K92 Mining Inc. (KNT) Earnings Call Transcript

Thank you for standing by. This is the conference operator. Welcome to the K92 Third Quarter 2020 Conference Call. [Operator Instructions] And 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 Third Quarter 2020 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. 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.

Okay. Thanks, David, and welcome, everyone. So the third quarter, once again, really represents another step forward for K92. Completing our Stage 2 plant expansion, commissioning to basically double our throughput from 550 tonnes per day or 200,000 tonnes per annum to 1,100 tonnes per day or 400,000 tonnes per annum, in addition to significant progress on exploration and a number of our other project areas. So if we start, first of all, with safety, third quarter, no lost time injuries. And we've only had one lost time injury since start of operations in 2017. So we continue to operate with one of the best safety records in the Australasia region. And we continue to have a very, very strong focus on that area of occupational health and safety. On the production front, we delivered 22,261 ounces of gold equivalent and combine that with a record mill throughput of 64,702 tonnes processed. If we compare that to Q3 2019, gold equivalent production was up approximately 16%, while throughput over doubled, an increase of 102%. Also important to note that for part of the quarter, our head grades were actually kept deliberately lower to mitigate any gold losses during the commissioning of that expansion. Overall, plant commissioning has performed well. We've seen positive in terms of the ultimate plant throughput where we have actually been able to achieve over 1,200 tonnes per day on a number of consecutive days, which is obviously notably higher than the designed throughput of 1,100 tonnes per day. On the mining front, long hole stoping continues to perform the design on both K1 and K2 veins. And this year, a major focus has been on expanding the number of operating levels that we have from the mine to expand throughput. I'm pleased to say, having just returned from site, in fact, we've now got 7 operating levels, 8 level being opened up. The incline continuing to go up towards the 1,285 level. And the decline going down to the 1,130 level. We have -- we've also started production from our largest stope today, which will provide the base production for the balance of the year. So as a result of the completion of Stage 2 plant commissioning and the multiple production fronts opened up underground, we're really looking for this fourth quarter to be the strongest of the year and therefore, of mine to date. I'd now like to turn over the call to our Chief Financial Officer, Justin Blanchet, to discuss our financial results for the third quarter. Justin, over to you.

Thank you, John, and hello, everyone. Our Q3 2020 revenue increased by 70% to $35.6 million compared to $21 million in Q3 2019. The increase in revenue was attributable to an increase in the realized selling gold price of $1,815 per ounce as compared to $1,409 per ounce in the prior year as well as increased production. As of September 30, 2020, there are 5,859 ounces of gold in concentrate inventory. Inventories increased by 2,420 ounces of gold during the quarter as we had a strong finish to the quarter after commissioning was completed in September. These ounces were subsequently sold in October. Cost of sales was $15.9 million for the quarter, an increase of 30% compared to the third quarter of 2019. This was primarily due to increased operational activity, including the commissioning of the Stage 2 plant expansion. 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 movement of personnel and supplies and safety- and medical-related costs. Cash flow from operating activities for Q3 2020 was $12.8 million compared to negative $2.6 million in Q3 2019. As of September 30, we had a $41.2 million cash balance, our highest balance on record, which includes making corporate tax installment payments in Papua New Guinea of a little over $5 million, paying $6.4 million year-to-date in principal loan payments to traffic bureau, having a remaining balance of $7 million as of September 30 and spending $15.3 million year-to-date in expansion capital. As John mentioned, in Q3 2020, the Kainantu Gold operations produced 21,298 ounces of gold, 488,020 pounds of copper and 7,127 ounces of silver. During the same period, we sold 19,265 ounces of gold, 487,087 pounds of copper and 7,166 ounces of silver. We incurred cash costs of $695 per ounce and an all-in sustaining cost of $834 per ounce, which was significantly below our realized gold selling price of $1,815 per ounce for the quarter. In comparison, 18,636 ounces of gold, 209,287 pounds of copper and 5,284 ounces of silver were produced and 15,562 ounces of gold, 181,422 pounds of copper and 4,847 ounces of silver were sold in Q3 2019. A cash cost of $649 and an all-in sustaining cost of $800 per ounce were also well below the Q3 2019 realized selling price of $1,409 per gold ounce. Our 2020 cash cost per ounce increased relative to prior year due to deliberately lower feed grades to minimize potential gold losses during the commissioning of the Stage 2 plant expansion as well as additional costs incurred related to COVID-19 pandemic and higher labor costs associated with the plant expansion. We see downward pressure on the cost via economies of scales, following the successful commissioning of the Stage 2 mill expansion and continued expansion of long hole stoping activities. I will now turn the call back to John to continue with the rest of the presentation.

Okay. Thanks, Justin. If you move on and look at on the exploration front, we are, I think, quite obviously, very pleased with the progress today. Recent results reported from 3 separate near mine infrastructure vein systems, Kora, Judd, Karempe. If we look at Kora, late August, we announced results consisting of both the infill drilling and step-out drilling for the site. First of all, we reported from the southernmost drill cuddy, which we only opened up in Q2, demonstrated the system basically continues alongside, which I have to say was pretty much what we expected and recorded 9 meters at 10.2 gram per tonne gold equivalent. Other results that we reported at that point in time included 4.3 meters at 113.8 gram per tonne gold equivalent. And our exploration development drive for the south has now extended beyond the mining lease and we're putting in a drill cuddy, which will actually be in our exploration area. So we will be drilling Kora South. And in fact, we already have, I think, a hole in Kora South, which is outside of our mining lease. On Judd, the announcement was made in early September and then, again, in mid-November. They were the first ever done by K92. The Judd vein system really has had very limited historical exploration. It's got a strike length of over 2.5 kilometers, up to 4 non-veins and it's subparallel to Kora. And approximately 200 meters to the Southeast -- Southwest, sorry. And generally, only 50 to 100 meters from our main infrastructure underground. In early September, ventilation infrastructure drive was developed along with Judd, J1 vein, as we call it, and that was done to provide a more detailed evaluation in terms of both grade continuity and the geotechnical conditions of that vein. Preliminary results estimated that we had taken 6,200 tonnes at 5.5 grams per tonne gold equivalent. Average thickness, 3.4 meters. Now that, we're now putting it as a bulk sample and putting it through the plant. In fact, we have already completed that work and we'll be reporting it in the near future. And I think it'd be fair to say, I think we're happy with what we've seen come out of that. Geotechnically, the vein was shown to be very competent. So overall, very happy with it. Importantly, I think mineralization encountered from a bulk sample is very similar to Kora. And that really -- with the continuity in the grain -- and the grades that we saw really drove us towards putting 2 of our rigs to actually commence a systematic -- an initial systematic exploration program from underground. Mid-November, we announced the first 4 holes from that Phase I program, as we call it, 3 of the holes intersecting high grade mineralization. Highlight was JDD0006, 7.25 meters at 258-gram per tonne gold equivalent; and hole JDD0003, 4.5 meters at 22.4 gram per tonne gold equivalent. Mineralization intersected is similar to that, which we've seen in the bulk sample and also Kora. It's obviously still very much early days, but the results are certainly very exciting. And we've got additional work planned for Judd. And so we will be enhancing our knowledge of Judd's continuity, size, grade potential, et cetera, et cetera, through exploration in the coming quarter and in the new year. Karempe, late October, we announced our maiden drill results from the vein system reporting 6 holes. Like Judd, Karempe runs parallel to Kora and the vein system is being mapped for a strike length of about 2 kilometers and had very little exploration on it. Now that vein is actually to the north, to the Northwest and about 400 meters away. We also recorded in multiple intersections, subparallel veins, the highlight being what we quoted as a KA1 Vein, which in 1 hole came up with 2.45 meters at a bit over 40-gram per tonne gold equivalent. And then approximately 100 meters down dip from that, 3.2 meters at 18.3 gram per tonne in one of the other holes gold equivalent. Again, mineralization encountered very similar Kora. So results from both Karempe and Judd, I've got a -- I can only term as excitement, to highlight the significant near-mine exploration upside potential of Kainantu. We've basically evaluated something like 20% of the vein field strike so far with the work we've done. So we've got an enormous amount of upside potential, which is still to be drilled with all veins remaining open at depth and open to the site. Over the coming months, we plan to assess the impact of our exploration results carefully. In terms of the throughput potential, we're looking for Stage 3 expansion and the potential follow of Stage 4 or I don't know, maybe a Stage 5. And so as a result, we continue to increase the number of drill rigs we've got on site. We're currently running 4 rigs underground, a fifth rig is due this week and so we should be drilling by the end of the month. And we've actually got a sixth rig due to arrive at the first quarter of next year for underground. So that takes us to currently 5 rigs on the surface, 4 rigs underground, 5 rigs by the end of the month, 6 rigs, a total of 11 rigs by the first quarter. And I can assure you our exploration people believe that they could actually use a few more. So we're having a look at that in our budget for 2021. And of course, I'd remind everyone that our exploration, production growth is all self-funded and we continue to bolster our balance sheet. So with that, operator, I'd be happy to commence the Q&A session.

[Operator Instructions] Our first question comes from Varun Arora of Clarus Securities.

Congratulations to you and the team on continued execution, particularly on the cost front, despite the lower grades during the quarter. I have a couple of questions. I guess I'll start with the gold sales. I noticed they were a bit lower as compared to the previous quarters. Could you talk about what happened during this quarter regarding the gold sales?

Okay. So I mean, basically, as was mentioned by Justin and myself in my talk, we were commissioning -- during the third quarter, commissioning the plant. So what that meant was we deliberately put lower grade through the plant, first half, a good portion of the quarter to make sure that in commissioning, where you always get a few issues, we didn't want to be putting high-grade through the plant while we're commissioning expansion and [ leasehold ]. So we had higher grades towards the tail end of the period, and we had a lot of higher grade right towards that end. That's high-grade production, especially in the latter half of September, will then basically not be sold until October, and I think Justin made comment on that. But I think that's what the amount of gold unsold at the end of the quarter, be with the quarter. So that's just something that we'll pick up in the next quarter.

All right. On the cost front, I believe you're seeing some unit cost savings as a result of commissioning. Could you comment a bit on that? And what would be your guidance going ahead? Do you expect more cost savings on the unit cost front?

Yes. Look, we certainly anticipate seeing -- continuing with savings or reductions in our unit costs as we complete the ramp-up from underground. We basically commissioned the plant and as I flagged -- the plant, in fact, is shown that it can, in fact, potentially do more than 1,100 tonnes per day. Underground, we've said it would really take us until the end of this quarter to get the production ramped up for the 1,100 tonnes a day. So we still got a little way to go in terms of the underground. But it's fast, approaching the 1,100 tonnes a day. And certainly, we would anticipate that, that will continue to drive down the unit costs. As you'd be aware, your -- probably our single biggest cost is labor and expat labor actually forms a fairly major cost center, doubling throughput. Basically at less than 10% to your expat labor and probably about 30% to your other labor. So it's not a doubling of the labor anywhere near. Same thing with power, which is what every other major costs doubling through, but it doesn't double your -- the power cost. And then, of course, underground, long hole stoping is ramping up. It's still not at what we would call a stable point because we're still opening up vertically underground. So as we move to more and more production coming out of long hole stopes. And ultimately, we're looking at about 60% long hole stope. And that, again, will drive down the cost.

Right. And what's the current breakdown between long hole versus cut and fill?

It does vary. But I would say that from probably around 70% plus is now long hole, so.

70% long hole. Okay. Great.

As opposed to cut and fill. Obviously, you get some production from developing along a longer main vein systems and opening up the stopes.

Right. Right. And just last question, what would be your guidance for the grade in Q4?

Grade in Q4, I would anticipate that -- I think will be around the 12 to 15 grams per tonne.

Our next question comes from Geordie Mark of Haywood Securities.

Yes, just a extension from the earlier questions there. On mining, you're saying ultimately, obviously, you're doing pretty well to get up to your 1,100 tonne per day rate. What do you think prevailing sort of capacity is there? And I guess that's an interplay between the mine design and stopes that you've got going forward. And ultimately, when you're looking at long hole stoping at the moment, can you give us an idea of the dilution factor that you're incorporating there? And anything that we can garner from how you're executing at the moment on that?

Okay. Well, look, the capacity of Stage 2 at 1,100 tonnes a day or 400,000 tonnes per annum was actually based on the plant. And that was the existing mill, which is a 900-kilowatt mill. All the work that we did and our consultants and the actual, Outokumpu who the supply the mill, all the work said, the mill itself could do 1,100 tonnes a day. That's the existing mill. And then what we needed to do was increase crusher capacity by putting in a bigger cone crusher, increase flotation capacity, pumps, pipes and some other upgrades such as the process control system, et cetera, et cetera. And so to go beyond that, 400,000 tonnes would involve a new mill. And obviously, the costs would go up dramatically, if that's what you wanted to do and, of course, impact on production, et cetera, et cetera. So that was the driver that really said, so we're looking at 400,000 tonnes, running 1,100 tonnes a day. From the perspective of underground, certainly you could do significantly more than that. And obviously, the Stage 3 has shown that with the resource as it currently stands, the PEA there said you can do 1 million tonnes per annum. So with continuing to open up and importantly, a twin incline, you can get to 1 million, probably significantly more than 1 million tonnes per annum. So underground with the existing incline, I would certainly say, we would be comfortable saying we could get to 500,000 tonnes per annum. We are moving currently a lot of waste as well. So we are -- we're actually moving more waste than mineralized material. I haven't got a study so we don't have any ore, we just have just mineralized material that makes us lots of money. So we can certainly move material, we couldn’t move 1 million tonnes, not with the existing incline. And as you'd be aware, one of the things that we have done is committed to that, to an incline. And in fact, the twin incline now, I think the 6x6 will be pushing about 100 meters in and the 5x5 probably around 70 meters. And so they're progressing fairly well. The important thing in the expansion are expanding underground production is opening up levels. And so I was underground last week, on site, longest trip I've had underground because there's just so much more to see. So you've got 11 -- we’ll be down 1,150, 1,170, 1,185, 1,205, 1,225, 1,245. And then incline going up to 1,265 and the decline going down to 1,130. So -- and up to 600 meters of straggling a long strike as well. So we've got multiple levels open. And then we've also got a [ chad] which is sitting at 1,235, which is, as we mentioned, that ventilation development, but is actually producing ore. So ramping up that production is about opening up those levels and then [ stilt ] production from it. So realistically, I think until you get the twin incline in, you could probably push to 500,000 tonnes, whether or not the plant can do that on a sustained basis, that would be something that we're still willing to look at. And this is still early days of having done that expansion, it's still in that optimizing phase and then you start moving into your debottlenecking and seeing what you can actually get out of what you've done. Did that answer all your questions, Geordie? Or is there something else that I need to?