KNTNF - K92 Mining's Growth Potential Is Massive

2023-11-27 08:46:30 ET

Summary

• K92 Mining's Kainantu Gold Mine in Papua New Guinea is a high-grade, low-cost underground mining operation.
• The company has successfully completed Stage 2 and 2A expansions, significantly increasing production to over 120,000 ounces of gold equivalent per year.
• K92 Mining has ambitious expansion plans for Stages 3 and 4, aiming to transform the mine into a world-class, Tier 1 gold mine with annual production exceeding 470,000 ounces of gold.

K92 Mining’s ( KNTNF ) Kainantu Gold Mine lies in the heart of Papua New Guinea's Eastern Highlands province. The mine is situated in a vast 830 km2 land package, and it is a high-grade, low-cost underground mining operation.

While it is already a profitable, producing gold mine, the best is likely yet to come. K92's ongoing journey of growth and expansion at Kainantu is a key reason to consider the stock as we near the end of 2023.

Following the successful completion of their Stage 2 Expansion at the end of the Q3 2020, which effectively doubled their throughput to 400ktpa, the company didn't rest on its laurels. In the Q2 of 2023, they further increased throughput by 25% to 500ktpa, thanks to the Stage 2A Expansion, significantly boosting production to over 120,000 ounces of gold equivalent per year.

However, much more growth appears to be ahead for K92 Mining, and that is where things get pretty exciting for investors.

K92’s Growth Potential

Previously, the company announced Stages 3 and 4 of its expansion plans for Kainantu. These stages will likely set the stage for transforming the Kainantu Gold Mine into a world-class, Tier 1 gold mine (loosely defined as a mine which produces at least 500,000 ounces per year at industry leading cash costs).

The Stage 3 Expansion, which is scheduled for commissioning by the end of Q1 2025, is forecasted to reach a production run-rate of over 291,000 ounces of gold equivalent annually, boasting impressively low average all-in sustaining costs (AISC) of $716/oz. The financial estimates are equally impressive, with a post-tax, net present value (5% discount rate) of $586 million at a gold price of $1,600/oz, which increases to $855 million at $2,000/oz gold.

The Stage 4 Expansion is setting its sights high, aiming for a remarkable annual production rate exceeding 470,000 ounces of gold. This target represents a fourfold increase from the production levels expected in 2023, showcasing significant growth potential.

Phase 4 Expansion Key Highlights

• Annual production of ~470,000-500,000 ounces of gold.
• The project's all-in sustaining costs (AISC) are projected at an industry-leading $674 per ounce .
• Financially, the expansion could yield a NPV (post-tax, 5% discount) ranging between $1.3 - $1.8 billion , depending on gold prices, which are estimated to be between $1,600 and $2,000 per ounce.

As K92 Mining advances with these impressive expansion plans, construction activities are already underway, signaling a period of massive growth for the company.

Additionally, K92 Mining is actively exploring its extensive land holdings, with as many as 11 drilling rigs operational across various prospective targets,

K92’s Strong Operational Performance

My confidence in K92 Mining's ability to successfully carry out its Stage 3 and 4 expansion programs is based on several key factors.

Firstly, K92 has established a track record of being a reliable and consistent performer. As evidenced in past quarters, the company has a history of meeting or even surpassing its production and cash cost targets. This consistent performance is a strong indicator of K92's operational expertise.

While there might be concerns among investors regarding the recent Q3 results , which reported all-in sustaining costs (AISC) of $1,300, which is notably higher compared to last year's $864 per ounce, it's important to understand the context behind this increase. The current elevation in costs is primarily a result of capital expenditures related to the Stage 3 and 4 expansions. These are temporary expenses, and as K92 progresses through these expansion phases and increases production, we can expect the costs to decrease significantly.

In fact, K92 has already forecasted that the AISC will drop below $700 per ounce once the expansions are complete and operational efficiencies are realized.

K92’s Path to Tier-1 Mine Status

The future growth prospects of K92 Mining's expansion plans are particularly compelling for a couple of key reasons.

Firstly, the cost of these expansions is quite reasonable when weighed against the potential upside, which I discuss in more detail below. Moreover, K92 is currently in a robust financial position, adding to the feasibility of these expansions.

A critical aspect of the Stage 3 expansion is its self-funding nature. K92 Mining plans to finance the $177 million initial capital expenditure through its own internal cash flow and cash on hand. This strategy indicates that the company is unlikely to seek additional funding through debt or equity markets, showcasing financial stability and a strong operational cash flow.

The Stage 4 expansion, however, is estimated to cost an additional $187 million , and is scheduled for commissioning in the second half of 2026. Considering the expected boost in production from this expansion, the investment seems pretty modest. This stage is set to elevate K92's annual production to 500,000 ounces of gold while bringing the all-in sustaining costs down to ~$700 per ounce, thereby boosting its margins and profitability.

Finally, K92's financial health at the end of the last quarter was solid, with $80 million in cash reserves and no debt. The company said recently that it also secured a new $100 million senior secured loan facility, bolstering its financial position and providing more flexibility in funding, particularly for the Stage 4 expansion. This supports K92's expansion plans, and I think it also reflects its commitment to maintaining a strong balance sheet.

K92’s Valuation is Attractive

It is hard to accurately value K92 Mining here because much of its value is based on its future production from completing the stage 3 and stage 4 expansions. It requires investors to take a more forward-looking approach.

If K92 successfully completes these expansions and gold prices remain stable, the projected value of the project could reach around $1.8 billion. This figure is nearly twice K92’s current enterprise value and implies that the company is currently underpriced. Even under a scenario with lower gold prices, at $1,600 per ounce, the project maintains significant value, with an NPV of $1.3 billion.

The anticipated production rate of 500,000 ounces of gold per year at an AISC of approximately $700 per ounce would likely significantly bolster the company's profitability. This operational efficiency would allow K92 to enjoy substantial margins, potentially around ~$1,300 per ounce at current gold prices. Back-of-the-envelope math puts annual EBITDA estimates in the vicinity of $600 million .

This kind of operational and financial performance would also make it a more appealing takeover target in the precious metals sector. Achieving “Tier 1” mine status would likely attract the attention of major producers in the industry, who typically focus on investing in such high-caliber assets.

Key Risks & The Bottom Line

K92 presents a compelling case for investors. The Stage 3 and 4 expansions are poised to transform Kainantu into a world-class, high-production mine, potentially tripling production rates while also reducing cash costs. K92 Mining is enhancing its profitability and positioning itself as an attractive acquisition target.

However, it's crucial to consider a few risks alongside these promising developments.

• Firstly, while K92 has been a steady performer, achieving its ambitious expansion goals will require execution and management of the complexities associated with large-scale mining operations.
• Another risk: The recent increase in all-in-sustaining costs, though temporary and related to expansion expenditures, reminds us that cost management in mining is always a delicate balance.
• Another aspect or key risk to consider is the reliance on stable gold prices. K92's future valuations heavily depend on gold prices maintaining current levels or higher. While I am a gold bull and believe higher prices are in store, this is still a key risk to consider, because any significant downturn in the gold market could negatively impact the stock.
• Lastly, operating in Papua New Guinea brings its own set of geopolitical and operational challenges. While K92 has navigated these successfully so far, investors should be mindful of potential changes in the regulatory or political landscape.

In conclusion, K92 Mining offers a strong investment case here for investors who want to bet on an exciting growth story in the gold mining sector.

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