Earnings Call: Q1 2021

May 14, 2021

Earnings release

Thank you for standing by. This is the conference operator. Welcome to the K92 Mining First Quarter 2021 Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to David Medelich, Vice President, Business Development and Investor Relations. Please go ahead. Thank you, operator, and thanks everyone for attending K92 Mining's Q1 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 Blanchett, Chief Financial Officer. I would also like to remind everyone that after the remarks from management, the call will be followed by a Q and 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 and A and Slide 2 of the webcast presentation. Also 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, Dave, and welcome, everyone. The Q1, the company made considerable progress operationally, financially and importantly on the exploration front. And this was achieved despite multiple short term challenges, which were somewhat unexpected. I'm pleased to report that we've been able to deal with all of these challenges, thanks primarily to the efforts of our people on the ground. Operationally, we see performance strengthening through the second quarter and then into the second half of the year. When we look first of all at our safety, One last time injury in 2020 and that sees K92 continuing to operate with one of the best safety records In the Australasian region since we started operations. Our focus, I believe, has been relentless in terms of occupational health and safety, And we continually look to improve. A large focus, as you would expect during this time, has been on the many challenges that are posed By the COVID-nineteen pandemic, and I believe that we have been particularly successful in addressing some of those challenges. When we look on the production front, we delivered 18,654 gold equivalent ounces With the operation delivering a record mill throughput 73,221 tons processed, Well, we had a reduced head grade of 8.5 grams per tonne. Grade reduction was due to treating significantly higher portion of Low grade stockpile than we had budgeted and that was a result of the challenges that I referred to previously, COVID-nineteen backfilling And a temporary shortage of locomotion, all of which as I said have been resolved. So when we compare To Q1 2020, coal to coal production decreased by 6%, while our throughput increased by 54%. Importantly, I think despite the operational challenges in Q1, we saw a 6% increase in mill throughput and a marginal increase In our total material moved in comparison with the previous record quarter. Underground Development, however, It's comparable with the Q1 of 2020, but 18% down on that record quarter of Q4 With the majority of the meters that were reduced coming from a reduction in The work undertaken on the twinning client and that was very much a decision taken so that we could focus on The operational side, production side during the challenges that we faced. When we look at the performance of the Stage 2 Process plant in the Q1, I think that has been particularly encouraging. The plant expansion, as you may recall, It was commissioned late in Q3 2020, nameplate capacity 400,000 tonnes per annum, 1100 tonnes per day, so it's a doubling of capacity. January February, we saw 6 consecutive weeks where the throughput averaged 1100 tonnes a day. 18 days, the average was actually above 1100 tonnes per day and in 8 days above 1200 tonnes per day. We also recorded a new record daily record of 1315 tonnes through the plant. So that certainly indicates that there is potential for the process plant to consistently deliver Significantly higher throughput than the nameplate and that obviously has significant implications Going forward in terms of our production capacity. Also during the quarter, we saw that when we look at our reconciliation Of resource and grade control models, again, we produce more ounces than we predicted being driven largely by grade. So this has been a consistent theme both in the original model and in the April 2020 model. And so again, producing more ounces in the call for. Looking at those challenges that we spoke about During the Q1, bulky margin explosives, logistical issues associated with bringing explosives Into PNG due to a number of issues, major one being the explosion that many people may have seen in Beirut, which Made the movement of explosives more controlled, pleased to report that we've overcome that issue working with the supplier Who has now almost completed a facility in lay. So we'll now have a domestic facility supplying our bulk emulsion To the mine, that's only 200 and something kilometers away. In addition, we had a loader incident, which impacted our stopping backfilling activities For approximately 3 weeks during the period, we've completed the investigation with the Department of Mines And put in place some additional procedures and what have you. That's all been resolved and we're back to our long haul stope and backfill. And then In early March, we had the Australian government announced a temporary suspension of travel of Fee for expansion workers in and out of Australia to PNG. We've worked with the Australian government through the PNG Chamber of Mines and Petroleum To resolve that issue, we've enhanced some of the protocols that we use as an industry. And as a result, I'm happy to say that just last week we had approval to recommence our people operations and in fact we've 1st set of people into country. And so we've seen that particular issue resolved So with that, I'll now hand you over to our Chief Financial Officer, Justin Monchey, to discuss Thank you, John, and hello, everyone. During the Q1, We had revenue of $29,500,000 a 7% increase from 2020. The increase in revenue was attributable to an increase in production And an increase in the realized selling gold price of $17.35 per ounce compared to $15.02 per ounce in 2020, Offset by negative adjustments to the fair value of settlement receivables from previous periods. As of March 31, 2021, There are 2,379 ounces of gold in concentrate inventory, a decrease of 3,072 gold ounces when compared to December 31, Due to the timing of sales, in the Q1, cost of sales was $20,900,000 compared to $15,200,000 in 2020. The higher costs were primarily due to increased operational activity, as illustrated by the significant increase in ore processed. In addition, the company incurred costs related to the COVID-nineteen pandemic, including additional pay for employees completing longer rosters at site, Additional costs related to the move in of personnel and supplies and additional safety and medical related costs. Quarterly cash flow from operating Before changes in working capital was $7,700,000 compared to $12,500,000 in Q1 2020. As at March 31, we had a record $66,200,000 in cash and cash equivalents, while spending $4,700,000 in expansion capital for the quarter. The company fully repaid the outstanding loan from Traffic Era during the quarter, leaving the company with no debt. As John mentioned, For the quarter, the Kannan 2 gold operations produced 17,774 ounces of gold, 426,153 pounds Copper and 7,925 ounces of silver or 18,654 ounces of gold equivalent, Which is a 6% decrease from 2020. We sold 21,879 ounces of gold, £394,635 pounds of copper and 7,463 houses of silver, we incurred a cash cost of $7.45 and an all in sustaining cost of $10.38 which was significantly below our realized gold selling price of $17.35 per ounce. Our Q1 2021 cash cost per ounce decreased to $7.45 versus $7.52 in 2020. The decrease in cash cost was due to a higher amounts of gold sold during the quarter versus the prior period and a successful ramp up of the 400 ks expansion, Allowing the company to achieve better economies of scale. These were offset by lower production due to the reasons outlined above. In addition, the company incurred costs related to the COVID-nineteen It is important to note that after commissioning the Stage 2 plant expansion in late Q3 2020, We have seen a significant compression in our total unit cost per ton processed, approaching $24 a ton. 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. Moving on to the 20 client. During the quarter, the 1st 2 months, we saw Considerable progress being made, very strong development, advanced rates with the further the 2 inclines at approximately 3.70 meters. However, during March, we cut back significantly on work on the twinning client to focus primarily on production As a result of the aforementioned challenges, primarily being restriction in FIFA workers. That has obviously continued through into the First half of the second quarter, but with the lifting of the travel restrictions, we're now picking up again in terms of our Development on the TwinInk plant. When we look on the exploration front, I think it'd be fair to say that we've been very pleased with the progress Both in the hydrate vein systems, Cora and Judd and also in our main growth targets at Blue Lake. Looking at Cora, mid February, I think we announced results from another 35 holes, which were both infill and step out Drilling, step back drilling being to the south. And this is all for our updated resource, which will be feeding into our feasibility study looking at completion in Q4. The results delivered multiple high grade intersections, the best of which I think was 7.2 meters, 65 grams It's on gold equivalent with a very high hit rate, 25 of both intersections exceeded 10 grams of its on gold equivalent. Results also featured a number of veins That are currently not in our existing resource. That includes 7.8 meters at 21 grams per tonne gold equivalent in the K2 Hanging Wall And just over 3 meters and 15 grams per ton in what we designate the K3 vein. Now in September of 2020, we announced the first significant exploration undertaken by the 92 on charter. We had over 108 meters development that we reported On the twelve-thirty five level and it would also take an example. January, at the end of January of this year, We updated that we developed 288 meters long strike with the additional 175 meters having averaged 3 point 7 meters vein thickness 15.4 gram per tonne gold equivalent. And the last 65 meters of that And I see average 3.8 meters at 18.7 grams per tonne gold equivalent. So over the entire almost 300 meters development We've done to that point in time. The J1 vein had averaged about 3.5 meters at over 10 grams per tonne gold equivalent. Now as a result of those I'm standing without from that development. We undertook a very limited drilling program because our drilling is We're focused on Cora and that resource update, but we undertook a limited drilling program and results from that I think were extremely encouraging. They included JDD-six, which gave results of 7.25 meters at 256 grams per ton And that was approximately 50 meters above the development. So when we look at that development, I think to date we've seen strong continuity And high grade, including in the faces, as you can see here, 5.5 meters at almost 110 grams per tonne gold equivalent. And from a geological perspective, very similar to Cora, but with probably better geotechnical Characteristics thus far. To say we are encouraged by the results, Judd, is probably an understatement. We've got multiple veins intersected. The geology, as I said, very similar to Cora and it's high grade. It's under explored, slightly into 2.5 kilometers, so it offers tremendous Upside potential. We'll be targeting Judd with far more aggressive drilling as we reach the completion of the Core resource updates. So look towards the end of this year to see us aggressively drilling at JAD. Finally, In terms of our porphyry target, the Phase 2 drill program for the Copper Gold Blue Lake porphyry target, shallow vector drilling, part of the program is now almost complete. And the next step is to evaluate that potassium core, Which we obviously expect to be the higher grade portion of the system. We currently have 2 drill rigs Working at the lake and at this point in time, we anticipate in the second half of the year, we will start the deeper drilling targeting that fantastic core. So I think the results both from the high grade vein field and from the porphyry drilling have been from our perspective exciting, Highlight the significant near term potential as well as the big system upside And with only approximately 20% of our vein field strike length being drilled so far, I think we still have An enormous amount of drilling and enormous amount of potential both long strike and at depth. Similarly, when we look at our porphyries, I think we drew 2 or 3 of a dozen targets to date. So again, still an enormous amount of work with an enormous amount of upside. So With that, operator, I think if we could commence the Q and A session. Thank you. We will now begin the question and answer You will hear a tone acknowledging your request. Our first question comes from Tom Gallo of Canaccord Genuity. Please go ahead. Thanks, operator. Thanks for taking my call and my question I've actually got 2 questions on sort of the exploration and the drilling. You mentioned a resource update coming here with Cora. Are we to expect any part of Judd, the stuff that you've done The development on and some of the drilling on to be incorporated in that resource or any of the other sort of veins Peripheral to the mine to be included in that resource or is it just a CORA resource update? Tom, thanks. Thanks for that. In terms of the resource update, we do expect to have Some Judd in that resource, I think it will be limited because it will be only a limited drilling program Completed prior to the resource update, but certainly in and around the development, which Sure. As we flagged with something over 300 meters in strike line, we will put a resource around that. However, It's really Pulse getting that resource side that we anticipate really getting aggressively into And I mean we've got the 6 rigs for underground and we'd expect Post the core resource, 3 of those at least will be focusing on drilling Chad and bringing Chad Into resource and 3 of them will continue with Cora pushing to the site and also extending Measure and indicated and potentially done this as well. Okay, very good. Thanks for that. Just one other question on the porphyries. You mentioned toward the end of the or the back half of this year to do your deep drilling at Blue Lake. First question on Blue Lake, have you guys sort of Decided where you're going to drill like did Phase 2 kind of give you enough evidence? And then more regionally, Are you going to look to apply this same sort of model where you do the vectoring and stuff to say A1 for example? Okay. In terms of Blue Lake, we did the 1st program as you're aware of Last year, finished the program last year and that gave us a certain vectoring into where that potential capacity core was, but it also highlighted that we needed additional drilling So really give us a full three-dimensional model. We certainly believe that with drilling that we're busy completing now, It will give us very strong action in terms of where to target that potassium core. And I think We very much said that we anticipate drilling it second half of this year putting in deep holes. It will be up to Up to a 1000 meters deep and that very much is where we're sitting at this point in time. I think we will have Some updates of drilling results out in the near future. I would say that While we've continued with our exploration program, It was certainly cause of the restrictions that we've had in terms of Personnel, COVID, and a movement of people were somewhat behind where we wanted to be in terms So actually doing the assaying of all the results that we've got and doing some of that Some of the other work on the core. So although the drilling has gone ahead, we're buying where we want it to be in terms of just Logging and assay. In terms of applying that to some of the regional targets such as A1 Headwater, certainly the overall model of drilling, Putting together a 3 d model would send allows us to vector in towards that metastatic core is Very much the way that we would see ourselves approaching it. Do you have a timing on when you'd maybe Look to step to your next porphyry target. Obviously, you're going to be doing your deep drilling at Blue Lake, but is there back half of this year or maybe next year To look to do some of the more some of that shallow drilling at A1 or another bore free target? I think at this point in time, we'd be saying next year. Perfect. Thanks. Looking at Where we sit in things with things like COVID and all the rest of it and making sure that we have a We've got a tight program that we can maintain. Certainly, as I think many people are aware, we operate The mine has effectively a COVID bubble. So anyone coming to site needs to quarantine for a week. When it comes to exploration, the exploration people actually don't come to site and we try and operate The drill sites that we're running as bubbles themselves, which is somewhat more challenging, obviously, because Smaller areas and there is interaction with local sub, it is more difficult to maintain the same sort of corded protocols that we're using at The main operating site with interaction through helicopters and various other things. So we're very cognizant of Those sort of issues when we look at our exploration process. Great, thanks. Our next question comes from Alex Taranto of Stifel. Please go ahead. Hi, good morning, afternoon guys. So just two questions for me. First, with the travel ban between PNG and Australia now lifted, How long before you get back to, I guess, where you could say full development plans on the Twin Incline and exploration activities? Dan, I appreciate it. It takes a bit of time, but how long I guess before you get back to plan? And then the second question, this question may be a little bit more So Justin, but you mentioned 2,300, I think, ounces or so in inventory. But can you give any guidance on the number of ounces that are provisionally priced at Look, in terms of ramping up to where we were previously, both in terms of Development projects, etcetera, and also in terms of exploration, it'll take us about 3 weeks of movement of people to get our people Back into a balance. We've effectively had a number of people who've been on-site for something like Almost 3 months in some cases as a result of that suspension of FIFO and The agreement that we've reached with the Assurant Government, so that was done as an industry Through the Chamber of Mines and Petroleum, which I'm one of the councils, I'll be one of the people That's been involved in the engagement with the Australian government, Queensland government, the PNG government. We're now moving people Basically, primarily through a charter, we as an industry move about 100 people a week and we have Approval from the government to move the Australian government to move 100 people a week as an industry. That's beyond the number that if we look at our operations, we actually need as an industry to move on a weekly basis. Obviously, we've all got to operate within that constraint. We don't like to immediately change all of our people, Which wouldn't be possible with the most constraint and that 100 people is on top of what government normally allow for movement of people. So we are provided with a guarantee of movement of people from the Australian government which is Very positive in our content. So given that, realistically, it will be into June Before we're really able to get the entire operation running back where it was in terms of the Twin Incline And all of the developments associated with operations, etcetera, etcetera. We've also curtailed some of our other projects. And realistically, that will take us a couple of months to bring all of those things back to The levels where they were previously and that's more related to looking at the overall Call the levels that we're seeing in the community. So our systems at this end of present And this is industry wide and it's part of the protocols that we've agreed with government and quite frankly were in place previously in any event. We operate above the operation as I mentioned. Anyone coming to site whether you're coming from overseas or whether you're coming from within P and G, you have In order to go in quarantine, you have to first of all pass COVID test. If you're COVID positive, you cannot go into quarantine because you obviously want to bring COVID positive people into quarantine. You then quarantine for a minimum of 7 days, you test it before you then go on to site. So our site is totally COVID free. We have I think currently we've got 3 positive cases within quarantine. And we do see almost every single batch of people coming in. We do see that 1 or 2 of those people will be presenting COVID positive before going into quarantine, so they don't go into quarantine. So we anticipate that we will see some impact on our people, nationals coming in. Certainly, the balance of this year and we're planning accordingly. And that means reducing the numbers of people that we have in the cap, etcetera, etcetera. And so that does mean that we'll certainly look at Focusing on operations, focusing on the twinning clients, focusing on other projects which are key for the next Phase of expansion and then other peripheral projects will be more opportunistic when we have the opportunity We'll have people and we'll bring them and have them operating. In terms of exploration, The exploration in terms of the meters that we've been drilling have been largely unaffected at this point in time By what's been happening, it's more been about logging and the processing of core because that's done on-site and We've had obviously curtailed people and curtailed some of our key national people. And again, we would anticipate that it's going to take us 6 to 8 weeks to To catch up on all of the logging and testing and everything else that we haven't been keeping up In terms of number 2, I'll hand that one over to you, Justin. Sure. Thanks, John. So as at March 31, K92 had about 40,000 gold ounces that were subject to provisional pricing, with final Pricing to be set between April through June. And so subsequently in Q2, we've already seen a recovery of some of The negative pricing adjustments that we had recorded in Q1. Okay. That's great. And then in your hedging program there, I mean, it's you're not locking in just so I'm clear on the mechanics of it, you're not locking in a Specific price, but you're just, I guess, protecting it with copper sorry, with gold collars. Is that correct? That's correct. Yes. So we sell quotes and purchase calls, so that the net cost of the company is nil and we purchase them each Time concentrate is sold and invoiced to our offtaker. Okay. Okay. Yes. So to be clear, it's price protection only for what we are already produced. It's not a We're not looking at a hedging situation or material that we haven't produced, but merely To live with the fact that when we sell something, the actual settlement date is 3 months later. So although we get a provisional payment when we basically get it delayed And that's based on the price of the day. The actual settlement is 3 months later. We don't want to get into the situation where, let's say, We get paid 90% of what we're going to get paid at $2,000 an ounce and gold collapses to $1,000 an ounce 3 months later And suddenly we've got to pay back a lot of money to our offtaker. So that's really what it's there for. Okay. No, that's great. Thank you. That's it for me. Our next question comes from Chris Thompson of PI Financial. Please go ahead. Hi there, John and team. Thanks for the call. Just a quick question more related, I guess, to the upcoming feasibility study and I guess, move To expand the operation in the next phase of expansion there, can you maybe just talk a little bit about what you're doing on the Permian side and what It will be a process of simply putting in new mine plants and having them approved. And we've done that already, A, to start quarter and B, then to expand quarter to the 400,000 ton per annum. So again, Not a major process. I would also say that certainly at this point in time, it would be our intent to apply for an additional mining lease, which And the support for our industry and that has been a key factor in moving to The situation we're in now where we've got total approval for our movement of people from the government. And so that's been extremely positive from Aerofontics. So We've had a very challenging Q1. We've come through it with record throughput with a new record cash balance And that sets us up in a very good position going forward for the balance of the year. We do anticipate that We'll continue to seek challenges in this COVID environment, but I think we've shown with our people and With our relationships that we are equal to meeting those challenges and maintaining The forward momentum of this company in terms of the expansion of production moving into a Stage 3 And really realizing the potential of what is, I think, one of the best Geological deposit and regions in the world today. So With that, I'd like to thank you for your attendance today or this evening with you in my part of the world And look forward to further discussions in 3 months' time when we've completed the Q2. So thank you for that.