, realistically, it will be into June before we're really able to get the entire operation running back where it was in terms of the twin incline and all the development associated with operations, et cetera, et cetera. We've also curtailed some of our other projects. And realistically, that will take us a couple of months to bring all of those things back to the levels where they were previously. And that's more related to looking at the overall COVID levels that we're seeing in the community. Our systems, as they stand at present, and this is industry-wide and it's part of the protocols that we've agreed with Government and, quite frankly, were in place previously, in any event, we operate a bubble at the operation, as I mentioned. Anyone coming to site, whether you're coming from overseas or whether you're coming from within PNG, you have to do a week in quarantine. In order to go in quarantine, you have to, first of all, pass a COVID test. If you're COVID-positive, you cannot go into quarantine, because you obviously don't want to bring COVID-positive people into quarantine. You're then quarantined for a minimum of 7 days. You're tested before you then go on to site. So our site is totally COVID-free. We have, I think, currently, I think we've got 3 positive cases within our quarantine. And we do see, almost every single batch of people coming in we do see that 1 or 2 of those people will be presenting COVID-positive before going into quarantine. So they don't go into quarantine. So we anticipate that we will see some impact on our people, our nationals coming in, certainly, the balance of this year, and we're planning accordingly. And that means reducing the numbers of people that we have in the camp, et cetera, et cetera. And so that does mean that we'll certainly look at focusing on operations, focusing on the twin incline and focusing on other projects which are key for the next phase of expansion, and then other peripheral projects will be more opportunistic when we have the opportunity [indiscernible] people and we'll bring them and have them operating. In terms of exploration, the exploration in terms of the meters that we've been doing have been largely unaffected at this point in time by what's been happening. It's more been about the logging and the processing of core because that's been on-site, and we have obviously curtailed people and curtailed some of our key national people. And again, we would anticipate that it's going to take us 6 to 8 weeks to actually catch up on all of the logging and assaying and everything else that we haven't been keeping up during this period. In terms of #2, I'll hand that one over to you, Justin.

Sure. Thanks, John. So as at March 31, K92 had about 40,000 gold ounces that were subject to provisional pricing, with final pricing to be set between April through June. And so subsequently, in Q2, we've already seen a recovery of some of the negative pricing adjustments that we had recorded in Q1.

Okay. That's great. And then in your hedging program there, you're not locking in, just so I'm clear on the mechanics of it, you're not locking in a specific price, but you're just, I guess, protecting it with gold collars. Is that correct?

That's correct, yes. So we sell puts and purchase calls so that the net cost to the company is nil, and we purchase them each time concentrate is sold and invoiced to our offtaker.

So to be clear, it's price protection only for what we are already produced. It's not a -- we're not looking at a hedging situation for material that we haven't produced. It's merely to [indiscernible] on the fact that when we sell something, the actual settlement date is 3 months later. So although we get a provisional payment when we basically get it to Lae, and that's based on the price of the day, the actual settlement is 3 months later. We don't want to get into the situation where, let's say, we get paid 90% of what we're going to get paid at $2,000 an ounce and gold collapses to $1,000 an ounce 3 months later, and suddenly we've got to pay back a whole lot of money to our offtaker. So that's really what it's there for.

[Operator Instructions] Our next question comes from Chris Thompson of PI Financial.

Just a quick question, more related, I guess, to the up-and-coming feasibility study and, I guess, moves to expand the operation and the next phase of expansion there. Can you maybe just talk a little bit about what you're doing on the permitting side and what needs to be done on the permitting side to envisage that level of expansion that you could see in the feasibility?

Okay. In terms of permitting for the expansion, we've had some discussion with Government. At this point in time, first off, in terms of tailings dam, the tailings dam is permitted. But as you do any lifts or whatever else, you have to go through a process with Government. We're going through one right now to do a Stage 2 lift. It's the first lift that's been done on the tailings dam, and there will be a Stage 3, 4 and 5, I think, on the tailings dam. That is an ongoing process that you go through with Government. It is not a permitting of a new dam. It's simply a permitting of the lift, similar to what we would go through in Australia. In terms of the mining lease, there is not an additional permit, per se, required we would put in on the basis of the feasibility study and updated mining plan to be approved by Government. It's very much the same [indiscernible] by the MRA, very much the same as we did to start Kora in the first place, because Kora was a new mining area. The original mine plan was based on the old [indiscernible] throughput deposit. And so it will be a process of simply putting in new mine plans and having them approved. And we've done that already, a, to start Kora; and, b, then to expand Kora to the 400,000-tonne [indiscernible]. So again, not a major process. I would also say that certainly, at this point in time, it would be our intent to apply for an additional mining lease which would look at an area to the south and potentially east and west as well, just expanding the mine [ efficiency ]. And that will be a whole process to go through for a new mining lease. And that's really recognizing that while the current resource sits within the mining lease, we do expect that resource to expand outside of the mining lease into our existing exploration areas. And as a result of that, we would expect to apply for a new mining lease, a new mining lease outside of the existing mining lease. That is not an essential part of doing the expansion; that's simply more about extending life of mine and, obviously, bringing in additional resources into that life of mine plan.

This concludes the question-and-answer session. I would like to turn the conference back over to John Lewins for any closing remarks.

Thank you, Operator. Look, I think it would be fair to say that the first quarter of 2021 has, in many ways, been probably one of the most challenging that we've had in the last couple of years. We've certainly, looking at our expansion, our Stage 2 expansion, I think we've been very pleased with what we've seen from the plant side of things, where we're certainly seeing potential ore 10% to 20% more throughput than we have designed, and that is a real positive, going forward. Ramping up the mine production to meet that. Certainly, we don't see within 2021 that any of that additional capacity beyond 1,100 tonnes per day would come out from underground. It will take us obviously a while to do that. We faced a number of challenges in relation to COVID, both in the domestic context of PNG, but also in the context of moving our people, combined with other issues, such as explosives and what have you. And really looking at what we've been able to achieve in those constrained times and those challenges has been a real testament, I think, to our people and their ability to deal with challenges as they are put up. The fact that PNG sits right next to Australia, although it is a country that we have our people in and out of, the strong relationship between Australia and PNG at the government level and, quite frankly, the business level has really come to the fore during the challenges, and we've seen from the Australian government a really, really strong support for our industry. And that has been a key factor in, for instance, moving to the situation we're in now, where we've got total approval for our movement of people from the government. And so that's been extremely positive from our context. So we've had a very challenging first quarter. We've come through it with record throughput, with a new record cash balance, and that sets us up in a very good position going forward for the balance of the year. We do anticipate that we'll continue to see challenges in this COVID environment, but I think we've shown with our people and with our relationships that we are equal to meeting those challenges and maintaining the forward momentum of this company in terms of the expansion of production and moving into our Stage 3 and really realizing the potential of what is, I think, one of the best geological deposits and regions in the world today. So with that, I'd like to thank you for your attendance today or this evening if you're in my part of the world, and look forward to further discussions in 3 months' time when we've completed the second quarter. So thank you for that.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.