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

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

Thank you, operator, and thanks everyone for attending K92 Mining's third 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, please 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.

Thank you, David, and welcome, everyone. So the third quarter saw Kainantu Gold Mine take a number of major steps forward. These included achieving Stage 2 extension run rate throughput in September; reporting extensive high-grade mineralization along the second sub-level at Judd; expanding Judd with more high-grade drill results; delivering some of the highest grade reported intersections at Kora; exceeding budget on the twin incline development meters; deeper drilling progressing at Blue Lake; and then soon after the quarter ended, announcing Board approval for the Stage 2 Expansion, which increases existing plant throughput and mine production a further 25% to 500,000 tonnes per annum for an estimated cost of just -- or CapEx of just $2.5 million. On the safety front, the third quarter, we're pleased to report that there were zero lost time injuries as K92 continues to operate with one of the best safety records in the Australasia region, something which we've done since the start of operations. We believe that we are relentless in our focus in occupational health and safety and continuously seeking to improve our safety systems. I'm pleased to report that K92 released its 2020 Sustainability Report. For the report, we completed a materiality assessment, listening to our various internal and external stakeholders to better appreciate what matters to them. This report incorporates a feedback and, more importantly, will influence our efforts going forward. The report has also upgraded our disclosure reporting to SASB Metals and Mining Standard. For the 2021 report, we're planning to have a major focus on carbon emissions; a greenhouse gas emission audit is currently underway and this will enhance our ESG reporting; our understanding of areas of improvement; and provide important information for developing corporate emissions goals and strategies. I think before moving to the next slide, I'd like to say that we're extremely proud of the positive impact that the operation has had on our communities and we encourage you to read the report, which can be found on our website in the Responsible Mining section. So, during the quarter, we produced 24,122 gold equivalent ounces, with the operation delivering a record mill throughput of 87,621 tonnes processed at a head grade of 9.82 gram per tonne gold equivalent. Compared to second quarter 2020, mill throughput increased 35%. Gold grades, once again, delivered a positive reconciliation versus the resource model and partially offset below budget mine grades, which were due to the impact of COVID-19 and PNG, which we will discuss further in the presentation. A major positive for the quarter was achieving Stage 2 Expansion run rate throughput in the month of September. And, in September, for 20 days, we actually processed more than 1,100 tonnes per day, with a single day record of 1,408 tonnes processed on September 22. While delivering a strong throughput, the mill also produced a notably finer grind than it's required, highlighting the potential for further throughput upside. We're pleased to report that in October, a new daily record was then set of 1,537 tonnes processed on October 24. In terms of the key operation, quarterly physical record material movements were achieved at both the process plant and the mine, increasing by 16% and 26%, respectively. Development increased over 50% from the previous quarter. Despite record material movements achieved during the quarter, COVID-19 was certainly a major factor. In the first half of 2021, Papua New Guinea has experienced record levels of COVID-19 cases, resulting for us in significant short staffing due to COVID-related absenteeism in addition to requiring an increase in the quarantine control measures, which we apply. In addition, from mid-March through to mid-May, expatriate travel was suspended between Australia and Papua New Guinea and this, obviously, had a notable impact on our underground development in the first half of 2021, as shown in the middle chart, with delayed access to higher-grade stoping than flowing through to Q3 for Kora. While these challenges have been significantly addressed via a 50% improvement in development meters in the third quarter versus the second quarter, increasing access to stoping areas at Kora plus mining ramping up at the new major front at Judd, we expect the fourth quarter to be the strongest quarter of the year. So, the impact of COVID without question has been significantly greater than we expected when we reported our guidance at the beginning of the year. We responded to COVID this year with even stronger mitigation measures, driven by extensive quarantining and testing, which directly increased cash costs by between $60 and $80 an ounce and all-in sustaining costs by between $70 and $90 an ounce. The impact of short-staffing has impacted production by an estimated 25,000 ounces to 30,000 ounces in 2021. COVID-19 is still a factor in the fourth quarter and the country is going through a record surge due to the Delta variant since the second half of September. The mine has continuously operated and our COVID-19 mitigation systems on site are working. However, as a result of these impacts during the year, we are updating our operational guidance to 96,000 ounces to 102,000 ounces gold equivalent production at a cash cost of between $670 and $720 an ounce and an all-in sustaining cost between $920 and $970 an ounce, growth capital, $20 million to $25 million, and exploration expenditure of $10 million to $13 million. In terms of investment bank research and analyst average estimates, the updated guidance is in line for production and cash costs and K92 all-in sustaining cost guidance is moderately better than the research consensus average. As noted earlier in the presentation, despite these challenges, 2021 has featured many major operational exploration accomplishments and we also see several positive developments for 2022. First, parts of Australia have already opened up for quarantine-free expatriate travel, with our workforce from New South Wales and Victoria no longer required to go through quarantine. Importantly, this means that many of our specialist Australian contractors is now available to travel to site, better supporting the operation and the near-term commencing work on several highly-accretive projects, such as commissioning of Stage 2 gravity circuit. The COVID-19 vaccination rollout on site is progressing with some 55% of our workforce having received at least one dose. As COVID-19 cases improve in Papua New Guinea and our vaccination rates increase, we plan to progressively relax our quarantine and mitigation measures. In Q4, mine operations will receive a major short and long-term boost from Judd stoping coming online. The process plant will be bigger in 2022 with the Stage 2A commissioning planned for third quarter. In exploration, our focus is shifting from infill drilling at Kora to resource growth initiatives at Kora South, Judd, Blue Lake, and eventually Kora Deeps as we advance the twin inclines. I will now turn over to our Chief Financial Officer, Justin Blanchet, to discuss the financial results for the third quarter.

Thank you, John, and hello, everyone. During the third quarter, we had revenue of $35.3 million, which was comparable to 2020. We sold 21,675 gold ounces during the quarter compared to 19,625 in 2020; however, had a lower realized selling price of $1,707 compared to $1,815 per ounce in 2020. As of September 30, 2021, there are 4,469 ounces of gold in concentrate inventory, a decrease of 986 gold ounces when compared to June 30 due to timing of sales. The company recorded a loss on receivables at fair value charged against revenue of $3.5 million, which was partially attributable to gold prices decreasing during the third quarter and subsequently in October. In the third quarter, cost of sales were $20.1 million compared to $15.9 million in 2020. The higher costs were primarily due to increased operational activity as illustrated by the significant increase in tonnes mined and processed and, when broken down on a per tonne basis, are lower than 2020 despite the Company incurring cost related to the COVID-19 pandemic, including additional pay for employees completing longer rosters at site, additional costs related to the movement of personnel and supplies, quarantine costs, and additional safety and medical-related costs. Quarterly cash flows from operating activities before changes in working capital was $12.6 million compared to $14.8 million in Q3 2020. As of September 30, 2021, we had $54.6 million in cash and cash equivalents, while spending $7.3 million in the expansion capital for the quarter, and having our strongest working capital balance to date of $80.6 million. The Company fully repaid the outstanding loan from Trafigura earlier in the year, leaving the Company with no debt. As John mentioned, for the quarter, the Kainantu Gold operations produced 21,908 ounces of gold, 802,545 pounds of copper, and 19,736 ounces of silver, or 24,122 ounces of gold equivalent. We sold 21,675 ounces of gold, 868,175 pounds of copper, and 20,444 ounces of silver, or 24,057 ounces gold equivalent. We incurred a cash cost of $596 per ounce and an all-in sustaining cost of $752 per ounce, which was significantly lower than our realized gold selling price of $1,707 per ounce. Our Q3 2021 cash cost per ounce decreased to $596 versus $700 in 2020. The decrease in cash costs was partially due to the successful ramp up of the 400,000 expansion, allowing the Company to achieve better economies of scale, but offset by cost related to the COVID-19 pandemic. It is important to note that after-commissioning the Stage 2 plant expansion in late third quarter, we've seen a significant compression in our total unit cost per tonne processed. 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. The exploration growth section of the call will begin with the Stage 2A Expansion. As noted earlier in the presentation, this was approved by the Board of Directors in early October and increases throughput by 25%. The planned capital is very low, estimated to be $2.5 million, with the Stage 3 sustaining capital for development and mobile equipment for the underground being brought forward. As I noted, capital for the Stage 2A Plant Expansion is lower and that's really due to no additional milling capacity being required with only a small number of ancillary plant items needing to be installed. First of those, a filter press is already installed and being commissioned. Second is the expansion of the crushing plant, and that's already designed to accommodate the additional TC-1000 that we plan to install and simply require some refurbishment of steel work, which is currently underway, the installation scheduled for the first quarter of 2022. The only other major item requirement is an additional 2 flotation cells, which test work has shown will increase our metallurgical recoveries. There will also be some minor upgrades of selected pipe working pumps in the existing circuit. The Stage 2A Expansion is expected meaningfully increase our free cash flow generation and strengthen our ability to self-fund a potentially larger Stage 3 Expansion. Other factors such as gold price being substantially higher than the $1,500 an ounce we used in economic study will also improve our ability to self-fund. Looking at the twin incline, development was 16% above budget for the quarter and the furthest incline was advanced to approximately 680 meters by the end of September. As the twin inclines advance towards Kora, we plan to begin utilizing them as a drill platform to target Kora Deeps and, in fact, Judd Deeps as well. On the exploration front, during the quarter, drilling was underway at Kora, Kora South, Judd, and also the Blue Lake porphyry. At Kora, our latest drill results featured some of the highest-grade holes drilled to date from both surface and underground. The hit rate continues to be very strong with approximately 30% of holes at both K1 and K2 veins exceeding 10 grams per tonne to date. We expect to provide a new drilling update on Kora in the near term. At Judd, we reported drilling results from 17 holes at the end of August, extending the J1 Vein underground, approximately 650 meters along strike, while delivering a solid thickness and hit rate of 35% of holes exceeding 10 gram per tonne gold equivalent and 29% of holes exceeding 20 grams per tonne gold equivalent. Also on Judd, development has made considerable progress along the second sub-level at 1265. Latest results reported near the end of October extended development by 211 meters with an average of 3.9 meter thickness at 21.7 grams per tonne gold equivalent reported. That level has now been reported along 294 meters of development, averaging 3.8 meters thickness at 20.3 gram per tonne gold equivalent. Judd is still very much under explored and has shown similar geology to that which we see at Kora with solid grades, thickness and a max strike length on surface of 2.5 kilometers. The focus today has been on the J1 Vein, but there are at least 4 known Judd Veins to the south shallow artisanal mining and drilling near surface, provides us some high-grade factors. So, the majority of our underground drill rigs are actually now drilling Judd, deleveraging the existing drill infrastructure, which was designed for Kora, but now that provides rapid efficient exploration of the Judd system, allowing us to complete significant step out drilling. The commencement of production stoping at Judd represents an entirely new mining front and that's expected to begin shortly with long hole drilling currently underway. On Kora South, I think we're particularly excited to have commenced step out drilling from surface. Drilling from surface will enable greater step outs to the South than from underground obviously as we advance towards A1 Headwater porphyry, which is located about a kilometer to the south of the existing Kora Resource. We believe that, that A1 Headwater is a major heat source for Kora, Judd and a large portion of the nearby vein field. The exploration program at Kora South also intends to target Judd South, which runs sub parallel. Lastly, we continue to advance our Phase 2 drill program at the Copper-Gold Blue Lake porphyry target. Drilling during the quarter has focused on deeper drilling targets looking for that potassic core as well as the south-western extension. Core logging and assay backlog at Kora and Judd has now very much been caught up, and so we're now in a position to focus on getting through the backlog of drilling at Blue Lake. We plan to provide an update on this in the near term. So in conclusion, the vein field and porphyry exploration is very exciting. We've got significant large system near-mine potential. And I think it's important to highlight that approximately 20% of the vein field strike has been drilled to date, with the majority of what has been drilled, remaining open at depth. With infill drilling at Kora complete, we're at, what we would call, a major inflection point, with the vast majority of our drilling will now focus on resource growth. With that, operator, I'd like to commence the Q&A session.

[Operator Instructions] Our first question is from Ralph Profiti with Eight Capital.

Good day, everyone. John, 2 questions from me please, if I can. Firstly is on, maybe digging a little bit deeper into the grind size at the plant, and just wondering if you can maybe quantify the impact. And are there any plans to perhaps coursing it up and back to design capacity, and under what conditions would you think about doing that?

Kora, we need a grind size of about 100, 105 microns. So, we still got quite a bit of spare capacity in the mill. And that in part, I would say, is that the Bond work index is obviously lower than has been allowed. And that's really the main driver that allows us to look at this significant expansion of 25% throughput. So, the 2A is a direct response of the fact that we are actually getting a finer grind than we need to optimize our recoveries. And our estimate at this point in time is we can get an extra 25% plus. And as was mentioned, we've now done over -- a record, it's now over 1,500 tonnes in a day, and that was still -- grind size was still better than the 100 micron that we need to target. So, 25% is the number, and then we'll see how things go from that point.

Fair enough. Yes, I get it. Okay. John, I'm looking at the increase in the productivity and development rates on the twin inclines and just wondering how much of that is productivity related, how much of that is geotechnical conditions?

Okay. The twin incline, we haven't really had any significant geotechnical challenges on the twin incline. We are advancing and doing shotcreting on both declines as we -- or inclines, rather, as we advance, so that is our primary grand support. There are a few cross-cutting structures which we pretty much know where they are, because we are following the overall line of the existing single incline, although obviously we are actually significantly lower than it now. So we've -- A, we've drilled ahead; and B, we are following the line of the existing incline, therefore, we have a good picture of what is ahead of us in terms of geotechnical aspects. And really the main things are there are number of cross-cutting structures. We've gone through a couple of them. They have not given us any significant problems, challenges, call it, what you will, to date. So, it's really been about, A, we've had our experts back on site, and so that is -- has been a major driver for the productivity. Remembering that when we are being impacted by some of these issues, we try and target to maintain production in the first instance, so the first thing that generally will be impacted will be the twin incline development, because obviously that's not critical at this point in time to production.

[Operator Instructions] Our next question is from Don DeMarco with Bank Financial (sic) [ National Bank Financial ].

My first question has to do with the record throughput days. I'm seeing 1,400 in September, we knew that, and then 1,537 in October. Can you discuss the underlying factors that drove this throughput and whether or not you can replicate this over longer periods?

Yes, look, I mean the expansion from 200,000 tonnes per annum to 400,000 tonnes per annum was based on our calculations, our consultant's calculations and Outokumpu actually made the mill of the throughput that we could achieve on Kora material targeting our 105 micron. And all of our work, all of the calculations, everyone independently came up with around 400,000 tonnes per annum was the capacity of the mill that obviously based on the Bond work index of Kora. So, as I mentioned earlier, what we found is that Bond work index is a little bit lower and we're actually achieving -- or able to achieve better throughput. The mill was always the constraining factor when we looked at our expansion, because if you have to put another mill, then that is a major cost, whereas the other equipment tends to be more ancillary in nature, and therefore lower cost. So having been able to achieve, as I said, a [ PAD ] of 75 micron at 1,100 tonnes, 1,150 tonnes per day, we've then been looking at what can we achieve, and I can certainly tell you that we've achieved over 1,400 tonnes per day on consecutive days. However, the areas that then give you a challenge or one that you're pushing your production by 25%, you are producing the concentrate production by 25%. Now, there we have a -- or had a single pressure filter, and we'd already identified that as being a potential pinch point for us and had already acquired a second pressure filter. And as mentioned in the presentation, that is actually being commissioned as we speak. So, that takes care of a major issue for us, which is you're producing more concentrate and you have to be able to obviously dry up, so that you can ship it. The second issue we have is floatation capacity to consistently treat 1,500 tonnes a day. Let's say, we need more floatation capacity, otherwise, when we get higher grade days, we're going to see a drop off in recovery. So, hence, we're looking at adding additional capacity to the flotation where we're looking at adding about over 30% capacity to the flow. The third issue that we need to address to be able to consistently get the higher throughput is being able to crush enough tonnes to supply the mill. And as part of the previous expansion, we put in a large or secondary crusher or TC-1000. The original crusher as it was constructed was actually a 3-stage crusher, so it had a primary, secondary and tertiary. In the refurbishment where we actually increased the capacity of the overall plant from 150,000 tonnes to 200,000 tonnes per annum when we first did it over, we converted it to a 2-stage crushing, so it's just primary and secondary. But all of the infrastructure is there, the conveyor, et cetera, for 3 stages or in fact, as we're now doing to put in a secondary crusher, the TC-1000, so that we're increasing secondary capacity, we're doubling our secondary crushing capacity. So, that then addresses the issue of providing enough crushed material to get through the mill. Outside of that, there are some pumps and pipes that need some upgrade, but they are generally pretty minor. So that I think sort of hopefully explains what we need to do to be able to get it consistently and maintain our recoveries importantly.

My next question has to do with the cost. So, I see costs were significantly lower quarter-over-quarter. And, of course, you mentioned that you expect some compression in unit processing costs as the ramp up continues, but yet I'm looking at Q -- the guidance, and if we hit the midpoint of guidance, that would imply Q4 costs are going to be higher than Q3. So, if you could just help me understand why were Q3 cost lower? And is that what you're kind of expecting, then we should see slightly higher costs in Q4 per the guidance?

So, in terms of our overall cost, obviously, unit costs came down as a result of increasing throughput. We do anticipate seeing a bit more of an increase in throughput in this current quarter. When we look at the driver, I think for the costs, it was in part salaries were down and that was because of difficulty in getting staff to site, et cetera, et cetera, and some turnover as well. Next quarter, we've got a recruitment campaign planned because we're now looking to step up our production to this Stage 2A, so that means we need to bring more people on -- especially on the mining side of things. So, in part, the increase is because we're looking at starting to man up for this 500,000 tonne per annum. And obviously, you've got a lead up to that, you've got to do more development, et cetera, et cetera. We have got more mobile plant arrived in the last quarter. We got more that's due to arrive in the first quarter of next year. Again, that helps us with that ramp up. So, those are the, I guess, the major things that: A, have driven the cost down; and B, that we anticipate will pick up a little bit in the coming quarter.

Okay. That makes sense. And...

I'd also make the other point that what we've also been doing is very much building up inventory. And as I think everyone is aware, the whole supply chain thing is something that we're all very cognizant of. For instance, we have to hold a number of seatainers at site, so we can ship our concentrate and we're not sort of held up by lack of seatainer. So you're also allowing for some of those potential challenges over the next 3 to 6 months. I think we are all expecting that 2022, we'll see an alleviation of some of these challenges, but at the end of the day, you've to got to make sure that you're alive for them.

Okay. Yes, well, it's interesting to see the lower cost when the sector is facing these inflationary headwinds, so thanks for that color. My final question. I heard you mentioned that there's a record surge of the Delta variant in PNG right now, does the updated guidance adequately address whatever contingencies on production and costs that this may result in? And as an investor, how should we be concerned about this?

Well, we certainly believe that it does, we've been relatively successful in getting our people to get vaccinated. There is undoubtedly a lot of vaccine hesitation in Papua New Guinea. We have been obviously actively seeking to get all of our employees vaccinated. We've got support from government to do that who recognize that the resource industry is critical, and so we have access to vaccinations et cetera, et cetera. In addition to that, we've actually contributed -- last year, we contributed PGK 1.5 million to Central Government and the provincial -- to provincial government where we operate to assist with COVID-related costs. With the surge in Delta last month, we provided another PGK 1 million, about $300,000, of funding to the eastern province, which is the province where we operate in, and that specifically has been used to construct a isolation ward for the major hospital in Goroka. So, we've been looking to contribute towards the challenge that COVID has presented. Certainly, Delta has had far more impact in either of the previous 2 waves in PNG. Although it's still relative to the rest of the world, still appears to be a lower impact than you've seen in countries such as India, for instance, and what have you. But undoubtedly, it's a lot more serious than anything we've seen in the other ones. It is, as we know, far more transmittable and we have seen a week of Delta has been equivalent to almost all the fatalities we saw last year. It does appear to be impacting those again with comorbidities, older people and what have you. Youngest generally not seeing it. We believe that the Delta, this current Delta wave will peak late November or early December. And if you look at the other countries, such as India, where you've had Delta go through, you get this massive spike and then a very, very rapid drop off, because it is so transmittable, it dramatically increases the number of people that have it and then it drops off significantly, and that's certainly from our discussions with the Australian health, who are assisting in PNG, that is our expectation of what we're going to see in PNG as well. We have improved our COVID mitigation. We operate the mine as a bubble. So if we got anyone coming to site, any PNG national coming to site, whether they come from a kilometer up the road, or village that's a kilometer up the road, or whether they come from Port Moresby, they go into quarantine for a week before coming to the mine. And they are tested before going into quarantine and they are tested before they're allowed to come on to site. So -- and we have a whole lot of protocols in place for deliveries and all those sort of things. And to date, that has been reasonably successful for us. We have had occasional COVID on site, but we haven't had anything absolutely major occurring on site and we do random testing all of the time. At one point, we had done more testing on the mine than the whole of the province had done. So, we continue to do those things. We've beefed up our clinic. We've got more capacity for testing and all of those sort of things as well. I'm going into a bit of detail, because it's really something that we've heavily focused on. You've got to, obviously. The positives that we're seeing, for instance, 1st of November, first of our people going back to New South Wales and Victoria were able to fly back, get into Australia and not quarantine. And over the next couple of months that will extend to almost all the states and that will significantly improve life for our expatriates, for instance, who have been operating on a 6-week on, 6-week off roster where the 6 weeks off includes 2 weeks hotel quarantine on return to Australia. So, by the end of the year that should pretty much be a thing of the past and that certainly will help us as well.

Good luck in Q4 and beyond.

Our next question is from Andrew Mikitchook with BMO Capital Markets.

John, congrats on a good quarter. You've already partially answered my question with your comments about the ramp up in mining, but maybe I could ask you to just kind of frame the level of mining development you have, maybe in terms of weeks -- stope development in weeks ahead of schedule, ahead of your current plan? And how you see that expanding over the balance of the year here and into next year as you ramp up to the year mining rate required for Phase 2A?

Look, first of, I'd say in terms of development, I mean we're behind budget right now, that's the impact of COVID. So, we are behind where we wanted to be at this point in time and that's obviously impacted our production. One of the reasons that we've actually focused as well on Judd is that, that gives us additional flexibility in terms of providing additional areas to mine with very limited development actually required to access those areas, because, as you'd be aware, Andrew, I mean all of that development that we've been doing to open up Kora also opens up Judd and actually allows us to bring on some stopes with less development than we'd have to do if we were bringing in Kora areas vertically up and vertically down or further along strike. So, it gives us greater flexibility and we're obviously -- and you concentrate your mining more in area wise. Going forward next year, our development generally will be in the region of 650 meters to 750 meters per month, which are the sort of figures. For instance, we achieved -- last month, we have got additional equipment coming in as well. So, we're not looking for a massive step up next year from what we have been able to achieve this year, but we are looking to achieve it more consistently by not having all of the stoppages that we've had to endure, especially this year with 2 lots of suspension of our COVID people, for instance -- I'm sorry, of our expats being able to fly in and out, which while we only have 5% of our workforces. As expats, they are quite a key aspect of it, especially in things like the twin boom jumbos and, therefore, obviously the development. So I think we are -- at this point in time, we are looking at third to fourth quarter before we get to our 500,000 tonne per annum from underground commissioning of the plant at third quarter, but underground it will take a little bit longer to ramp up. And the reality is that we averaged over 1,000 tonnes a day from the mine in September, but the plan had been at the beginning of the year that we would have been 1,100 tonnes in that third quarter already. So, that's a sort of measure I guess of how far we've -- the impact of COVID has put us in terms of that ramp-up of underground.

Kind of you've got about a year's runway here to get up to that 500,000 level -- 500,000 run rate with...

As usual, the mining guys are telling us they will get there quicker, but we are putting that into the context of some ongoing impact from COVID, et cetera, et cetera. And all of those other things that are coming through such as some delays in delivery of equipment, shipping, et cetera, et cetera.

Our next question is from Michael Gray with Agentis Capital.

John, it's great to hear you're shifting focus from infill drilling to exploration expansion drilling. First off, you mentioned greater step-outs for Kora South drilling into EL150. What is the scope of the step outs, just a little bit more color on that?

So Kora South, surface expression and it has been pretty limited work done to the South of the mining lease and there has been no drilling down to the sites of the mining lease from surface, there is a bit of drilling that's being done from underground. We are looking to take basically 100-meter step outs and so have a series of fence lines approximately every 100 meters. We believe from the information that we have that the Kora and Judd extend up to a 1,000 meters outside of the mining lease, and then, of course, you get into the A1 Headwater porphyry which, as we mentioned, we believe this is a heat source of Kora, Judd and Maniape, Arakompa, et cetera, et cetera. So, we're basically -- right now we have one rig operating. The intent is to go to 2 rigs operating on Kora South and that program to continue all of next year. So, that will be the Kora focus and Judd for the matter, so it's not just Kora, we will also be drilling Judd to the South.

And for Judd to the South, you mentioned the artisanal workings really being your vector of proxy. Can you provide any more insights as you extend the artisanal workings whether they're surface, underground, or both?

The artisanal working certainly have little [ addeds ] into them. They don't go down too far, because the water table is quite high in that area and the ground is pretty hard as well, so they're actually quite limited. There is -- just to the South, a layer into the South pit further than we are right now, there was actually a stamp mill put in the '70s I think by an Australian. He came along. He married a local tribe's person, which made him part of the tribe and, therefore, he could do this informal artisanal mining, which included putting a stamp mill in. The stamp mill is actually still there or a part of it is still there. And as we understand, the said Australian made his money and retired to the Gold Coast. He left behind the stamp mill, which is now, you can see, it's a stamp mill with most of its gone, so it's looking very old and tired and he also left behind the wife and I believe some kids. So, I can't comment on how she is looking.

Final question. You've disclosed 1,400-meter long hole at Blue Lake in Q2, and I appreciate you mentioned that there'll be a Blue Lake update coming out soon. But in this MD&A, you talk about laterally mineralization zoning towards core potassic alteration zone and there being widespread presence of bornite. Are you able to expand on that in relation to that longer hole or we're going to have to wait until you put out the news?

I think the long and short of it is, you'll have to wait until we put out the news. We are behind -- significantly behind in actually processing core from Blue Lake, because basically, again, impact of COVID. What we did was we kept the underground rigs running and focused on drilling Kora, because that was time critical for us in terms of getting resource update for Kora to fit into our feasibility study. So, we actually took the surface exploration geos. We're also roped into catching up on the backlog. I think at the end of June, we had like 50 odd holes from underground that hadn't been processed. And with the cut-off date at the end of October and 6 rigs still turning out, we had to focus on getting all of that. That has been caught up and all of that's gone in and our consultant is busy with his Kora update and the exploration guys are now focused on catching up all of the backlog that we've got at Blue Lake, remembering also that some of our holes were -- exploration we're doing on the surface were in Kora and they obviously took priority as well.

John, I appreciate all the expanded insights on COVID-19 and your answers on previous questions.

Our next question is from Geordie Mark with Haywood Securities.

A lot of the questions already asked and answered, but maybe can we talk a little bit on the grade reconciliation and positive skewness commonly reported on quarters. So, have you done any work to look at where particularly positive grade reconciliation is derived from? Can you look at any of the potential stope characteristics that generate that skewness? And are you able to counterfactor that into the modeling going forward? And does that impact at all recovery characteristics when you're looking through them? Or can you -- you're working with any modifications in the play -- I guess, configuration to better recover gold, I guess, if you get large skewness in grade given what we're seeing around recent drilling at Judd, et cetera?

So in terms of the modeling, certainly all of the information that we have has gone into the consultant in terms of those reconciliations. And if you look at our first model to the second model, certainly the reconciliations were the closer with the second model that we had the one that we currently use, so the fact that we were getting a positive reconciliation was taken into account in the modeling and things like top cuts and what have you. We anticipate that, again, will be -- will go into the modeling process. In terms of the source, that remains -- from our perspective, first off, it is primarily -- we're getting more ounces, the ounces come from grade rather than from additional tonnes. So, it is that we're getting higher grades than we anticipate almost every quarter by one I think we've got more answers than we projected. At the same time, as I say, it hasn't come from tonnage, it does appear to come from grade. What we do have, of course, is we've got a lot of water in Kora itself. It is a very wet ore body, high pressure water. So, we think that there is some potential that you're getting some water, although generally our core recovery is actually very good. But in some of those high-grade areas, you do get crushed stones and various other things. So, part of it may relate to that. And certainly when you've gone through Judd, you can -- you come up against the face, that's 5 meters at 100 grams per tonne, and the next phase 4 meters at 27 tonnes. So, you do get variability along the strike. We've been doing significant test work as part of the feasibility study on K1, K2 and Judd, in terms of flotation work and also gravity. And that work is going into, obviously, the design that we come up with for the new plant, the Stage 3 plant. But that work, the results of that work is also going into what we are looking to do with the existing plant, and hence, as I mentioned earlier, we are increasing our flotation capacity as we've shown that additional residence time is going to help improve recoveries. Gravity will recover some of the gold. It is variable. K1 has lower gravity gold than K2 and Judd from the test work that we've done to date. We had started commissioning our gravity plant that we installed as part of the Stage 2 Expansion and then COVID put a pretty much a stop to that, so we are looking to get that gravity plant commissioned early next year and that we believe will assist with the recovery. What we've also found from the test work that we've been doing that, that test work has been done in primarily in Perth, our labs here, is slight change to the reagent suite that we are using will improve recovery. So, we are looking to bring in some slightly different reagents and to trial those in the plant as well as also indicated that we can get a couple of percentage points at least better recovery with a slightly different reagent mix. So, we always viewed doing the metallurgical tests work for the feasibility study would also feed into looking to optimize the performance of the existing plant. And that's certainly what we're doing. And the other thing is, one of the reasons that you want that extra float capacity and we also have a flash float as well is that you want to be able to deal with that if you do get a spike or whatever in your grades, you want to be able to deal with it. And for instance, in the new plant, we will have real-time analysis so that we are -- we more quickly get indications of the grade that's going through the plant to deal with that variability. And the other point, of course, is, and it's something that we're trying to do right now, we multiple stopes blending, so that to you reduce the likelihood of getting a high spike coming through, because you're blending it.

Any thoughts on any modifications in sampling or face sampling, the practical approach to sort of looking at what stope grades could be as part of the chain between grade reconciliations and I guess at the field plant and at the mine site, a little bit around that or something?

We -- that quite frankly is an evolving process. We've looked at a couple of different methods of face sampling. And basically, we've obviously got the drilling. We've got face sampling on the development levels, so that we have different sources, obviously of our mine grade control. But also looking at how you're taking the face samples, 2 cuts across the face rather than one cut across the face, so that you are seeing the variability from one being, say, 1 meter above and the other one being 3 meters above the floor. So, that it just tightens up what you get in terms of variability and being able to identify what variability is. But, it's still something that we are very much working on, I guess, is the long and short of it. And certainly, if you look over the last few quarters, overall, the grades, you haven't seen the same variability as we were seeing earlier in the piece. I think, we're getting better, especially from the underground grade control what we call for and what we actually produce.

[Operator Instructions] Our next question is from Sean Ghosal with Stifel.

So, my question is, we lowered the production guidance for Q4. And my question is why now, and not during the production release in October? Because -- is it because it incorporates the impact of COVID Delta variant, the impact of which was really understood after October?

I think the reality is that we have -- when you look at COVID and you look at the last couple of months in PNG, there's been a very significant increase in the amount of COVID that we've seen in PNG, and it has been throughout the country. It's not just in one area, it is throughout the country. Eastern Highlands where we are was certainly one of the epicenters. The border area with Indonesia was the first epicenter, probably because it was coming in primarily through Indonesia. It's -- although the border is closed, it's a porous borders, it's a jungle. So, you can't stop people moving through. And so, undoubtedly that's where it came through, and from there, it's got into the rest of the country. It was always going to come in at some point. I mean, that's just how it is. Certainly, what we've seen is the impact over the last 2 months within local communities has been quite significant. And we've been looking to try and quantify what that was going to mean for our guidance. And it's a moving feast. Because you are estimating what something is going to do to your operation, taking into account the various mitigation that you've put in place, and mitigations that we had in place 6 months ago, not as strict as they are now because we found that we had to tighten up our mitigation because of Delta and the fact it is more transmittable, et cetera, et cetera. So you're trying to bring all of that in and give the market the best estimate that you can. Up until quite recently, we certainly had a view that we could get a higher production this year than we're now giving guidance, because we had anticipated that we would get over the current -- we get over COVID. We had things I think pretty well under control. The country had things pretty well under control. But that flared quite dramatically and we've had to look at what we could do, what we could achieve, and come out with numbers that took all of those things into account. And yes, we potentially could have come out with those figures a few weeks ago, but we also wanted to present them to our Board and go through with the Board on what we were achieving, what we were doing, what we were anticipating in terms of production, how the mitigation was going, and what we saw as the ongoing impact.

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. Well, firstly, thanks to everyone for attending our conference call today. It's appreciated the opportunity to give this -- a feedback on what we've been doing and to get the questions and understand what are the areas of focus for people, and we use that to hopefully try and come out with more information which addresses the sort of things that the market and analysts want to get from us. This has been a really challenging year, I think, for everyone around the world. And we've had a lot of challenges to deal with in this year. I am really, really quite impressed with what our people on site have been able to achieve in such a challenging environment. And I mean, the reality is that we have been able to expand our throughput, we've been able to ramp up commission and expansion, keep the exploration going, and come out with some great results in this tough environment. I think we are really pleased with what we've seen from our people on site. I think, we're all looking forward to the 2022 where there hopefully will not be as many challenges as we've had to face in 2021. All those challenges are going to be more about things that are more to do with mining and less to do with COVID and all of the impacts that has. That said, we are finding that COVID will be around, that we will have to deal with it, that we will have our mitigation processes in place, so that no matter what, we're able to continue to deliver and to, hopefully, see ourselves going forward, getting into Stage 3 -- no, Stage 2A first, and then Stage 3, and onward and upward. So, I'd like to, again, thank you all for attendance this morning, your time, this evening my time, and wish you all the very best. And hopefully quite a number of analysts on the call, we look forward to seeing you next year on site. So, thank you very much.

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