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

Thank you for standing by. This is the conference operator. Welcome to the K92 Mining Second Quarter Financial Results Conference Call and Webcast. 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 Second Quarter 2022 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, Dave, and welcome, everyone. The second quarter took another step forward, delivering on multiple records, including record cash balance, record mine production, record mill throughput, while also achieving strong all-in sustaining and cash costs. This was the first quarter where we achieved throughput significantly above that Stage 2 run rate, where we averaged 1,196 tonnes per day against a Stage 2 run rate of 1,100 tonnes per day. Subsequent to the end of the quarter, in July, the process plant actually achieved multiple new daily throughput records which were substantially higher than the Stage 2A expansion run rate of 1,370 tonnes per day. Importantly, these record throughputs were achieved without the installation of the new flotation cells which will double our rougher capacity, which were only planned for the fourth quarter. And that really highlights the upside potential beyond even our Stage 2A design. Lastly, we continue to make significant progress in our organic growth through exploration, delivering a 10.8 million ounce gold equivalent maiden inferred resource at Blue Lake at a discovery cost of less than $1 an ounce. We had high-grade drill results at Kora and Judd, and I'm pleased to report there are now 4 surface diamond rigs operating at Kora South, Judd South, with a fifth on the way. And in addition, we have the 6 diamond rigs operating underground. So we're really excited about the exploration and believe this is only the tip of the iceberg, both in relation to the high-grade vein systems, but also in relation to the porphyry targets. On the safety front, we recorded 1 lost time injury during the quarter. We remain proud to operate with one of the best safety records in the Australasian region. We have a strong focus on occupational health and safety and also continuously improving our safety systems. On the ESG front, I'm pleased to report that we recently completed multiple community projects, including refurbishment of the Kainantu police station and refurbishment of the Kainantu high school library. Other projects, including upgrading of community roads, various agricultural projects, training and education initiatives, remain ongoing. While I was in Papua New Guinea last month, K92 received recognition for our industrial training program. K92 provides practical work experience to the largest number of mining engineers, metallurgy and geology university students of any mining company in PNG. Developing the workforce skills domestically is a major focus, and we highlight that our workforce has one of the lowest percentages of expatriates of any mine in the country. The program is one of many community and social programs, and I encourage you to read our sustainability report for more information. Our 2021 sustainability report is planned to be published shortly, and we're very proud of the positive impacts that K92 has had in Papua New Guinea. Greenhouse gas emissions and climate change is another key focus for K92, and I'm very pleased to announce that we've completed our 2021 greenhouse gas emissions inventory and TCFD gap analysis. The findings, in addition to our greenhouse gas emissions forecast, which is underway, will be a key tool in K92's emission targeting and goal setting, going forward. The 2021 greenhouse gas emissions inventory was completed by WSP Consultants and shows that K92 delivers low-carbon production with an emission intensity which is approximately 60% below the global gold sector average. The results also highlight a near-term opportunity to massively reduce our emissions. Referring to the emissions build-up pie chart shown here, upgrades to the grid for our direct power distribution from Yonki Dam and improvements to our distribution reliability can potentially reduce by almost 2/3 our combined Scope 1 and Scope 2 location-based emissions. And I'm pleased to report we're working in collaboration with PNG Power to upgrade this, and that is actually already underway. This is expected to make a major positive impact towards reducing our emissions intensity. And most importantly, it's not long-dated. The potential to realize this is over the next 12 to 24 months. Moving on to our operational performance. During the quarter, we produced 26,085 ounces gold equivalent, with 108,853 tonnes processed at a grade of 8.2 grams per tonne. If we compare this to the Q2 2021 mill throughput, our mill throughput increased 44% and our production increased 59%, respectively. A major positive continues to be the strong performance of the mill. In the second quarter, as I've noted, average mill throughput was 1,196 tonnes per day, which is 9% above Stage 2 run rate. In June, the plant achieved a record monthly average of 1,251 tonnes per day. And in June, following the installation of our new TC-1000 crusher, multiple daily records were achieved, including 1,638 tonnes processed on July 6; 1,642 on the 14th; and 1,609 on the 12th. As I've previously mentioned, what makes this even more impressive is that we have not yet installed the additional rougher flotation cells, which are the important part of the Stage 2A expansion. In terms of our key operational quarterly physicals, Kainantu delivered record mill throughput, record mine material. Development also increased significantly, 19% quarter-on-quarter, and was the second highest quarterly development of [indiscernible] to date. Development was certainly impacted by COVID-19, and it remains a major near-term focus as we expand the mine and increase our near-term operational stope sequencing flexibility. I'm pleased to report that in June, near-record development advance was achieved. And with a new jumbo and loader recently arrived in country, we obviously see that continuing. Plans to add more equipment over the coming months are also underway. In terms of 2022, I think it's important to remind investors our guidance is based on the second half of the year being stronger than the first, driven primarily by increased throughput rates and also by higher-grade stope grades from our stope sequencing. So this puts us now well positioned to achieve our production guidance of 115,000 to 140,000 ounces gold equivalent. So I'll now turn the call over to our Chief Financial Officer, Justin Blanchet, to discuss our financial results for the third quarter.

Thank you, John, and hello, everyone. During the second quarter, we had revenue of $37.4 million, a 5% increase from prior year. We sold 23,674 gold ounces at an average realized selling price of $1,783 per ounce, compared to 18,939 ounces at an average realized selling price of $1,754 per ounce in the prior year. As of June 30, 2022, there are 3,012 gold ounces in inventory, including both concentrate and ore, a decrease of 1,836 gold ounces when compared to March 31, due to timing of sales. Cost of sales was $23.2 million, compared to $20.9 million in the prior year; or $18.5 million, compared to $15 million, excluding noncash items. Cost of sales is higher due to increased tonnes mined and processed in 2022 and an inflationary impact from both the COVID-19 pandemic and the war in Ukraine. The successful ramp-up of the Stage 2 expansion has allowed the company to achieve better economies of scale and lower unit costs, with mining activity increasing from 72,000 tonnes in Q2 prior year to 114,471 tonnes in Q2 2022. In Q2 2022, cash flow from operating activities before changes in working capital was $10.5 million, compared to $15.2 million in the prior year. As of June 30, 2022, we had $81.7 million in cash and cash equivalents, while spending $10.7 million in expansion capital for the quarter and having our strongest working capital balance to date of $94 million. Subsequent to quarter-end, the company completed a bought deal financing for gross proceeds of CAD 50 million. The company has no debt on the balance sheet. As John mentioned, during the second quarter the Kainantu gold operations produced 22,934 ounces of gold, 1,229,961 pounds of copper and 25,224 ounces of silver, or 26,085 ounces gold equivalent. We sold 23,674 ounces of gold, 1,349,816 pounds of copper and 27,033 ounces of silver. We incurred a cash cost of $617 and an all-in sustaining cost of $893 per ounce gold, which was significantly below our realized gold selling price of $1,783 per ounce. When comparing to prior year, our cash costs decreased from $736 per ounce. The decrease in cash costs was primarily due to the successful ramp-up of the 400,000 expansion, allowing the company to achieve better economies of scale and a 25% increase in the amount of gold ounces sold. It is important to note that after commissioning the Stage 2 plant expansion in late third quarter 2021, we have 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.

Thank you, Justin. So for the exploration and growth section of the call, we'll begin with Kainantu's production growth strategy. So the Stage 2 expansion to 400,000 tonnes per annum was achieved in late third quarter of 2021. Throughput rates have now obviously exceeded that in the second quarter, and our Stage 2A expansion is currently well underway, increasing our throughput a further 25%, to 500,000 tonnes per annum. We're also advancing the Stage 3A expansion, which increases throughput to 1.2 million tonnes per annum through the construction of a standalone new processing plant. Feasibility study also includes looking at a PEA case where having commissioned the new 1.2 million tonnes per annum plant, we will then bring the existing 2A plant back online and ramp our production up to fill both plants. The study is well advanced, and we plan to announce them over the coming weeks. In terms of Stage 2A, capital cost, as I think you will recall, is low, at $2.5 million, which is primarily for the ancillary equipment for the process plant. In terms of the underground, mining rate increases are achieved through accelerating the timing of some of the Stage 2A sustaining capital. At the plant, the filter press is operational; additional TC-1000 is installed and commissioned; float tanks are planned for installation in the fourth quarter, with commissioning in that fourth quarter as well. However, based on the strong performance of the plant to date, we are still able to increase mine and processing throughput rates ahead of the delivery of those float tanks, and that's obviously been demonstrated what you've seen over the last couple of months. On the Stage 2A, we expect to see a meaningful boost in our free cash flow generation, which will obviously further strengthen our ability to self-fund our growth. Also during the second quarter, in April, we received our ore export license from the Bank of Papua New Guinea. First gold ore sales occurred during the quarter. Now with this export license granted, our gravity circuit will be ramped up, and we expect to see an improvement in overall payabilities and recoveries. So while on site in July, I inspected the new TC-1000 crusher, which was recently installed and being commissioned. Now the crusher was originally planned to operate in parallel with the existing TC-1000 crusher. However, with the improved performance we've seen from the crusher over the last few months, we've actually installed it as a tertiary crusher, with an ability to also act as a backup secondary crusher. Now the advantage of putting it in as a tertiary crusher is it now means we can deliver a finer product to the mill, and that has the potential to further drive overall plant throughput even higher. Also while on site, was able to see the underground teleremote system in operation. It's one of the many examples of advanced technology we're investing in Kainantu Gold Mine. And from the video, you can see it's an advanced system with LiDAR and drive mapping. Other examples on site include the jumbos with auto drill. And we're also in the process of setting up our underground WiFi system, which will enable detailed real-time tracking of our mobile plant and personnel. On the twin incline, the furthest incline has now advanced 1.4 kilometers by the end of July, and the performance of the development crew has been extremely strong over 2022, with the twin incline advance exceeding budget by about 38%. You may recall the twin incline has been oversized, capable of handling up to and perhaps beyond 5 million tonnes per annum with conveyors, enabling the infrastructure to meet expansions well beyond Stage 3. On exploration, during the quarter drilling was underway at a Kora, Kora South, Judd and Judd South. In June, we announced high-grade underground drill results at Kora and Judd. At Kora, 54 holes were reported, with highlights including 5.9 meters true thickness at 23.18 gram per tonne gold equivalent and 2.64 meters at 37.38 gram per tonne gold equivalent. Judd also delivering some strong results during the quarter, 62 holes, including 8.8 meters true thickness at 61.17, 5.17 meters true thickness at 18.83 gram per tonne gold equivalent. If we look at Kora, Kora South vein system and look at this long section, there are 3 key areas for our exploration. Area 1, which is drilling Kora South from the surface. As you can see in the long section, been absolutely no previous drilling along about a kilometer of strike length. Only one hole has been reported to date, and that was drilled by K92 in Q1. And that recorded potentially the most significant exploration result since the discovery hallway back in 2017. The second area is drilling Kora South from underground, and this is expected to provide information synergies with that surface program, allowing us to extend that resource at depth. Area 3, in the second half of the year we plan to drill what we refer to as Kora Deeps and the northern strike extension of Kora from the twin incline. Drilling at the northern extension of Kora below [indiscernible] recently commenced on the twin incline. On the Judge, Judd South vein system, exploration program really follows a similar plan, with the distinction that the exploration along the vein system is about 3 years behind Kora. If you recall, we made the discovery of high grade at Judd only in Q4 2020, whereas Kora North, obviously, was May 2017. Drilling at Judd South from surface is underway, and drilling at Judd South from underground also recently commenced. And a major portion of our underground rigs are focused on drilling Judd vein system. Again, on site in July, I visited our most southern underground drill rig, the rig initially drilling Judd South, but also then targeting Kora South. You may recall that our development underground sits between the Judd and the Kora vein systems. So we're drilling off to the left here. So that will be drilling into Judd. The rig change and drilling to the right, that would then be drilling Kora. Once we've finished our initial drilling program here, that rig will be pulled out, and we're going to develop this another 100 to 150 meters to the south. And again, we'll commence more of our drilling of Kora South from underground. I'm also pleased to report that our fourth surface drill rig is operating at Kora South and Judd South, as shown on the image to the left. All drill rigs are delivering strong drill meters, and plans are underway to bring in a fifth rig. Now last week, we advanced a major milestone, the maiden Blue Lake inferred resource, 10.8 million ounces gold equivalent or 4.7 billion pounds copper equivalent. The resource is large, has a high-grade core, is open at depth and is the fifth largest known porphyry in Papua New Guinea. It was defined with under 17 kilometers of drilling at less than $1 per ounce gold equivalent. Now the long section, you can see the resource has a defined high-grade potassic core, with increasing grade tenor at depth. The porphyry environment appears to be relatively well preserved, limited erosion and little evidence of faulting, which you can see by the relatively high degree of symmetry in the section. Porphyry is open at depth, and we believe there's a strong expansion potential through step-out drilling. From our exploration at Blue Lake, we've gained a tremendous amount of knowledge and plan to apply it to other targets within that prospective porphyry belt. You may recall, in late 2021, we flew the mobile MT advanced geophysics, and this confirmed several of the known porphyry targets in addition to highlighting the potential for additional targets. And we'd note that in Papua New Guinea, porphyries tend to cluster and there are 5 targets defined near Blue Lake. Now the work clearly shows that A1 is our #1 porphyry target. It has very strong connectivity response, while also being situated in a very prospective geological environment. Essentially, it's believed to be the main resource for the high-grade Kora, Judd, Maniape, Arakompa deposits. Additionally, from field mapping Blue Lake, A1 and [indiscernible] are within the same large lithocap, indicating the potential for additional porphyries in between. We plan to commence a comprehensive SAR program imminently, followed by a detailed drill program for A1. So with that, Operator, I would like to commence the Q&A session. Thank you.

[Operator Instructions] The first question is from Ovais Habib, from Scotiabank.

John, great to see mining rates steadily be picking up. So just on that, based on guidance, production in the second half is expected to be stronger in the second half. And also with the 2022 year-to-date all-in sustaining cost of around $838 per ounce, the reiterated guidance implies AISC of around $942 per ounce in the second half to meet the bottom end of our guidance. So John, are you just being conservative in regarding to the cost guidance? Or is there a catch-up planned in the second half?

Ovais, look, I mean, the one area where we haven't done as well as we've wanted to is in our development. And as you know, we're looking to expand into the 2A and then that's immediately rolling into what we call our Stage 3. So certainly, the intent is that there will be a significant increase in the development that we're doing, which doesn't come into necessarily cash costs. It will come into the all-in sustaining cost.

Okay. Sounds good. And just kind of moving into the elections in PNG. And maybe if you can give us some color on your expectation on timing of the mining lease renewal as well.

Okay. So in terms of the election, basically the incumbent government under Marape was returned. So PM Marape's party actually was the -- got the most number of seats in the election. As always, there was no one dominant party. So the new government is still a coalition, but it's a coalition led by the party of PM James Marape. Also, as we normally see in PNG, there was a high percentage of turnover of MPs. Not quite 50%, which is the normal, a bit less than normal, but nevertheless, a significant turnover in MPs. And that included our local member and the mining minister. So certainly, there's been a number of changes around. The new government in terms of the ministries have not yet been announced. We expect them to be announced in the coming week. I'm actually heading into PNG this week, and that will be for meetings with our new local MP, our governor of the province, the Eastern Highlands province, as well as with the new ministers as they are appointed. And then as a chamber, we have a day where the Chamber of Mining and Oil and Gas, we go in and we give a briefing in parliament to the new parliament on the industry and what we're doing, et cetera, et cetera. So that will be occurring next week. So it will be back to business, I think, obviously, for the government. And they've certainly flagged that oil and gas and mining are the 2 key industries for them and really are the driver for the economy recovering after COVID. In terms of the renewal of our ML, we've put in the application to have that renewal done early. It's actually not due until October of '24, but we're looking to have it renewed hopefully by the end of this year. And certainly, that's our anticipation at this point in time, is that we should get renewal by the end of the year. I met with the MD of the MRA a couple of weeks back when I was in country, and he certainly indicated that from their perspective they're pushing our renewal along and that was a realistic expectation.

The next question is from Don DeMarco, from National Bank Financial.

So I see that year-to-date, H1, you've got 42% of the production guidance at midpoint delivered, and you reiterated guidance, which is great. Yet, the guidance range is somewhat wide. It's 115,000 to 140,000 ounces gold equivalent. Can you give us an indication about where you might expect to fall within that broad range?

Okay. Thanks for that, Don. Look, I mean, it is wide. It were deliberately wide basically because of all the uncertainties coming into the year, which included all of the impacts that we've seen from COVID. And quite a number of those are ongoing, as I think you'd be very aware from other companies, and that includes supply chain issues. We've continued to increase our stocks on site month-by-month. And in part, that's obviously because we're looking at our expansion of production, but it's also because we're trying to ameliorate against the issues of supply chain. And those can have an impact. And one of the areas that we've also flagged is in relation to our mobile plant, where we received additional mobile plant in [indiscernible]. But all of those were months later than the supplier had originally committed to. And so all of those have had an impact in terms of our ramp-up, especially in the development area. And that, in turn, has also meant that we haven't had as much flexibility as we would like, for instance, in some of our stope scheduling. So these things can impact you, not necessarily in reducing perhaps the tonnes that you treat, and we're actually running a little bit ahead of the tonnes that we're going to treat, but certainly in terms of where you can mine and what have you. And so it's a combination of those things that really had us giving a relatively wide guidance. I would certainly say it will be a challenge to get to the top end of that guidance. And so we'd certainly expect that we're more likely to be in the midrange than we are to be above that, which is sort of hedging it, I know.

Okay. Well, that's good. I mean, it sounds like directionally it's going to be higher than what you delivered in H1. In Q2, we saw grades just over 7 grams per tonne. You hit a lower grade sequence at the end of the year. Encouraging to see you've got higher grade stopes in the back half. What does this mean? I mean, does it mean going back to 9 or 10 grams per tonne? We've seen that before in previous quarters.

Certainly, the mine schedule has us moving up to higher grades than we've had in the first half of the year. That's certainly our expectation.

Okay. Okay. We can leave it at that. And just as a final question, looking at Blue Lake. So you've only got 26 holes in this, and yet you've got almost 11 million ounces. How many rigs are running on this? And are you targeting the high-grade potassic core at this point? Are you drilling below the lithocap? It seems like there's a number of targets. And are you increasing the priority of this target given the maiden inferred resource?