Earnings Call: Q4 2020

Mar 29, 2021

Earnings release

Thank you for standing by. This is the conference operator. Welcome to the K92 4th Quarter 2020 Financial Results 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 Medilek, Vice President, Business Development and Investor Relations. Please go ahead, sir. Thank you, operator, and thanks everyone for attending K92 Mining's Q4 2020 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, 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. Thanks, Kevin, and welcome, everyone. So the 4th quarter represented another important step forward for K92 with the commissioning of our Stage 2 expansion, Taking the plant capacity from 200,000 tons per annum or 5 50 tons per day to 400,000 tons per annum or 1100 tonnes per day. Importantly, during the quarter, K92 was announced as the recipient of the Importantly, within P&G, it was seen as very important. Recognition from government included taking out full page advertisement because it was celebrating not only Our success that I saw it very much is a recognition of the mineral potential of ENG. The award NICE sits in Mimmo Reis, which is the MRA head office, and we had a formal ceremony to actually present Yes, trophy to the government. So that's been viewed in a very, very positive manner. On the safety front, We had one lost time injury in 2020. So we continue to operate as one of One of the safest finds in the Australasian region and it's an area where we continue to have a very, very strong focus We continue to look for improvement. Production, we delivered a record quarter, just under 30,000 ounces for the quarter. And that was on the back of record mill throughput, just under 69,000 tonnes processed and very, very solid head grade 14.2 grams per tonne gold equivalent. If we compare that To the Q4 of 2019, we see a 26% increase in our production, while Tropu increased 127%. And on an annual basis, our production was just under 99,096 score equivalent, 98,872, and that was a 20% increase from 2019. Importantly, I think during the quarter, we also continued to see positive gold offer, Great reconciliation versus a resource model and a positive reconciliation both for the Previous model and for the more recently updated April 2020 model. 4th quarter, You can see very much we continued the ramp up that's been really happening since 2019, since we announced We would be going ahead with Stage 2 expansion. And in the period from the Q4 of 2019, you can see that Material movement increased 275%, development meters increased almost 400% And we'll throw a bit over 2 50%. So on every metric, we are continuing to Expand and achieve new records as we go forward. Certainly, in this quarter, the initial part of this quarter, we've seen that those metrics Continue to be positive. On the mining front, oil stoping Continues to be expanded both in K1 and K2 and that obviously provides us with The flexibility the operational flexibility that we need as we ramp up to our 400,000 tonnes per annum. 2020 major focus has been to increase the number of levels as we expand The mine throughput during the quarter, we sourced ore from material from 7 levels. And when you look at the mine plan going forward, this looks to increase it to 13. And also to bring in Judd. So again, we'll see more flexibility As we get into 2021, no review of 2020 and A view of where we are today can be done without addressing COVID. We operated, I I think very well during 2020 with in that cold environment. But what we have seen more recently in this current quarter, the Q1 of 2021. It's an increase in COVID in P and G. We've obviously We've been operating in a COVID environment and we've had quite some time to prepare and in fact Operating in what we consider to be a COVID safe manner. We've got containment measures. We operate the mine as a bubble. So we've got quarantining procedures for everybody arriving outside whether they have Come from an international or whether they come domestically, everyone is quarantined coming to Sun. Enhanced hygiene, Social distancing PPE increased our on-site medical staff. We do on-site testing, CR testing. And at the same time, we've also been looking at potential impacts from areas Such as supply chain, so we've increased our inventories on-site. And importantly, we established a, I call it, Assistance for ENGIE for government and CHF 1,500,000,000 which was provided to The 2 provinces which we operate, which is Morobe and Eastern Islands and also for the central government. Number one priority is obviously going to be the health and safety, not only of our workforce, but also of our local community. On March 16, the Australian government implemented a 2 week travel restriction between Australia And P and G. And that includes our FLY in FLY out expansion workforce. While it's not expected to significantly impact on our production, We've certainly taken the step of reducing our non production activities. So some of the Projects that we've been doing, the expansion projects we've been doing, etcetera, etcetera, we put on hold. We are working with The PNG government, the Australian government, in terms of looking at all of our protocols and ensuring that we can Come off this initial suspension as soon as possible. And certainly, the response from both governments has been very positive, recognizing the importance of The resource industry for P&G and also the importance of being able to move our people around. Also, I think when we put out that release in relation to COVID, we also noted that stoking operations have been impacted by An incident involving a loader, which prevented backfill operations. And so that actually Deferred some of our high grade because it effectively stopped our stopping. And so During the latter half of the quarter, we shifted to processing the low grade stockpile material. Subsequent to that, I'm pleased to say that we have restarted Our sorting activities are backfilled and other sorting activities. And in terms of guidance for 2021, the guidance for 2021 It's not expected to be impacted, so our guidance remains as we put out. I think it's important perhaps to emphasize the timing of high grade ounces will certainly mean that the Q1 will be materially below budget production in the 2nd quarter, expected to benefit from that. However, Now I'd like to turn the call over to our Chief Financial Officer, Justin Monchey, to discuss our financial results for the Q4 and for the full year. Over to you, Justin. Thank you, John, and hello, everyone. Our 2020 revenue increased 56% year over year to 159,100,000 The increase in revenue was attributable to an increase in production and selling at an increased realized gold price of $16.92 per ounce compared to 13.34 per ounce in 2019. In the 4th quarter, we had revenue of $48,000,000 A 40 5 percent increase from 2019. As of December 31, 2020, there was 5,451 ounces of gold in concentrate inventory that was sold in 2021. Cost of sales for 2020 was $73,400,000 compared to $48,000,000 in 20 19. In the Q4, cost of sales was $23,900,000 compared to $13,900,000 in 20 19. Higher costs were primarily due to increased operational activity as illustrated by the significant increase in ore mined. 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 movement of personnel and supplies and additional safety and medical related costs. Cash flow from operating activities before working capital adjustments increased 55% year over year to 76,500,000 versus $49,700,000 in 20 19. In the 4th quarter, cash flow from operating activities before working capital adjustments was $18,900,000 compared to $18,100,000 in 2019. As at December 31, We had a record $51,500,000 in cash and cash equivalents, while spending $20,000,000 in expansion capital for the year. Following the record production reported in the Q4, we took the opportunity to repay the outstanding loan from Trafigura of $4,900,000 in early 2021, leaving the company with no debt. As John mentioned, for the year, the Kinantu Gold Operations 36,067 ounces of silver or 98,872 ounces of gold equivalent, a 20% increase from 2019. For the year, we sold 93,273 ounces of gold, £1,827,368 of copper and 36,655 ounces of silver. We incurred cash costs of $6.51 per ounce and an all in sustaining cost of $7.82 per ounce During the year, we were significantly below our realized gold selling price of $16.90 per ounce. In the Q4, we produced 28,809 ounces of gold, 493,584 pounds of copper and 10,395 ounces of silver or 29,820 ounces of gold equivalent, which is a 26% increase from 2019. We sold 28,112 ounces of gold, 512 £1,203 of copper and 10,594 ounces of silver. We incurred a cash cost of $639 And an all in sustaining cost of $7.68 per ounce, which was significantly below our realized gold selling price of $17.92 per ounce. Our 2020 cash cost per ounce increased to $6.51 from $5.32 in 20.19 due to the additional costs incurred related to the COVID-nineteen pandemic, Higher labor costs associated with the plant expansion and lower head grades. It is important to note that after commissioning the Stage 2 plant expansion in late Q3. We have seen a significant compression in our total unit cost per tonne produced or processed, approaching $30 a tonne. 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. Thanks, Phil, and Tustin. Now moving on to exploration and growth, Starting with growth and the trend incline. So we made considerable progress. Strong development rates we've achieved, Furthest decline as of late March, 370 meters, trailing incline slightly behind that. I would point out the Turning client activities are expected to slow down during this period of travel restrictions as we focus on production. However, at this point in time, we don't expect it to materially impact on the advance rates that we achieved for 2021 and Completion dates, etcetera, etcetera. On the exploration front, I think it would be fair to say, we're very pleased with the results today, particularly at Chora, Chad and also Blue Lake. Chora, mid February, we announced results from 35 holes, which were primarily infill holes focused on increasing our measurement indicated for the updated resource Part of the feasibility study, but also some step out holes to the side. We delivered multiple high grade intersections, including 7.2 meters 65 grams per tonne, Gartner Skorp equivalent and a very high hit rate, 25 of the 35 holes, for instance, Over 10 grams per tonne. The results also featured some high grade intersections from veins that are not currently in our And that included 7.8 meters at 21 grams per tonne from the K2 hanging wall And also just over 3 meters of 15 grams per ton in K3. By chance, Late January, we announced the latest development extension from Chad at the 1235 level, so the development of the 1235 level, which was 65 meters of call it GA1 vein, averaged 3.8 meters at 18.7 gram per tonne gold equivalent. The last 179 meters that we've developed averaged 3.7 meters at 15.4 So development has really shown strong continuity. I think High grade faces, 5.5 meters here at 109 grams per tonne. I think this was from My son visit in late 2020. Importantly as well, the geology Looks very similar to Cora and certainly from the geotechnical perspective, Characteristics thus far are extremely good. So very happy with what we're seeing there. Important also, I think, to note that when you look at the limited drilling program that we've completed, included in that was 7.25 meters at 256 grams per tonne gold equivalent, which was, I think, a top five intersection in the world last year. So at this stage, very limited drilling program. What we've seen extremely encouraging to say the least. We've intersected multiple veins. We've shown the geology is very similar 2 that which we see at Cora is high grade. We've got over 2, 2.5 kilometers of strike length, which has got almost no drilling in it. So there is tremendous upside potential. We do expect Post completion of the DFS drilling for Cora that we will target Judd With significantly more rigs. We do anticipate having initial resource by the end of Q3, but that will be a very limited resource based on probably just 1 rig drilling. But as I said, post AFS, we expect At least 50% of our rigs underground should be targeting JAD. And of course, all of those drill cutters that we've been using for Cora, We turn the rigs around 180 degrees and they're drilling Jut. So there is potential to quite rapidly July, Chad, and significantly more answers to our results. And then Moving on to Blue Lake, we made considerable progress in drilling this copper core frame. The drilling that we've been doing in 2020 and we continue to do is shallow to medium depth 5 or 600 meters deep, where we're doing completing a number of handsholes that We initiated during our first phase and they are really completing that three-dimensional picture So that we are able to vector in towards that potential potassium high grade core. And we should be providing an update to the market with results in the coming quarter. I think the results from both The vein drilling and also the porphyry drilling are exciting. The highlights of the near mine big system, We've got at Kinantu show the potential that we've got there. We've only drilled 20% of the high grade vein fuel that we know of. And The majority of drilling that we have done, it remains open. The debt, it remains open, certainly, along Strike to the side. We will continue with a focus on our exploration. Second half of this year, we anticipate having additional Exploration rigs on-site and we've got a very substantial budget this year for our exploration. So With that, operator, I'd like to commence the Q and A. Thank you. And Our first question is from Geordie Marker with Haywood Securities. Please go ahead. Yes. Good morning, John. Well, Good morning, evening. Where are you? Just questions, mate, on ops there. When you're looking at I had a long hold of Mr. Hoping. For K1, K2, what's the sort of level of dilution that you're getting? And you reported Continued positive grade reconciliation, what sort of level of quantum are you looking at there? Thanks. Thanks, Jordi. Yes, it is evening here. Although it's a very warm evening, we're having a fairly high temperatures and growth despite the fact We're into the fall. Look, in terms of dilution in K1 and K2, It does we are getting some variable dilution. Some of the stocks we see almost no dilution at all. Other ones, we can get 30% depending on the geotechnical brand around the stores. You may recall that there is some alliance that some of K1 for instance would still come out With a cut and fill, which is what we've done in the past, where the geotechnical conditions require that. Having said that to date, We haven't done that with anything since we switched to long haul. We expect long haul. In terms of the reconciliation, there was a graph In the presentation, I believe the overall numbers would be sitting around 15% more Gold, then we call for in the model and that tends to be grade relevant Tonnage Associated. Okay. Thanks, Mike. And in terms of, I guess development along Judd, what sort of advance rate are you looking at there? Look, development along JAD is not a priority as such. It is it's a heading that we develop as a secondary heading, not as a priority development. It is still actually developed in part as a ventilation system, which is What the original justification, if you like, was to give a piece of recent history. Our guys on-site, the geology exploration guys have been wanting to really get into a detailed drilling program of just for the last couple of years, but everything has been focused on Cora. First of all, to get the resource to be able to Fill the middle and then to get a resource to be able to expand to 400,000 tons per annum and then to get a resource to look at the Next phase of the PEA and more recently to focus on expanding our measure and indicated from the 1.1 in the current resource unit up to around 2,000,000 That's been a bit of frustration I think for the guys on-site, hence they came up with the Proposal to develop a long strike and generate all the information on JAD by doing that development. And of course, it Generates not only the information in terms of the grades and what have you, but also geotechnical and all the rest of it, which I have to say have been extremely good to date really, really competent brands, so very good from that perspective. So I think we're probably doing anywhere between 20 and 40, 50 meters a month and it really just depends on what other areas we're focused on. We're running in the order of 600 to 700 meters of development a month at this point in time across the mine. Okay. That's great. Sort of it ends my next question. And maybe lastly, Forward on the other callers. To Blue Lake, sort of the scope of the work that was done there, we'll be Sort of set to update soon, what's sort of number of drill holes that you look to vector in, I guess, on developing An understanding of the system. Okay. So we've got 2 rigs currently working. 1 is our own rig and 1 is a contractor rig. There are basically plan to keep running for the rest of the year. The holes have been drilling In the current program have generally been sort of 4 to a bit over 500 meters. So we characterize them in the porphyry system as shallow, but I guess there's more medium depth rather than shallow depth, I'd say. We've probably got about another 3 or 4 holes to drill. We've drilled I think we've completed about 4 holes so far. We haven't got results for all of those. We're planning on getting results out in the next quarter. And At this point in time, we believe we'll start drilling the deeper holes And the 3rd probably towards the Q4 where we start vectoring in on that deeper potassium core. So overall that would give us something in excess, I think of probably around 20 holes we'll drill before we start Really targeting more of that potassium core. Okay. That's a Our next question is from Alex Tarantino with Stifel. Please go ahead. Yes. Hello. Hi, everybody. Just a couple of questions for you. One on Q1, you noted that you expect production to be materially below your budget. You're guidance, which is obviously positive there. But I'm just trying to get an estimate on the quantum. Is this just a grade impact or are you seeing tonnage Declined a little bit as well. So that's kind of first question. And then the second one was you mentioned that Due to the travel restrictions with Australia, you've reduced the scope of non production activities. So I wonder if you can just give us a little bit more details on that. Thank you. Okay. Thanks, Alex. Look, first off, in terms of tonnage, tonnage versus grade, It's more about grade rather than tonnage. We were treating lower grade material, all of it coming from stockpile. At this point, Certainly anticipate that we probably have a record quarter in terms of the tonnage to treat it. And it really at grade its Impact is really just this quarter, back stope mining, etcetera, as we speak. In terms of what we sort of cut out, I mean, there's 2 drivers for that. 1 is In terms of the travel restrictions, which are currently being put in place for a 2 week period by Australia between Australia and B and G, which impacts our people workers and this is something that we experienced Almost 12 months ago when we had the first cases in ENG that resulted in a State of emergency being declared. We were running with around 15 people on-site 15 expats, sorry, not people, and it doesn't have a lot more than that, but 15 expats on-site. And so the work that we cut down on tends to be anything that's non production related. So we've had a fair bit All capital projects going on, for instance, expansion of the CAM, expansion of the warehouse. So some of those things have been cut back simply to be able to focus on production. Some drilling has been impacted. Some of our exploration drilling has been impacted More the underground drilling rather than the surface drilling. The other area, I guess, that we do have some concern relates to The increase in COVID that we've seen in the community and PNG assets, There is certainly a significant spike that's occurred over the last 4 weeks and hence Australia has taken a mistake of A, Suspending the FIFO fly in fly out and be restricting other flights. They haven't stopped them completely, but they have restricted them. So that community transmission of COVID starts to give us some concern because obviously Some of our people can test positive for COVID. We've had people arriving into our quarantine system testing positive. As I think many people are aware, we like all the other mines in P and G, we operate a bubble effectively For the mines, so that we quarantine everyone coming to site for at least 7 days, some longer Before they're allowed in, whether you come from Australia, whether you come from Port Moresby or whether you come from a kilometer up the road, You're required to quarantine and be tested before you're allowed to come in and obviously test it. But the increasing community transmission, certainly the concern is that that will have some impact. Hello. At this point in time, we don't believe it will be significant. But in order to cater for that and ensure that We don't impact production, we give priorities to production. Same for the Twin To an incline is not considered same priority as production. So if we're going to if we're going to drop a couple of Development phases will drop them in the to an incline rather than drop them in the main underground. Okay, that's great. Thanks. And just a follow-up here. So obviously, you said you had 15 expats on-site before. So that's not a whole lot. So Maybe this kind of answers my own question, but how confident or comfortable are you with your current staffing levels? So I mean if this Extension travel ban gets extended longer. Do you feel that you've got enough your people on-site are sufficiently trained and you're comfortable that Even if you aren't getting new people in, you can continue to operate according to plan? Yes. Look, I mean, we have about sort of 40x pence. So normally any given time, we'd have 20, maybe a bit more than 20 on-site. And that number has increased Over the last 12 months because we've brought in the TwinIncline and that's Over 10 people I think as a result of bringing that to an incline in. So if you were looking at 12 months ago and said, well, how many people you have on-site, How many expats would you have on-site at any given time? It would be around 15. So in that context and just as luck would have it by the way, Alex, that when we had The last state of emergency, quite a number of our senior guys were on-site for that one and stayed on-site for a couple of months. As a result of that last state of emergency. So we've got the same guys, a number of the same guys on-site as well and Been trying to assure me it's not their fault. But look, we operate With 4% expats, we operate with the lowest number of expats of any mining company that I'm aware of in P&G. So we have a lot of our senior people are P&G Nationals, mine managers, Geology superintendents, metallurgical superintendents, etcetera, etcetera. And that's been deliberate on our part We obviously target top people in P and G. Some of those are actually people that have come back to P and G having been working in Australia. So we're comfortable that as it stands right now, we've got the people that we need to maintain production. I would also just add to that, that we are through the chamber And I'm a counselor of the Chamber of Mines in PNG. We're engaged with both the PNG government and the Australian government. In fact, last week we had a virtual meeting with the Australian High Commissioner and I mean the messages that were coming out were first off that the Australian and PNG governments are fully cognizant of the importance of keeping the resource industry operating in PNG. And the numbers are actually quite I mean, when you think about it, 85 percent of exports from P and G come from the resource sector. That's either LNG or primarily gold copper, over 30% of GDP, 20,000 direct employees, 30,000 who then work with contractors who work only in the results industry. And when you consider that there are less than 300,000 taxpayers in the whole of P and G, over 100,000 of those are actually government employees, So it gives you an idea of just how important the resource industry is to P and G, With the taxes we pay, royalties, etcetera, etcetera. So I think we're comfortable that PNG Government, Australian Government Fully recognize the importance of the industry and want to work with industry to make sure that we keep it going, that We have in place all the systems and procedures, protocols that we need to ensure that we can Safely move people in and out of PNG from the mines back to Australia and we've Been engaged with governments on exactly that in Australia and in PNG. Okay, great. Thanks guys. There are no further questions registered at this time. I would like to turn the conference back over to John Viewings for closing remarks. Well, thank you for that operator and thanks for everyone For attending this 4th quarter results, look, I think it would be fair to say that We are happy with the performance in 2020. We're happy with a record production In that Q4 and the record not just in ounces, but in tons treated, in meters developed. So it's very much driven by the important metrics that we're trying to tick the box on in terms of our expansion. And we've done that in probably one of the toughest years For many mining companies to operate with COVID and the impact that that has had on our world. We've done it on the back of what I believe is one of the best teams that any company could have, Any team in the results sector could have. We are very much a P and G company. It's a P and G team with some Australians and Canadians thrown in there as well. But the team has really Delivered. And I think it's from our perspective, we are extremely pleased With the performance and what's been achieved, we've set ourselves up well to achieve more in 2021, both in terms of our Stage 2 expansion and then moving on to that Stage 3 expansion. And at the same time, a lot more potential there in the exploration side of things, both in terms of expanding the resource with Cora, but also we think pretty importantly And that's a really exciting I think for us over the next 12 to 18 months. I think that's going to be really exciting for us. And then of course Blue Lake, the big 4 free target. So thank you for your attendance. And hopefully, we can continue to deliver and see the company move forward and go to the next level. So Thank you for your time this morning, this evening or whatever time it is in the day where you are. Thank you.