K92 Mining could grow gold production a lot, quickly, and on the cheap, says Nana Sangmuah, Associate Analyst at Clarus Securities.

Emerging Papua New Guinea gold producer K92 Mining Inc, listed on the TSXV under the symbol “KNT”, recently hosted an analyst trip to the company’s flagship Kainantu project. I can imagine the excitement the analysts felt as they touched down on the airfield 8KM away from the mine. K92 is an ambitious company, thinking they can reboot a mine that Barrick Gold decided to sell in 2015 -- but fortune favours the bold.

K92 made an initial $2 million payment for the project. Barrick sold the underperforming asset as part of an asset rationalization and debt reduction program at what appears to be firesale prices.

The Kainantu gold project contains the Irumafimpa and Kora deposits (both underground operations), and a processing plant Barrick acquired from Highlands Pacific Limited in 2007 for US $141.5 million. Barrick may have overpaid for that acquisition at the top of the market in 2007 and they may have also sold it too cheaply at the bottom in 2015. It's up to K92 to show whether they can operate the mine profitably. They may just find themselves well positioned to improve the property and sell it back to a major at the top of the next market cycle, whenever that may be.

Since acquiring the asset, K92 Mining has been readying the Irumafimpa mine for a re-start of operations, listed the company publicly, raised substantial capital, and published a preliminary economic assessment on the Kora deposit. The company’s news flow is available here and on SEDAR.

Nana Sangmuah, Associate Analyst at Clarus Securities, added K92 Mining to the Clarus watchlist Tuesday in a report titled, “Production Fast-Track With Massive Exploration Upside”.

The first thing to understand here is that there is a mountain on their property that has gold in it. One side of the hill has a gold deposit called Irumafimpa that was mined by Barrick. There is still gold left there and the company is working on getting it out immediately -- as in Q1/2017. The other side of the hill has a deposit called Kora, which has not been mined yet. In between the two deposits is a large untested area, which the company can access from its underground mine workings at Irumafimpa.

K92 is expecting solid numbers from Irumafimpa and Kora. Quoting from Sangmuah's report:

  • Commercial production at Irumafimpa starting in Q1/17 with production rate of 200 ktpa ore @ 8.2 g/t producing ~50 koz/year.
  • Estimated AISC for Irumafimpa of ~US$680/oz for ~3 years.
  • Additional growth in production from Kora with estimated initial capital cost of ~US$14 MM to produce 108 koz AuEq production at a cash cost of US$547/oz AuEq over an eight year mine life.
  • Pre-tax NPV (5%) of US$415 MM and an IRR of +100% for Kora from October 2016 PEA.

In other words, K92 stands to grow gold production a lot, quickly, and for little expense.

What's more, this kind of production profile can spin off sufficient free cash flow to fund exploration and help the company establish an even bigger resource base, which means even further production growth in the future! It can be a beautiful thing when this business plan works well. Of course, there are no guarantees.

There were pros and cons in Sangmuah’s report, summarized for your convenience.

Pros:

  1. Plant at Irumafimpa is refurbished. Apparently spent $7.5M and "scrubber and a gravity circuit has been installed to deal with wetness and clay content of the Irumafimpa ore, an issue that plagued past operators". Good to see K92 is getting ready for production in Q1/2017. Some would say that they need to show the market the goods, as soon as possible.
  2. Drilling for grade control has begun. Just starting to learn about this, myself, but I love it because it is all about how to mitigate the risk of dilution that Brent Cook has talked about in past years.
  3. The company has made a (good) change to their mine plan: "Mining method has been changed from shrinkage to long hole stoping with the stope dimensions reduced to 15 meters from 30 meters to also help minimize dilution."
  4. Contract details are reasonable: "First working stopes are to be opened by January 2017 with first concentrate shipment expected in Dec. Some 90% of the value of the concentrate is made available to KNT upon shipment with the remainder settled over 60-90 days." Assuming they are able to collect on the bills, this immediate repayment is a subtle but important thing to help the company manage cash flow and reinvest in itself. K92 has big potential for bootstrapping.
  5. The company is finding good people to work at the mine site: "Most of the senior staff have +20 years of mining experience including in country PNG experience and have been incentivized with an option program well aligning their interests to that of shareholders’. In addition, post Barrick sale of 50% interest in Porgera to Chinese miner – Zijin Mining Group, some attrition in the workforce at Porgera is making good talent available for KNT. The full operational team is in place with some training required for some junior staff." Pedal to the metal, guys!
  6. Blue sky continues to open up over the Kora deposit, which is the next target for development after Irumafimpa: "Kora veins are wider with higher recoveries and offer significant copper by-product credits pointing to a much higher margin. Once underground access is created, management intends to do infill drilling at Kora to improve the confidence in the resource by converting some resources into reserves (the PFS/PEA excluded 1.0 Mt of resources that could be converted into resources once underground access is established)."
  7. Building an underground mine in the side of a mountain has certain benefits: "All water requirements at the plant are supplied by dewatering the Itumafimpa workings. It's worth noting that most of water is removed via gravity reducing the need for pumps which helps reduce power draw. All the water required for the plant is supplied from drainage from the adit workings and it's more than sufficient."
  8. The original mine-builders were planning on building a large mine and they over-built capacity, which is good for K92: "Tailings dam capacity can accommodate the entire incremental throughput at Kora with a couple of additional lifts."

Cons:

  1. Slow to complete underground mine development. Sangmuah writes: "Development work is advancing well with reinforcements put in places for weak ground conditions. However, the goal of establishing 4 working stopes for steady state production is yet to be attained. In our opinion commercial production and steady state will likely be in Q1/17." I don't know the details of this, but this development work seems to be critically important and delays could be a problem. I am inclined to be generous towards the engineering challenges they face, but will be keen to get some additional colour from management on this issue.
  2. Slow to advance drilling for grade control. Sangmuah writes: "Management has been very conservative with its grade projection and 55% dilution estimates, using head grades of 8.4 g/t, in line with historically mined grades (not 21 g/t as assumed by Highland Pacific). However, management ought to accelerate the current grade control drilling campaign to minimize the risk of deviation to mine plan." Again, an issue that may deserve to be addressed by management in forthcoming communications.
  3. Potential issues with mining contractors? Sangmuah writes: "Operations were run by coordinating activities between the 1300 portal and the 800 using helicopter access. Heavy clouds around the mountains typically meant supervision was lapse and the mining contractors did not complete enough grade control drilling to minimize dilution. Bonus payment were tied to tonnage moved providing less of an incentive to be more selective in mining." It's a bit of an 'inside baseball' detail here, but it is important because it brings up issues around safety and grade control.

Sangmuah closes off with discussion of exploration upside for the company. In short, there is a lot of it. 

One comment jumped off the page at me: "Drifting to Kora is expected to commence in Q1/17 at an estimated cost of $5MM. This also should provide a lot of excitement as previously untested zones from the top of the mountain would now be drill tested including Eutompi and Kora 'deeps' that could provide another possible phase of expansion to support further production growth contingent on exploration success." The excitement that Sangmuah is talking about here is the untested area between Irumafimpa and Kora, which could provide a whole new area of economic mineralization -- low hanging fruit.

K92 Mining has ~114,617,196 shares outstanding and last traded at $1.00, for an approximate market cap of $115 million. K92 has raised $26 million since May 25th via two private placement financings and various warrant exercises.

Thanks very much to Mr. Sangmuah and Clarus Securities for their research. Clarus has a past business relationship with K92 Mining. You can join the conversation on K92 here at CEO.CA on the #KNT channel. Best wishes to all involved, from Peter Bell. 

K92 Mining Inc. is a  CEO.ca sponsor. This publication may contain errors and should not be relied upon. K92 Mining faces a very high degree of risk in executing its business plan. Read the company's profile on SEDAR.com for important risk disclosures. Always do your own due diligence and consult a licensed investment advisor prior to making financial decisions.