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 2021 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 of Business Development and Investor Relations. Please go ahead.

Thank you, operator, and thanks, everyone, for attending K92 Mining's Second Quarter 2021 Conference Call. We hope you and your families are doing well. In addition to myself, we have on the line, John Lewins, Chief Executive Officer and Director; and Justin Blanchet, Chief Financial Officer. I would also like to remind everyone that after the remarks from management, the call will be followed by a Q&A session. As we will be making forward-looking statements during the call, please refer to the cautionary notes and risk disclosure in our MD&A and Slide 2 of the webcast presentation. Also, please bear in mind that all dollar amounts mentioned in the conference call are in United dollars unless otherwise noted. Now I'll turn it over to John to provide you with an overview.

Well, thanks, David, and welcome, everyone. So I'm actually pleased to be joining you today from our Kainantu gold mine in Papa New Guinea. We're witnessing, I think, firsthand the impressive progress that we've made on sites over the last quarter, in the last 6 months, in fact. And really, I think there's many exciting areas where we're progressing, and that includes opening up another sublevel in Judd, ramping up a mine process plant advancement of the inclines drilling at Kora, which now includes Kora South, and moving into a new phase of doing at the Lake where we're looking to drill some deeper holes targeting that potassic core. So in the second quarter, it saw Papua New Guinea and its resource sector facing some fairly major challenges with an unprecedented surge in COVID-19 cases, which really commenced in the first quarter of the year and increased significantly in the second quarter. And that resulted in the Australian government suspending all [indiscernible] movements. By the resource sectors of the entire resource sector in and of PNG from late in the first quarter through until the second half of May. As an industry, we responded by enhancing our COVID-19 protocols and mitigation measures, which included things like off-site testing, quarantining personnel, et cetera, et cetera. And as a result of that, an agreement was reached with the Australian government to restart our people operations and really very, very supportive of the Australian government wanted to get things restarted as quickly possible, but also obviously making sure that we were not bringing COVID into Australia. Having faced that challenge overall, I'm also pleased to say that we operated continuously during that whole period and during the entire quarter, and certainly delivered a strong second half performance where we produced over 16,000 ounces gold equivalent from mid-May until the end of June. And that really reflects the efforts of our entire team on site. Set us up not only we have that stronger second half of the quarter, but that really sets us up for the second half of the year, where we expect it to be significantly stronger in the first half of the year. And in the case of the fourth quarter, we're certainly looking at potentially a record quarter. Moving on and starting with safety. In the second quarter, pleased to report there was no lost time injuries, and we continue to operate with one of the best safety records not only in PNG, but in the Australia region. And that's really been since the start of operations. This is an area where we focus on, I think, quite relentlessly for whole occupational health and safety, and that obviously includes COVID. And we're continuously looking to improve our systems. Looking at production. We produced just over 25,000 ounces gold equivalent. And the operation delivered a record mill throughput, 75,667 tonnes processed, head grade of 10.3 grams per tonne. Head grade was about 2% below budget, despite the fact that we treated a significant amount of low-grade stockpiles, certainly more than we anticipated, and that really was due to the COVID surge and the impact that had on our mining rates. If we compare that to the year previously, the second quarter of 2020, mill throughput increased by 53%. If we look at the key operational physicals. Process plant, as I mentioned, delivered a record throughput. Underground development, total mine material, obviously declined. All 3 metrics were really impacted by that surge in COVID-19 during the first half of the quarter. And that in turn caused shortage of staff in most of our areas of operation, and that was related to COVID-19, absenteeism, suspension of the people flights, which I've mentioned for effectively 2 months, increase in the quarantine durations that we're looking at some of our enhanced control measures as well. As I mentioned, second half of the quarter, we saw a fairly significant improvement, not just in the mill plant throughput but also in those other metrics as well. In terms of COVID-19, I'm pleased to report that we've significantly increased our operational resilience and our ability to deal with the ongoing impacts of this pandemic. From mid-May, as I mentioned, the Australian government lifted the restrictions on movement of personnel, and we now have a specific exemption which exempts from the restrictions that the Australian government put on movement of international people in and out of Australia. And this is not only for K92, but for the whole resource sector. And that's a recognition by the Australian government of the importance of the resource industry to PNG. We're over 30% of GDP, and we're over 85% of all exports. To point out that these enhanced protocols over the past 3 months that we've instituted, certainly appear to be working very well. And operationally, we've gone, I think, from strength-to-strength since we instituted these. And we've obviously, we started to [indiscernible]. In addition to that, our vaccination program is well underway. Almost all of our expatriates are now fully vaccinated, and vaccinations are also underway for our PNG nationals. And today, we've had a very, very solid uptake in that. That uptake in terms of vaccinations is also allowing us to look at relaxing some of those quarantine restrictions. For instance, I was in the first group. I came in on Thursday, first group, it's been alive to come in from Australia and not required to quarantine in PNG, a normal is to have a week of quarantine. And in fact, for the first time for anyone who is fully vaccinated, no quarantine required. So these things obviously can significantly improve our operations and our efficiency going forward. The mine site does, however, continue to operate as a COVID-free bubble, and we believe now with that increased rate of vaccination in many of these controls that we've now established. Our resilience to the pandemic has increased, it's strong, it's improving. Now with that, I'll turn the call over to our Chief Financial Officer, Justin Blanchet, to discuss the financial results.

Thank you, John, and hello, everyone. During the second quarter, K92 had revenue of $35.5 million. Despite higher production in Q2 2021 when compared to 2020, our 26% decrease in revenue was due to a decrease in the feed grade of 10.3 grams per tonne compared to 17.6 grams per tonne last year. This was partially offset by an increase in the realized selling gold price of $1,754 per gold ounce compared to $1,631 per gold ounce in 2020. In addition, as of June 30, 2021, K92 had 5,456 gold ounces in concentrate inventory that was sold in July, an increase of 3,077 gold ounces when compared to March 31 due to timing of sales. In the second quarter, cost of sales was $20.9 million, only 14% higher than Q2 2020, despite having increased operational activity as illustrated by the 91% increase in ore mine and a 53% increase in ore processed. 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, quarantine costs and additional safety and medical-related costs. Quarterly cash flow from operating activities before changes in working capital was $15.2 million compared with $30.3 million in Q2 2020. As at June 30, 2021, we had $56.2 million in cash and cash equivalents, while spending $4.9 million in expansion capital and nearly $8.5 million in income tax installments for the quarter. The company fully repaid the outstanding loan from Trafigura in early 2021, leaving the company with no debt. As John mentioned, for the quarter, the Kainantu gold operations produced 22,153 ounces of gold, 1,098,370 pounds of copper and 14,914 ounces of silver or 25,015 ounces of gold equivalent. We sold 18,939 ounces of gold, 862,407 pounds of copper and 12,472 ounces of silver. We incurred a cash cost of $736 and an all-in sustaining cost of $1,057 per ounce, which was significantly below our realized gold selling price of $1,754 per ounce. Our Q2 2021 cash cost per ounce increased to $736 from $560 in 2020. The increase in cash cost was due to a lower feed grade, despite increased production due to the successful ramp-up of the 400,000 expansion allowing the company to achieve better economies of scale. In addition, the company incurred costs related to the COVID-19 pandemic. It is important to note that after commissioning the Stage 2 plant expansion in late third quarter, we have seen a significant compression in our total unit cost per tonne processed, approaching $24 per tonne. We continue to see downward pressure on the costs via economies of scale as operations ramp up. I will now turn the call back to John.

Thanks for that, Justin. So when we look at the incline development. That resumed second half of May, following that 2-month hiatus after the COVID-19 restrictions imposed by the Australian government. Considerable progress really has been made in that area upon resuming that redevelopment. And as of July 30, the [indiscernible] of the 2 in clients had advanced to approximately 530 meters, and the other is about 10, 15 meters behind that. On the exploration front, during the quarter, drilling was underway at Kora, Kora South, Judd, and also, the Blue Lake porphyry. As previously noted, COVID restrictions did result in a number of personnel that were on site for the majority of the quarter being significantly reduced, and that was in order to obviously, reduce the potential of COVID issues on site. In order to reduce the impact of that on the core resource drilling, the focus was maintained on manning the rigs underground. And when you look at the results of that, what that meant towards that, the processing of core was given a lower priority. As a result of that, by the end of June, end of the quarter, we had in excess of 50 drill holes that had not been processed. Now this has been reduced to currently around 40. And in late July, we announced the results of 43 of those holes, and they consist of both the infill and the step-out drilling to the south for our updated resource, which is targeting late in the fourth quarter. The results delivered multiple high-grade intersections including 3 meters at over 70 grams per tonne gold equivalent in the K1 ban and 6.3 meters at 32 grams per tonne in K2. The hit rate, as I think everyone has come to expect, was again very strong. All holes intersected mineralization, 45 intersections above 5 grams per tonne, 20 intersections, exceeding 10 grams per tonne and 9 intersections exceeding 20-gram per tonne. If we move on to Judd. We're ramping up both development and drilling activities. As I think many of you are aware, Judd is very unexplored, and it has been shown to have very similar geology to Kora with similar grade thickness and a map strike length of over 2.5 kilometers running parallel, subparallel to [indiscernible] 200 meters away. The focus that we've had to date is what we call the J1 vein, although there are at least 4 non-Judd veins. As an outcome of the positive development drilling and metallurgical results that we've seen at Judd to date. Judd has been integrated into a 2021 mine plan targeting production -- store production that is by fourth quarter or within the fourth quarter. That will provide a boost to our operational flexibility and with the grades we've seen will also bring in some high grade. Development is already underway at the second sub level, 1265 level, which is going in both north and south directions. The drive to the site will develop approximately 10 meters below JDD 0006, which intersected 7.25 meters at 258 grams per tonne. To date, we've developed approximately 80 meters along the J1 vein on that 1265 level. Results have been consistent with our expectations, and we'll be looking to provide an update on actual results in the near term. Drilling is also well underway, targeting both major and indicated as well as inferred resources, eliminating that backlog of holes from assaying, core logging, et cetera, at Judd and Kora is one of our top focuses current. And we do expect to announce results in the near-term Judd, and also, obviously, further from Kora. Additionally, when we're looking at Judd, end of this quarter into the fourth quarter, we do actually anticipate that a larger portion of our drill fleet underground will actually be targeting Judd. Over the past weekend, on site, have been able to go underground. And one of the opportunities I had, obviously, was a priority, quite frankly, was to go in and have a look at the 1265 Judd development. The geology, as I think some of you who are aware of the geology of Kora. The geology of Judd is actually very similar to that of Kora in terms of thickness and mineralization. And when you look at the 1235 level, we reported average thickness of 3.7 meters at 11.6 grams per tonne gold equivalent over almost 300 meters strike, best grades being towards the south, and that included 3.7 meters at 15.4 grams per tonne gold equivalent over the last 175 meters of the strike reported. And certainly, from what we're seeing in 1265 the geology looks pretty similar to Kora. And I think technically, you probably say it's better than we see at Kora. Moving on to Blue Lake, our copper gold porphyry target, that Phase 2 drilling that -- so that's been underway for some months has made significant progress. We've completed quite a number of shallow vector drilling, and we've recently commenced some deep drilling targeting that potassic core, which we believe to be the -- obviously, the higher-grade zone. I'd say the performance capabilities of the drill rigs have been strong. And in whole KDD 0020, we hit a record drilling depth of 1,400 meters. The hole is pending prolonging and assaying point our exploration people are currently focused together with the mine geology people on catching up on our -- on underground drilling from Kora and Judd. But currently, we've got 2 jewel rigs drilling at Blue Lake, and we will be providing a more detailed update to the market in due course. I think both the vein field and the porphyry drilling are really at quite exciting times, and they really highlight the significant big system and near-mine upside potential of Kainantu. We still are sitting with something like only 20% of the [indiscernible] strike that's been drilled with the majority obviously still to be drilled and still very much open at depth. So with that, operator, I think we'd like to commence the Q&A session. Thank you.

[Operator Instructions] The first question comes from Alex Terentiew from Stifel GMP.

Just my main question here -- actually a very simple one first. Justin, you mentioned something about $24 a tonne. I just missed what you were talking about. Can you reiterate that comment, please?

Yes, yes. That's our processing costs per tonne at the mine site.

Okay. And is that -- your target -- is that the number you guys want to get to? Or do you think there's room for improvement there?

It's definitely moving in the right direction, and it's a number that we're happy with right now.

Okay. Okay. So my main question here is just on Judd. Could you guys quantify for us a little bit just the potential contribution for Q4, and I guess, longer term, 2022 in particular. And just maybe give us a little bit of color on any incremental cost to mine and add that ore to the mill?

Thanks, Alex. It's 10:51 p.m. here, by the way. You're looking for the time. So it's a little dark outside. Look, Judd, we would anticipate somewhere between 20,000 and 25,000 tonnes will come from Judd in the fourth quarter. Grade-wise, that will be somewhere around the -- between 10 and 15, probably more of that 12 to 13, but there will be some higher-grade portions of that overall. I was underground at Judd on Sunday. I've got to say it looks -- the phase 1 looked very good. And as we mentioned, we'll put out some results on the development that we've done there. And then, of course, we've also got quite a bit of drilling that we're in the process of catching up. In terms of contribution next year, I really can't give you that figure yet. That's something that we're actually still working on. Judd really is very much a work in progress. Remember that we're actually going to be producing material from stopes. And in fact, we haven't actually issued a resource yet on Judd. And there will be a resource coming out on Judd as part of the resource updates that we're putting together. So we're putting up in the fourth quarter, there will be a resource coming out -- or an updated results coming out for Kora, and there will be a first resource coming out for Judd. So it is still very early days. And until we've got that and can put that into our planning, I can give you a figure for next year, but certainly, I would anticipate it will provide a significant amount of what we produce next year, certainly a month or 2 months material. In terms of costs, really, we'd see a similar cost to what we're getting from Kora. Geotechnically, it looks very similar to Kora, if anything better than Kora, in fact, geotechnically. And so we don't see any issues in that area. And of course, we're coming off the development that we've already got in place for Kora to get into Judd. So it's not that we're sort of developing out and it's not like developing a new ore body that you found and you have to go off and develop to open up. So cost-wise, we don't think it's going to add anything to our cost, if anything, potentially it can help drive your cost down slightly.

Okay. That's great. Just -- and one more quick question, if I may. Your guy's target of 1,100 tonnes per day. What's the bottleneck in that? With Judd opening up here, you're going to have additional mining faces available. Is that 1,100 tonne a day mine constrained? Or is it more mill constrained? I mean yes, maybe any color on that would be helpful.

I think at this point in time, the 1,100 tonnes a day is -- it's about getting the mine to produce that consistently. The COVID issues that we had during the first half of the year in the first quarter and for the majority almost of the second quarter. One of the big issues really was that we -- our numbers on site came down quite dramatically. And obviously, the mining side of things is significantly more labor-intensive in terms of numbers than the plant. And so in a number of areas, there's no doubt that the guys got behind simply because we didn't have all the people. We didn't have our -- a full complement of expat able to come in, and they're quite key to upskilling all of our locals and what have you. And remember, we're trying to expand our labor at the current time. And then we get the constraints of COVID and all the rest of it. We've -- and when you think about it, every single person that comes to this site for a roster, has to quarantine. Some of that is done on site. Some of it is done off-site because we've set up off-site quarantines. We simply couldn't operate if it was all on time. So if you're bringing somebody in for a 6-week roster. And they have to do a week of quarantine, then you actually need, obviously, 15% more rooms. If it's a 4-week roster and our domestic guys are on shorter rosters, it's 25% more rooms. So you need a heck of a lot more rooms. And in fact, like all operations in PNG, quite a number of our rooms are shared rooms. And when you're doing quarantining and all the rest of it, of course, you can't do anything like that. So big focus, we're just bringing on an extra 100 rooms in the next week to 2 weeks that have been installed during the last 3 months, for instance. And we've got another 100 to 200 that will be done by the end of the year. So we're -- we've got a huge focus on expanding the camp. But of course, in order to expand the camp, that means that you need to be in contractors who need to go through quarantine and then be on site taking up some of the rooms that you actually want for your operations people. So it's been a real balancing act to get this. And that's why -- for instance, we're behind on logging of Kora because we focused on having the people on site that could do the drilling with the limitations on accommodation, so that we kept the drilling up as much as possible and accepted that we have to do a catch-up in terms of our logging. And as we are ramped up the numbers on site, we've been able to do that. And in fact, our exploration people are actually right now focused on not surface logging, but [indiscernible] logging of all the call from underground so that we can catch up all of our Kora and Judd for our cutoff, for our resource updates on Kora and the new resource with Judd. Sorry, long-winded answer, but I was trying to give you a bit of flavor to that.

The next question comes from Tom Gallo from Canaccord.

Folks, just on the Blue Lake, switching gears a little bit to the regional drilling. Obviously, exciting to see all -- I think it was hole 20 down to that 1,400 meter level. Just a couple of questions around what the program looks like. First of all, how deep are the holes plan? I mean is 1,400 meters that planned depth or was that whole terminated for some other reason. And then maybe more on the spacing, are you planning to step out from that hole. And how far away are your steps are planned?

Thanks, Tom. Look, Blue Lake 1,400 meters was actually beyond where we were looking to take it. And in part, it was -- it's just driven down by -- we were trying to see what the rig could actually achieve. The -- we've got some other holes that are planned. I don't think we've got any holes right now that are planned as deep as 1,400, but we do have some holes that are certainly going to go over 1,000 meters over the next few months. They are consistent with the fence lines that we've been doing currently, which have been -- the fence lines, I mean, 200 meters apart. So there will be basically, obviously, targeting a deeper potassic at Kora that we've got vectors on from the drilling that we've done to date. As I said, unfortunately, we've had to make a call between some of our exploration holes and our Kora and Judd. And right now, Kora and Judd are taking priority from a logging perspective because we've got a cutoff in terms of getting a resource update completed. So right now, all of the guys are focused on getting all of the backlog of Kora and Judd. That should be done pretty much by the end of this quarter. We think we should have caught up all of those holes. There's also, obviously, be a lot more results coming out probably towards the end of the quarter, early next quarter on both Kora and Judd. And I think it would be fair to say the deals remain excited by Blue Lake and what -- and certainly what they're seeing Blue Lake in terms of Kora, et, cetera, that's coming. We do have -- we do protocols in place, which actually limit our interaction as well with our exploration sites. So we support the exploration sites from site, from Kainantu, but if anyone actually goes on to the site, then of course, they go to quarantine before they can come back on site. So I was around today, actually, Tom -- with Chris Muller, just going around the sites in the chopper, but we weren't actually landing and going in to talk to the guys and have a look on the ground because we do that, and now we have to come back and go into quarantine for more limited 3 days because we're vaccinated, but nonetheless, we still have to go into a quarantine situation. Chris, for instance, does that every 2 weeks. Every 2 weeks, he actually gets up and goes around all the sites, spend some time there, comes back to site, has to do 3 days quarantine. So it does give you a few challenges. But I think what we've got in place is making that extremely manageable and certainly, the meters that we're getting are fairly reasonable. I think that we're getting both at Blue Lake and Kora, Judd on the surface as well because we're also doing some drilling on Kora, Judd at surface.

Very good, John. Just to clarify, what are the number of rigs on site, including the stuff underground, the surface drills and the Blue Lake drills just to get a tally?

We have 11. I think, 10 are operating right now. So 4 on the surface, and 6 underground.

[Operator Instructions] There are no more questions in the queue -- excuse me, we have a question from Geordie Mark from Haywood Securities.

Just some follow-up questions there. Just looking at the ramp-up that you're having through the mill. Just wondering when you get to the nominal nameplate capacity, expect to evolve on a fixed cost basis. And what sort of proportion of costs are going to be in fixed versus consumables?

Well, I haven't got it off the top of my head, but I think it's around 60% is actually fixed cost. As I'm sure you're aware, from a plant perspective, this -- people, for instance, say, power is a variable cost. 90% of power for plant is not a variable cost. It's a fixed cost. So our fixed costs are obviously, our labor, our plant, assaying, those sort of things. And there are the majority of our -- certainly there are the majority of our costs are fixed as opposed to variable.