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

Thank you for standing by. This is the conference operator. Welcome to the 2023 first quarter financial results conference call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to David Medilek, President. Please go ahead.

Thank you, operator, and thanks, everyone, for attending K92 Mining's First Quarter 2023 Results 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.

Well, thank you, David, and welcome, everyone. So during the first quarter, the operation continued to progress on multiple fronts, performing strongly in all areas other than grade, and that was due to some unexpected short-term challenges, which will go into this presentation.  So I was in Papua New Guinea late last month. The operation is certainly on top of those challenges, and the mine has performed well since mid-April. There is a major focus on increasing our operational flexibility on multiple fronts, and this is obviously something that will continue. I think it's important to highlight that we've got a strong mining track record, having successfully mined coal for 5 years and Judd for almost 3 years while at the same time successfully expanding our whole operation during this time, increasing throughput by 250% in a pandemic environment. There are multiple positives from Q1, and we'll continue to build off those.  Process plant performance has been very strong, exceeding our expectations and continuing to set [indiscernible]. Development, which has been a major focus, delivered another consecutive quarterly development advance record. And then finally, K92 achieved multiple growth catalysts and milestones during the quarter, including strong exploration results on Kora coal site [indiscernible], and also commencing exploration drilling for the first time ever on the A1 copper-gold porphyry target, which we see very much as our #1 target.  So on the safety front, we recorded no lost time injuries during the first quarter. And as the chart shows, since commercial production commenced in 2018, K92 has operated with a lost time injury frequency rate well below the industry average. However, as previously reported, subsequent to the end of the quarter with some profound sadness, we had to report that on May 2, 2 individuals were fatally injured during a vehicular accident. The accident occurred offsite. So it wasn't on the mining lease area. In fact, it was on a remote country road, some distance from the mine. So mining operations were not impacted. And I would like to say on behalf of K92 Mining to the family, the friends, the coworkers of our 2 colleagues, we offer our sincerest condolences and heartfelt prayers during this very difficult time. Safety has been and always will be a major focus for K92.  On the ESG front, I'd like to begin with providing a very positive progress update on our tax credit scheme. So after multiple meetings last year, the committee has now been formed, and the endorsement of the first branded projects is planned in the near term. So for clarity, tax credit scheme allows for 2% of K92's accessible taxable income to be allocated to eligible projects, primarily focused on infrastructure, and then we get a commensurate tax credit granted. So the program effectively partners with the government to deliver even more projects and benefits to communities, and multiple priority targets have been identified. Importantly, the tax credit scheme is in addition to our existing community programs.  Now while in Papua New Guinea in late April, we had the pleasure of hosting the Board of Directors of K92, whereas I visited our operations plus meetings in Port Moresby with a wide range of stakeholders, including representatives of government happening in the chamber of mines in petroleum, suppliers, service providers, industry, academia, and [ miose media ]. The picture here shows our Chair Anne Giardini with this year's recipients of our K92 Mining scholarship program, plus 2 recipients from a scholarship from our JV partner, Pagini. Each K92 scholarship recipient receives the metal, which honors a senior Papua New Guinea leader within K92.  The program itself is an annual program. It's to third-year students in the study of mining, metallurgy geology. This year, we added women in mining. Scholar recipients also, when they complete their fourth year, they then join the mine and go into our 2-year graduate training program. I'd also like to announce that this coming year, we will be adding a further scholarship, which will be a postgraduate scholarship, which will be the Turkey Angus Memorial scholarship later. Now the Board of Directors also had the honor of having dinner with the Prime Minister of Papua New Guinea, the Honorable James Marape; the Governor of Eastern Islands province, the Honorable Simon Sia; and member of Parliament for Kainantu District, the Honorable William Hagahuno. And of course, the support of the government continues to be a major factor in our success.  Now moving to operational performance. During the quarter, we produced 21,488 ounces of gold equivalent, with 11,703 tonnes processed at a head grade of 6.35 grams per tonne gold equivalent. Now that compares with Q1 2022, ore processed increased 18%. Cash costs, $758 per ounce, and all-in sustaining costs $1.506 per ounce. Production during the quarter, as we've alluded to, was impacted by 2 short-term issues, which gave us 8 days of unplanned plant maintenance and then the challenging ground conditions localized area at Kora, which I will discuss in some detail later in the presentation.  In terms of the key operational quarterly physicals, K92 delivered near-record ore tonnes processed and mined plus record development, which we see is particularly strong when you consider the short-term challenges that were faced during the quarter. As noted in previous conference calls, increasing our development rate continues to remain a major focus as we catch up on the development that was impacted due to COVID and of course, subsequent to COVID supply chain issues. Therefore, I'm really pleased with the development pace that we've achieved in the past 2 quarters with the arrival of another Jumbo during the last quarter. And then we have a further Jumbo to midyear and another one by the end of 2024. So we'll be looking to build on these 2 quarters and continue to expand and increase our development rates.  Now in addition to the strong development, advance rates, a major positive in the first quarter has been the performance of the plan. In remarks, we set a new monthly record averaging 1,490 tonnes per day. That's 9% above the Stage 2a expansion rate. The plan also set 4 new daily records during the quarter, as shown in the chart here, with the current record now standing at 1,815 tonnes processed in a single day. So Stage 2a expansion is currently undergoing its final commissioning, and we see the potential for a further throughput upside with this. As previously reported, during the first quarter, unexpected operational challenges occurred in both the process plant and the mine. But the mine, notably more challenging ground conditions than expected were encountered in a localized area in late February, and that impacted on production stopping rates and access to a large high-grade Avoca stoping area, which is circled here in the diagram. Now generally, in this situation, the mill feed will be supplemented by mining from additional higher-grade mining fronts as we mine through the impacted area more solely. In this case, as I think you can see from this diagram, our backup stops would have been located on the 1,285 level at Kora, but that top access or Avoca in the 1305 level was not yet completely developed and that really comes down to below budget development rates for several quarters during COVID, which we've shown previously. And you saw in our operating results.  So as a result, the mill feed was supplemented with lower-grade material from underground as well as some more grade stock valuer that we maintain. I think it's important to highlight, firstly, that we do intend to mine this area in the future. So it will come back into our production and when we introduced Paseo, which is part of that Stage 3 expansion, that will provide a big boost to our geotech and mining sequence flexibility and better enable us to manage any future situations such as these. I think for our stopping sequence, it's also important to highlight that Judd has extremely good geotechnical conditions, and we've not experienced any areas with localized challenges there. And we're now developing the 1305 level in Judd so we'll have multiple large stocking areas going forward, as you can see in this diagram. So I think importantly, we are following our stopping sequence for the 2023 plan, which does drive our guidance. Looking at the underground mine performance for Q2, moderately impacted the first half of the vehicle due to the challenges noted in the previous slide. However, since then, the mine has been performing well. There still being sequenced to set ourselves up for a strong second half of the year. On the process plan front, as previously mentioned, there were a total of 8 days of unexpected planned downtime. So that was due to a mill trunnion bearing failure and a limited electrical fire in the cable tray in the wet section of the plant. Pleased to report that the Kora sales plant has performed extremely well and in fact, has set a new record on the throughput front.  I think it's also important to highlight that we see the underground mine continuing to strengthen as the year progresses. There are multiple positive factors driving this. Firstly, our development rates have been very strong for each of those last 2 quarters, each one being a new record. And we see that very much as a leading indicator. Secondly, we've received key pieces of equipment already this year-to-date and more expected going forward. And that provides a boost to our capabilities underground. We'll show some followers later in the presentation on that.  And then lastly, after commencing underground development of the Twin incline in 2020, we expect to mine the first ore tons from the lower mine in Q4. Now that is well ahead of schedule, and that's been driven by strong advance rates in between clients. So ore tons from this area were not planned until 2024. Now we will actually see our first tonnes come in 2023. So that establishes a major mining front of debt supported by obviously the large and very efficient infrastructure. I'd also like to highlight that the localized area of challenging geotechnical conditions that we faced in Q1, there is also an opportunity there for us. And as much as the subparallel structure is mineralized. It's not currently in any of the mine plans in the DFS or PA and potentially provides us with a significant upside in throughput. So we're working with our own people and consultants to determine its resource potential and the best way to unlock it through mining.  Lastly, I'd like to reiterate that K92 has a significant plus 5-year track record of mining and expanding operations. Long-haul is still being commenced in the early 2020s and has been successfully executed and ramped up. We maintain our outlook for production to be within our guidance range, albeit in the lower half. So I'll now turn over to our Chief Financial Officer, Justin Blanchet, to discuss our financial results for the first quarter.

Thank you, John, and hello, everyone. During the first quarter 2023, we had revenue of $40.4 million, a 23% decrease from the prior year. We sold 17,602 gold ounces at an average selling price of $1,807 compared to 26,471 ounces at an average selling price of 1,769 in the prior year. As at March 31, 2023, there was 3,292 gold ounces in inventory, including both concentrate and dore a decrease of 320 gold ounces when compared to December 31 due to the timing of sales.  Q1 2023 cash flow from operating activities before changes in working capital was $16.5 million compared to $22.5 million in the same period the prior year. As of March 31, 2023, we had $88.6 million in cash and cash equivalents. The decrease in cash and cash equivalents when compared to December 31 is primarily a result of spending $12.7 million on expansion capital, decreasing our accounts payable other than landowners accrual by a net $7.3 million, and increasing our mine supplies, consumables, and fuel by a net $3 million during the quarter. As at March 31, K92 had one of its strongest reported working capital balances of $117.3 million despite record expenditure of $23.5 million for property, plant, and equipment during the quarter.  Further, as at March 31, receivables had increased to $35.1 million from $29.3 million at December 31. Inventory had increased to $31.9 million from $28.5 million and accounts payable had decreased to $29.8 million from $37 million. The company has no debt on the balance sheet. Q1 cost of sales was $23.7 million compared to $22.5 million in the prior year or $16.7 million compared to $17.7 million when you exclude noncash items. Despite an overall increase in the cost of sales, the company achieved better economies of scale and lower unit costs when measured for each ton of ore produced attributable to the successful ramp-up of the Stage 2 expansion with ore tonnes mined increasing from $10,124 in Q1 2022 to 117,865 in Q1 2023.  As John mentioned, during the first quarter, the Kainantu Gold operations produced 17,593 ounces of gold, 1,651,297 pounds of copper, and 29,859 silver ounces or 21,488 ounces of gold equivalent. We sold 17,602 ounces of gold, 1,538,590 pounds of copper, and 29,164 ounces of silver. We incurred a cash cost of $758 and an all-in-sustaining cost of $1,506 per ounce of gold, which was significantly below our selling price of $1,807 per ounce. Our Q1 cash cost per ounce of gold increased to $758 from $536 in Q1 2022.  The increase in cash cost was primarily due to the lower head-grade material compared to the prior year, as John mentioned. Our Q1 all-in sustaining cost per ounce of gold increased to $1.506 from $788 in Q1 2022. The increase in cost per ounce in addition to the lower head grade material can be attributed to the $11.2 million spent on sustaining capital as compared to $5 million in the same period prior year.  The increase in sustaining capital is a result of increased capital development when compared to the prior year as well as replacing some equipment during the quarter. It is important to note that after commissioning the Stage 2 plant expansion in the 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.

Well, thank you, Justin. So for the exploration and growth section, we begin with the Kainantu mine strategy growth pipeline. On Stage 2a, we're pleased to be in the final commissioning stage with the last item being the rougher flotation currently being recommissioned. Stage 3, we've made considerable progress on the tenders. We'll be awarding the various long lead items by the end of the month, and we're currently out on tender for the EPC for the process plant and the Pasco, and we'll be looking to award these by midyear. After completing that tender process, we plan to release a growth capital guidance update and scheduled update.  Next, lift on the tailings dam. It's already commenced. That's well ahead of when it's required, and it's already 20% complete. Now the video that you see here was taken last week, and that's the wet commissioning of Stage 2a rougher flotation circuit expansion. So that expansion and additional 2 cells, but those additional 2 cells are far larger than the existing sales, and that more than doubles our rougher capacity. With these commissions, we believe we'll see 1, 2 percentage points at least improvement in our recovery as well as providing us with potentially further ability to increase our throughput.  But over the last few months, we are obviously pleased to have received quite a number of pieces of key equipment, underground equipment. This particular image shows our new [ Jungl in action ] that arrived in the first quarter. We've got another jumbo to midyear and then a third new one before the end of the year. Also in Q1, we received a new long-haul rig. So that's our second long-haul rig. And so that's an important addition because obviously, it doubles the size of our fleet and provides us with greater flexibility and the ability to steadily grow our drill stocks.  During the quarter, other equipment arrivals included a new lawyer as shown here, 2 integrated tool carriers, a cement agitator, and a Norm charging machine. That equipment is designed, obviously, to expand our fleet, and improve our productivity by replacing some additional equipment as well. More equipment is on the way. The 2 care trucks you see here. They are currently on the water between Brisbane and late, and we expect these to arrive in the country by the end of the month. So that significantly enhances our truck fleet.  So now on the Twin incline, the further incline has now achieved 2,315 meters as of the end of April. So that's a couple of weeks already ago, and that's tracking well ahead of schedule. Incline development is now something like 80% complete. And as you can see from the diagram, the Twin incline advance is now getting very close or impact it's within the core deposits. Q4, we actually plan to commence mining from the lower portions of the Kora resource from the twin incline, which is well ahead of schedule. That was only planned for next year, and it's a result of the twin incline being significantly ahead of the ships we've mentioned.  Importantly, it creates a significant boost to our operational flexibility, as we're now establishing a new mining front at depth and obviously located in that new infrastructure area. In terms of the main field exploration, drilling is underway at Kora south, Judd site northern deeps, and shortly, it will be Kora deeps. We're now looking at a long section here of Kora south. And to date, we've defined a potential strike length of something like 2.65 kilometers with exploration from the surface focusing on Kora south.  Underground exploration is targeting Kora south and as I mentioned, imminently, Kora deeps, with the twin incline claim significantly advanced as shown by the arrow here in the diagram, we're in the process of moving a second diamond drill rig into the twin incline and that drilling is to advance basically from north to south. And obviously, this is one of our most highly prospective targets, and importantly, it's within the mining lease. So it's adding ounces that are within the mining which additionally, Kora south drill drive has made significant progress advancing to the south. Drilling is underway from that drill drive, and we're certainly excited to be testing that downdip extension of Kora south from underground, including importantly, that dilatant zone that we've reported previously, and you can see some of the numbers that we've had there.  When we look at Judd south, again, showing the long section to date, we've defined something like 1.7 kilometers of strike length. Judd south is open in multiple directions. Unlike the Kora coal site, we've intersected mineralization normally in every drill hole today. Again, like the Kora coal south, the advancement of the underground infrastructure is opening up, Harley prospective drill platforms to explore at depth and we plan to provide an exploration update of our vein drilling later this month.  On the porphyry exploration after announcing that to maiden Blue Lake inferred resource of 10.8 million ounces gold equivalent or 4.7 billion pounds copper equivalent, which is the fifth largest non-carry in Papua New Guinea. We have now got drilling underway at A1. A1, at this point in time, is our #1 porphyry target based on our airborne advanced mobile MTT physics, which was flown in late 2021 and also from our surface mapping. As you can see from this image, A1 is interpreted to be part of the same large litho complex that hosts Blue Lake and also the Ayena target. So we're currently drilling our second hole at A1 and look forward to providing an update on that in due course. So with that, operator, we'd like to commence the Q&A session. Thank you.

[Operator Instructions] Our first question comes from Alex Terentiew of Stifel.

Just a couple of questions from me. First, I know that the mill capacity, pardon me, is the ultimate bottleneck. But when it comes to the mining, the lower levels of the mine that the incline is going to connect to in Q4, how should we think about the production potential from that incline as we look into 2024? I'm just wondering, do you have the equipment and the people? I know we're still talking 6-plus months away. But I'm just trying to get a sense of what mining rates we could see from the mine on an overall basis once you guys get into that zone. The other one is just more on the Phase III for expansion. Just wondering if you can give us some color on the timing of that spend over the next couple of years. And I know a lot of the cost is development and you guys are spending as you go along on that. But just kind of just trying to think of spending over the next 2 years as we -- something to kind of put into our model to better forecast cash flows.

Okay. Thanks, Alex. Look, in terms of first of all, the capacity from the lower levels coming out of the twin incline. I guess there are a couple of things that are important there. One, as we reported, we do have now a second long-haul rig. So we actually have the ability to operate in 2 different areas in the mine in terms of stopping. And that's only recently happened out some in the last quarter. As I said, right now, there is nothing in the schedule at all for tonnage from that lower level. So right now, we just don't have an actual schedule of what we would mine. Realistically, you're opening up a new area. You've got a 2 development along strike. And of course, you got to develop multiple headings within the actual ore bodies themselves. So we're not looking for a lot of tonnes this year. Quite frankly, if we got 10,000 tonnes of there out of it in the fourth quarter, that would probably be a reasonable number.  Next year, the vast majority of our tonnes come from the existing mining areas, that's called Kora and Judd. And I certainly wouldn't see that around 20% of our tons tops coming out of that lower area, and that really would be the top end of our expectations. As you said, ultimately, the plan right now is our bottleneck, but it seems to be the expanding bottleneck. And quite frankly, the plan continues to surprise us with the capacity that we are getting from it. And certainly, it's something that we're going to be looking at in our budgeting process next year.  In terms of the Stage 3 expansion spend, as we've said, we will give guidance on that around the end of this quarter, we've got the tenders due in. I think actually next week, I think we have a series of calls to tender us next week going through that detail. So we should be able to provide some detail to assist with the cash flow models by the end of this quarter. But obviously, there are 2 aspects to it. One aspect is ongoing sustaining capital. And I think we've given guidance, I think, or it certainly comes out of the studies that you've got around $60 million a year over the next 4 years for your sustaining capital. And I think it's reasonable to be modelling that simply on a quarter-by-quarter basis, equally split. In terms of the expansion capital, we expected to follow a classic S curve as you would for any of this sort of project. But the detail of that will only really be able to provide end of the quarter.

Our next question comes from Ovais Habib of Scotiabank.

John, starting off with my first question, just on underground development. You recently received a new equipment jumbo, and you received an additional jumbo loader. You're expecting to receive an additional jumbo on rotor shortly. Two parts over here. Is there a specific underground development rate that you are targeting? And what do you need to get there? Do you need additional equipment? Do you need additional people? And second part of this question is, how many stops are you currently mining from and preparing versus where you need to be comfortable sustaining a 500,000 tonne per annum rate?

Okay. So I guess, first of all, in terms of the underground development target rate, the target by the end of this year is to be developing approximately 1,000 meters a month. And we've scheduled our new equipment to be able to meet that schedule. So right now, we're running at around $800 a month.  And the current equipment, obviously, is sufficient for that. As was mentioned, we've got an additional [ twin boomer ] coming in. And that, together with the second one, I think we've got coming in, in the fourth quarter, we'll go with the ability to get up to our 500 meters plus a month. I think in the original studies, that was about the level that we needed to get to. But we are looking at getting up to around 1,200 a month next year, simply to catch up on those meters that we dropped during COVID. And so we will have, I think, 1 or 2 additional [ twin boomers ] coming in next year as well and other equipment. And I think we've got our first -- we placed the order for our first larger scale equipment, which is a 21-ton loader versus the 17-ton we're currently using. And we've also, I think, ordered our first of our larger trucks, which are the 63-tonne trucks as opposed to the current 45th we're running. So we are also looking at scaling up as the twin incline comes into production.  In terms of the number of stopes, I mean, currently, we have I think 4 stopes that were mined in Judd during the quarter, and I think we had 3 stopes that were mined for Kora. And that actually is sufficient for 500,000 tonnes per annum effects sufficient for a bit more than that when you bring in your development tonnes. So we'll be running with the same sort of number. And I think if you look at for the balance of the year, I think we've got about 9 states of various sizes coming out of Judd. Kora only has 5 or 6 depending on how you define them coming out, but they are significantly the largest stops that we've got planned for Judd. We tend to have larger stops.

Just in terms of the dollars that you're looking to spend, let's say, in terms of catching up on development this year, would you think based on the equipment that you have and the based on the people that you have, you will be able to spend that? Or do you think that's going to be spilling over into 2024?

Interesting question, actually, always, because certainly, some of the capital spend that we had planned for 2022 did spill over to 23%. But in the main part, that was capital, although there is obviously because some of the development, we mean sustaining capital, some of it did spill over. I think at this point in time, when we look at what we budgeted in terms of our sustaining capital. We certainly have the equipment to be able to achieve what we've set out to do. We have been recruiting some of those key areas to boomers, for instance, twin incline operators, and we have been successful at recruiting those. So at this point in time, our expectation is that we will spend the money that we've said we will this year and we will continue to spend at that rate over the next couple of years.  I think importantly, there are a couple of things there that are perhaps important. One, the twin incline, which has obviously been going for a couple of years now, actually gets to the end of the mining lease, I think it's this year. And late in the fourth quarter, it may go over to the fifth quarter, depending on how we focus on our ramps going up and down. But we've been spending in excess of $1 million a month on those twin inclines. And that's very much coming to an end. There are other things that we're doing, obviously, including the internal ramps to connect the twin incline up. But that's been obviously a major expenditure for the last 2 years, 2.5 years. So you'll see sort of expenditure in that area dropping off. But obviously, that means that we're focusing on development in other areas.

My last question then, just moving on to the twin incline then. I think you answered part of my question in the previous question that was asked. So twin incline seems to be ahead of schedule, and that continues to be ahead of schedule, and you're looking to mine the first ore at Kora, I believe, in Q4. Now will the processing of ore from this area get you back and up towards that midpoint of guidance? Or are you still kind of guiding towards the bottom line of guidance based on how things are progressing in Q1 and Q2?

Look, I think from our perspective, we would say that our expectation is it will be in the lower half of guidance. We are certainly scheduling from our own perspective that we achieve our tonnages, which basically is for this year, we had budgeted 500,000 tonnes per annum, and that is where we're guiding at this point in time. Is the potential to push more tonnes? Obviously, there is. But at this point in time, we haven't built that into our budgets for the second half of the year.

Our next question comes from Arun Lamba of TD Securities.