K92 Mining Inc. (KNT) Earnings Call Transcript

Thank you for standing by. This is the conference operator. Welcome to the K92 Mining's 2024 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 and CEO (sic) [ COO ]. Please go ahead.

Thank you, operator, and thanks, everyone, for attending K92 Mining's 2024 first quarter 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 our 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. As always, we begin with safety, K92's #1 priority. K92 has historically operated one of the best safety records in PNG as well as the broader Australasian region, as shown in this chart. And as we stated in our previous conference call, we take the increased lost-time injury frequency rate we achieved in 2023 very seriously. Multiple actions have been taken. Two independent safety audits have completed, the first in the second half of 2023 and the second in April of this year. While overall our systems were found to be comparable with other operations in Australia and the Asia-Pacific region, opportunities to improve safety were identified and many improvements have already been realized. Additional safety technologies have been progressively introduced such as in-cab monitoring and the implementation of our proximity detection and collision avoidance system, which is nearly complete. Further enhancements and systems beyond this are also planned. I think culturally, there are multiple positive leading indicators, including a significant increase in job safety assessments for several consecutive quarters. As part of our expansion process, management and supervisory capabilities have been enhanced and expanded, including to provide a major focus on safety and training. In Q1, there were no lost-time injuries, and I'm pleased to highlight that this is now the third consecutive lost time injury-free quarter. I'd like to reiterate that K92 relentlessly pursue our goal of achieving 0 harm among our workforce. So now I'd like to provide an update on the non-industrial incident that occurred on the mining lease on March 10 and which resulted in a deceased employee as well as the issuance of a Form 29 by the Mineral Resources Authority or MRA. I note that the Form 29 required a temporary suspension of underground activities on March 13 as it was initially incorrectly interpreted as a mine accident. On April 8, we announced that the MRA had vacated to Form 29 through letter and the operations were resuming imminently. This letter followed a presentation that was delivered by the independent safety auditor to the MRA, which highlighted that our underground safety management plan was good, conformed to criteria in ISO45001 and had been implemented. The safety auditor also noted that no substandard document process or systems were found and that the underground safety management plan was comparable to other operations in Australia and Asia. Since restarting, operations ramped up in April and have now returned to normal, and we're pleased with the focus and motivation of our workforce. In terms of the proximity detection and collision avoidance system, installation is nearing completion with as noted in the prior slide. Lastly, in late April, the coroner's report confirmed that the incident is non-industrial. It is deemed not to be a mine accident and is a jurisdiction of the Royal Papua New Guinea Constabulary or the Police. On the ESG highlights, K92 is extremely proud of its positive impact on women's empowerment. The 5 female graduates shown on this slide are within a larger group of outstanding female leaders and future leaders in our company. They work in a range of roles within the company, including, but not limited to, mining engineering, sustainable agriculture and livelihoods, finance and community affairs. Some of the female graduates are also previous scholarship recipients including the inaugural women in mining scholarship. Our women's empowerment programs are wide-ranging, focusing on education and health care training and awareness, business development, developing our workforce and partnering with Academia and are designed to deliver long-term and diverse positive impacts. K92 is extremely proud of the positive impact that we're having in Papua New Guinea, and we look forward to announcing our latest sustainability report in the next couple of months. Now moving on to operational performance. During the quarter, Kainantu Gold Mines slightly exceeded budget with 27,462 ounces gold equivalent produced, even with the temporary suspension of underground operations for the final 22 days of the quarter due to that non-industrial incident. During the quarter, a total of 130,632 tonnes were processed at a head grade of 7.2 grams per tonne gold equivalent and cash cost $934 an ounce all-in sustaining cost, $1,366 an ounce. As annotated on the chart, all-in sustaining costs have been elevated for the past few quarters as the company continues to make considerable investment in that Stage 3 expansion, particularly in 2024, with costs then expected to decline considerably after delivering Stage 3 expansion next year. I think it's important to highlight that the non-industrial incident had a moderate impact on our Q1 production of about 3,000 to 4,000 ounces, and we expect a moderate impact in Q2, as previously disclosed. Q1 was on track prior to the incident to be our best first quarter on record, and there's certainly a lot of positives to build on going forward. As outlined in our operational guidance earlier in the year, the second half of the year is expected to be our strongest. So we reiterate our 2024 guidance. In terms of key operational quarterly physicals, K92 has demonstrated the ability to sequentially expand the operation for several years, with physicals in Q1 clearly impacted by the temporary suspension of underground operations for the majority of March as well as the completion of the twin incline. In Q1, a major positive in terms of operational physicals was realized with a process plant delivering multiple records earlier in the quarter. A new monthly throughput record was achieved in January, averaging 1,843 tonnes per day or 35% greater than the Stage 2A design throughput. A new weekly throughput record was achieved in January, averaging 2,149 tonnes per day, which is 50% greater than the Stage 2A design. And finally, a new daily record throughput was achieved on the 21st of January of 2,389 tonnes processed, 74% greater than that Stage 2A design. So the process plant has clearly demonstrated that with the tonnes in front of it from the mine, it is extremely capable and provides significant optionality going forward. I think the records also highlight the potential of the Stage 3 process plant, which has used the same design parameters as a Stage 2A process plant, and is therefore, potentially capable of significantly greater throughput than the 1.2 million tonne per annum nameplate design. With that, I'll now turn over to our Chief Financial Officer, Justin Blanchet, to discuss our financial results for the first quarter.

Thank you, John. Hello, everyone. During the first quarter 2024, we had quarterly revenue of $59.8 million, a 48% increase from prior year. We sold 27,996 gold ounces at an average selling price of $2,016 compared to 17,602 ounces at an average selling price of $1,807 in the prior year. As at March 31, 2024, there was 1,677 gold ounces in inventory, including both concentrate and dore, a decrease of 3,608 gold ounces when compared to December 31st due to timing of sales. During the first quarter, 2024, cost of sales was $40.9 million compared to $23.7 million in the prior year or $32.9 million compared to $16.7 million when excluding non-cash items. Cost of sales is higher as expenditures incurred during the temporary suspension were expensed directly to cost of sales. In addition, there was a reduction of costs capitalized as development. During the first quarter of 2024, cash flow from operating activities before changes in working capital was $20 million compared to $16.5 million in the prior year. As at March 31, 2024, we had $73.4 million in cash, cash equivalents and short-term treasury bills while spending $18.1 million in expansion capital in the quarter. We had a working capital balance of $89.2 million and had no debt on the balance sheet. As John mentioned, during the first quarter, the Kainantu Gold operations produced 24,389 ounces of gold, 1,443,300 pounds of copper and 35,650 ounces of silver or 27,462 ounces of gold equivalent. We sold 27,996 ounces of gold, 1,582,668 pounds of copper and 38,812 ounces of silver. We incurred a cash cost of $934 and an all-in sustaining cost of $1,366 per ounce of gold, which was significantly below our selling price of $2,016 per ounce. Our first quarter cash cost per ounce of gold increase to $934 from $758 in 2023. The increase was due to the higher cost of sales mentioned earlier. It is important to note that we will see downward pressure on costs via economies of scale as operations ramp up and the Stage 3 expansion is complete. I will now turn the call back to John to continue with the rest of the presentation.

Well, thank you, Justin. For the exploration growth section, we begin with an update on the Stage 3 and 4 expansion, which are designed to fundamentally transform K92 into a Tier 1 mid-tier producer through sequentially increasing production to 300,000 ounces per annum and then to 470,000 ounces per annum. Importantly, this transformation is happening near term with the commissioning of the Stage 3 process planned for late April 2025. I note this is a slight extension from our original timing of late March 2025 due to a longer and significantly wetter rainy season and also some impact from the Form 29 suspension. And that delayed the completion of the site earthworks and subsequent handover to the contractor. Fortunately, the impact occurred early in the mobilization process, resulting in limited variation to costs. The delivery of Stage 4 expansion remains on track, targeting second half 2026. As at the end of April, 52% of Stage 3 for growth capital has either been spent or committed. And as a reminder, the process plant is the largest growth capital package, and that was awarded in July 2023 on a lump sum fixed price basis, significantly derisking the project for K92. We're pleased to report that GR Engineering Services or GRES is now fully mobilized on site. So this video clip begins with the design layout of the process plant, which as outlined in the integrated development plan is a conventional single-stage crash SAG ball mill combination, followed by gravity and flotation recovery producing a copper gold concentrate and dore. The recovery method is the same proven method as we use in the Stage 2A expansion with the new plant having a much more optimized design and an enhanced process control, which includes real-time product analysis. We now pivot to show recent drone footage of the construction sites, starting with the primary crusher, where we installed pilings prior to handing over the site to GRES. Moving towards a surge bin and reclaims plus stockpile area, which is not on the critical path. So we've seen limited work to date. That's followed by the SAG and ball mill area, which, as you can see, GRES is already well underway with work on the mill footings and foundation. And then towards the wet end of the process plant, where you can see GRES is already underway, completed work on the concentrate and tailings thickeners footings and foundations. Over to the right is a long lead and material laydown area. I think it's important to highlight that there's been a surplus area for the construction materials and long-lead items, which derisks the project in terms of inventory management. Then in the far right are the offices for GRES and the various subcontractors, which are now operational. And then lastly, as we continue along, these are the designated areas for the reagents, water services and concentrate filtration and storage head. Again, this is not on the critical path, so limited work has been completed in this area to date. I think it's fair to say, we're excited with the increased construction activity, which is gaining significant momentum, and we're looking forward to providing further updates on the process plant construction in due course. On the Paste Fill Plant, front-end engineering and design is almost complete. And as shown on this slide, we've got the latest designs. The image on the left is our tailings filtration plant design, utilizing plate and frame pressure filters. The image on the top right is our surface storage system near the portal area for the filter cake and binder before it's transported underground to the paste plant itself with the design shown in the bottom right image here. Long lead item ordering is progressing, the pumps, which are the longest lead item were ordered in Q1 and the remaining long-lead items are to be ordered shortly. Work towards award of the construction contract is well advanced. Beyond the Stage 3 and 4 expansion surface works, multiple near-term major infrastructure upgrades that are fundamentally transforming the mine productivity are being put in place with the twin incline already effectively completed. As part of the expansion, we're also putting in place a series of ore and waste passes to efficiently leverage gravity to connect the main mine to the highly productive twin incline infrastructure. As shown in the images, the raise bore rig and associated [indiscernible] is underground with electrical commissioning to begin imminently followed by the commencement of boring operations. The first raise will be to upgrade our ventilation to the main mine and that will be followed by waste and ore passes. These various infrastructure upgrades, combined with the tripling of the mining fronts in 2024, as shown on this slide, are set to fundamentally transform the mining business into a Tier 1 mid-tier producer near term. Now in terms of exploration, we are drilling Kora & Kora South, Judd South Vein systems, Arakompa Vein system and of course A1 Porphyry. On May 6, K92 reported a total of 140 holes at Kora, Kora South, and Judd, Judd South, which we believe continue to demonstrate that this is a world-class deposit with significant upside potential. I think for the results at Kora, there are 3 key takeaways. Firstly, it's a he discovery of a new potential dilatant zone to the south beyond the existing resource [indiscernible], highlighted by hole KUDD0053, intersecting 78.5 meters at 27.3 gram per tonne gold. Second is the expansion and upgrade of a large zone of high grade within the resource as demarcated by the larger lip with a dash black line in multiple areas drilling results were higher grade than the resource with highlights including KMDD0657, recording 6 meters at 47.27 gram per tonne gold equivalent in K2, KMDD0662, 9 meters at 4.35 gram per tonne gold equivalent also in K2 and then KMDD0634, recording 12.1 meters at 18.9 grams per tonne gold equivalent in Q1. These results, I think, are particularly important as they are immediately above the main working setting ourselves up well for the Stage 3 expansion over the near to medium term in that area. And then thirdly, it's a significant high-grade mineralization intersected from step-out drilling to the south from the underground drill drives shown by the smaller lips located on the left, including KMDD0652 with 9.3 meters at 15.3 grams per tonne gold equivalent and KMDD0654A, recording 17.5 meters at 23.79 gram per tonne gold equivalent in the K2 vein. These holes continue to support our view that Kora, Kora South best grade is at depth. I think it's important to highlight that exploration to the south continues to intersect high-grade copper as annotated in the K2 long section with multiple significant step-out intersections approaching 4% copper in addition to recording high gold. These intersections have extended the high-grade copper zone further to the south and continue to confirm our thesis for high and potentially increasing copper grades as we drill further to the south towards the A1 Porphyry. Now Judd also delivered some impressive drilling results with 2 key takeaways. Firstly, is the expansion vertically of a high-grade zone, the J1 vein, as shown by the large dashed black line lips and very importantly, at significantly higher grades than the resorts with multiple plus 1 ounce per tonne intersections, including JDD0025 (sic) [JDD0235] with 4.1 meters at 69 grams per tonne gold equivalent, JDD0231 with 3.67 meters at 41.05 gram per tonne gold equivalent and JDD0239 with 2.7 meters at 44.4 gram per tonne gold equivalent. By Kora, this is particularly important as it's immediately above the main mine workings. And so again, it's setting our sales up well for that Stage 3 expansion into that area. Second is the intersection of significant mineralization to the north from a 300-meter step out in an area which effectively has no drilling, highlighted by KODD0055, recording 9.85 meters at 7.58 gram per tonne gold equivalent. In late February, K92 announced the first drilling results at Arakompa for 32 years. Arakompa, as shown on the map to the right, is located approximately 4.5 kilometers from the process plant, so that makes it closer than Kora and Judd. Historically, Arakompa has recorded limited drilling with a total of only 18 largely shallow holes for a total of 1.8 kilometers drilled. So averaging just a 100 meter dept. Our initial drilling results reporting 2 holes were exceptional. The second hole recorded 4 high-grade loads, including 7.2 meters at 24.8 gram per tonne gold equivalent, 5.7 meters at 9.9 grams per tonne gold equivalent, 5.3 meters at 6.1 grams per tonne gold equivalent and 3.6 meters at 3.4 gram per tonne gold equivalent. These intersections are within a bulk intersection of 219.8 meters at 1.59 grams per tonne gold equivalent. And within that, a higher-grade core of 149.4 meters at 2.12 grams per tonne gold equivalent. As shown in the cross-section mineralization started near surface and the entire winter that corridor is still to be drilled. Importantly, the target size is also very large, comprising a 150 to 225-meter-wide corridor of mineralization containing these high-grade veins with a non-mineralization strike of 1.7 kilometers and a non-vertical depth of 500 meters as shown in the plan view and long section here. And as you can see, the system is open in multiple directions. We're pleased to report that exploration Arakompa is accelerating. From the recent drone footage, we began at the Arakompa exploration camp looking towards the Markham Valley in the distance. The exploration camp, as you can see, is a significant facility since we believe that we'll be drilling here for an extended period. As the drone footage rotates, the Kainantu Gold Mine accommodation facility or Kumian camp, which I think some analysts on the call will be familiar with can be seen in the distance with the process plant just hitting from view. And that's located, as I mentioned, 4.5 kilometers from Arakompa. We now pivot to footage of the exploration drills operating. Drilling at Arakompa commenced with a single rig and after the exceptional initial drilling results, we've increased the number of rigs to 2. We're shortly adding a third rig with its drill pad construction almost complete. Conditions for drilling are good. The rock is competent and penetration rates and productivity are better than Kora and Judd. Now from the footage, you'll also notice the topography towards the Markham Valley is relatively gentle with a positive attribute for constructing road access and hopefully, the eventual transportation of mine material downhill to a process plant. Now here's some of the fresh drill core that are drone crew filmed as it was coming out. While the core footage is not from one of the high-grade loads, you'll notice that the rock is still well mineralized. An important feature of Arakompa is the presence of significant background gold copper mineralization between the high-grade loads. This indicates, as we mentioned, the potential for bulk mining from those initial results, intersection of almost 220 meters at 1.59 gram per tonne gold equivalent. Within that, that higher-grade 149 meters at 2.12 gram per tonne gold equivalent. The Rock, as demonstrated here is confident and the mineralization is certainly easy to visually distinguish. For the high-grade loads the mineralization has similarities to Kora and Judd. We look forward to providing an update on our exploration at Arakompa in the near term. And with that, operator, we'd like to commence the Q&A session.

[Operator Instructions] The first question comes from Ralph Profiti with Eight Capital.

So firstly, as it pertains to development and total material mined, just wondering if you're -- the original target was 1.6 million tonnes of total material mined for '24. Just wondering if you're kind of back to that run rate at least and sort of whether or not that target is still good for 2024?

Okay. It took us until basically end of April to get ourselves back up to our budgeted run rate. We obviously have dropped some of our meters of development during that suspension of operations. In terms of total tonnes mined for the year, we're still looking at that 1.5 million to 1.6 million tonnes for the year.

Yes. A question on the dilatant zones. And it's still early days, and we got some indication on the May 6th press release on where you're going with that. I'm just wondering, even though it's still early days, is it the view that from a dimension of these zones that both vertically and along strike, the same dimensions as the veins themselves? Or are we going greater long strike or perhaps even greater depth extent, dilates versus veins?

I think I know what you're asking here, but let me answer if I didn't answer it, then just add to it. At this point, we think -- and as you say, we've got limited information so far. It appears that they have more vertical extent than horizontal extend. So less a long strike, more down dip. It is still early days, but it appears that you have multiple dilated zones. And they do -- certainly, we've seen at least one instance where a dilatant zone in Judd is also in that same northern. We're also seeing a dilatant zone in Kora, which may suggest obviously there's some sort of cross-cutting structure that is contributing to that our latency. But again, it's still early days, and we're obviously targeting some of those areas with additional drilling so that we can actually fill out and understand what we've got because clearly, they've got a very significant potential in terms of ounces within the resource and also areas which can provide a lot of tonnes at very, very good grades for mining and will require some -- potentially some different design in terms of how we mine them.

Yes. That's what I was looking for.

The next question comes from Alex Terentiew with Ventum Financial.

A couple of questions. First one on the Trafigura loan. I know that it's been in works for a while. Any update there you can tell us? But I mean, obviously, $73 million in cash on the balance sheet now. So there's no need to use that soon. But I'm just wondering, any insights on the progress there would be appreciated.

Well, thanks, Alex. Okay. So the Trafi loan, as I think you are has 2 elements. One is the loan itself. The second is a new offtake. And the new offtake provides approximately an extra 3 percentage points of payability. The system in PNG is that the mine has a gold export license, it has it for life of mine, and that is issued by the Central Bank. The Central Bank then subsequently approves any offtake. So we have approval for the current Trafigura loan and we have approval for the current ABC dore offtake. Change it and you require Central Bank approval again. And obviously, that's to do things like stock transfer pricing, for instance, so they review the contract. We've received the draft letter of approval for comment, which we gave. And so now we're awaiting the final letter of approval for the offtake and then obviously that then allows the loan. So it's just a process with the Central Bank, same as the reserve bank or whatever and they are a quasi-independent government entity, same lines as you'd see in Australia or Canada.

Well, it sounds like it's making progress then. Okay. Second question I have is that Q1, obviously, you guys had a bit of downtime there, but despite processing a bunch of stockpile, the grade was still pretty solid. I got to say better than expected. Any color you can give on grade for the rest of this year or kind of what you're seeing now? Are they in line with plan or a little bit better?

Look, I think it would be fair to say that first quarter grade was better than budget. And we're not sort of saying that, that will continue for the balance of the year. So we're -- we'll obviously stick with our budget in terms of what we're going to be doing, et cetera, et cetera, for the balance of the year. I think positives you've got right now is that we do actually have some stockpile. I think we've already developed about 5,000 tonnes of stockpile. So we do have some stockpile there. We don't see ourselves running with a high stockpile until probably the fourth quarter when our mining rate starts to accelerate, and we start developing stockpile for the commissioning of the Stage 3 plant. We're certainly starting to see more benefit from other work that we've put into the mine up. We have got certainly more flexibility than we had 12 months ago. And so that does give you an ability to get -- maintain your grades and offset any lower-grade stopes that are part of the plan to combine them with higher grade and maintain a more constant grade, and that obviously helps the plant as well in terms of recovery in operations. And we've -- I think we're certainly seeing in this quarter, for instance, that our grades right now are running fairly much on budget and our recoveries right now are marginally above about budget.