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Whereas we have seen margin compression throughout many sectors attributable to inflationary pressures, the gold producers have been hit the toughest, impacted by a decline within the value of their commodity coupled with greater prices (labor, gas, cyanide, metal, energy). Happily, for K92 Mining (OTCQX:KNTNF), the corporate operates a high-grade and comparatively low-volume operation. As well as, the corporate is on monitor to triple manufacturing over the subsequent 4 years if it will possibly execute its Stage 3 Enlargement efficiently.
So, whereas it is not immune from the pressures felt sector-wide, it has appreciable claw-back means relative to friends, with the denominator on its manufacturing set to skyrocket. It additionally would not harm that the corporate’s growth charges and plant efficiency are properly above funds, offering confidence in its means to probably profit from capability properly above preliminary expectations (1.70+ million tonnes each year with two mills vs. 1.4 million tonnes each year). Given the corporate’s industry-leading natural progress profile & means to ship on guarantees, I see it as a top-12 gold producer.

Kainantu Mine (Firm Presentation)
Manufacturing & Gross sales
K92 Mining launched its Q2 monetary outcomes final month, reporting quarterly manufacturing of ~26,100 gold-equivalent ounces [GEOs], a virtually 5% enchancment from the year-ago interval. Nonetheless, the headline end result did not do the Q2 efficiency justice. It is because each mine/mill throughput hit new data, and growth meters are monitoring properly forward of budgeted ranges (+ 38%). Notably, the corporate noticed new data for mill throughput reached in Q3, with a number of days above 1,600 tonnes per day (~580,000 tonnes each year annualized), above the design capability.

K92 Mining – Quarterly GEO Manufacturing (Firm Filings, Writer’s Chart)
Some buyers is likely to be just a little delay by the H1 manufacturing of ~54,300 GEOs, which is monitoring miles behind the FY2022 steering mid-point of 127,500 GEOs (~42.5%) and seemingly setting K92 Mining (“K92”) up for no manufacturing progress year-over-year. Nonetheless, with the good thing about mill throughput charges averaging 1,251 tonnes per day in June and probably averaging 1,400+ tonnes per day in H2 2022 mixed with higher-grade stopes, K92 Mining is on monitor for a robust end to the yr. Assuming the corporate can ship into its steering mid-point (127,500 GEOs), we should always see K92’s quarterly manufacturing common are available in at ~36,600 GEOs in H2 2022 (common), up sharply from a ~27,000 GEO quarterly common within the first half.

K92 Mining – Quarterly Income (Firm Filings, Writer’s Chart)
Transferring over to gross sales, K92 did not get a lot assist from the gold value, with a mean realized value of ~$1,780/ozin H1 2022. Nonetheless, the corporate noticed elevated by-product credit from greater copper kilos bought and a pointy enhance in gold gross sales quantity, with ~50,000 GEOs bought in H1 2022. This allowed the corporate to generate H1 2022 income of ~$89.8 million, a big enchancment from H1 2020 (fewer headwinds) and a greater than 33% enhance from H1 2021 ranges, a simple interval on a comparable foundation attributable to a number of headwinds (journey restrictions impacting ex-pat staff, scarcity of bulk emulsion explosives, an incident involving underground loader).
Lastly, I might be remiss to not develop on mine throughput, which hit a file of 114,500 tonnes in Q2, properly above plant throughput of 108,900 tonnes. These figures are anticipated to enhance with further mine tools to be added to the fleet and a brand new jumbo and loader that not too long ago landed in Papua New Guinea. From a growth standpoint, its inclines #2 and #3 have superior by 1,276 meters and 1,317 meters, respectively, setting the corporate up for a big enhance in mining charges to assist its large mill growth with the addition of a stand-alone mill in step with its Stage 3 Enlargement plans.
To summarize, whereas manufacturing might not have hit a file in Q2, a have a look at progress thus far suggests this asset may produce as much as 40,000 GEOs in a robust quarter as soon as the Stage 2A growth is full.
Prices & Margins
Transferring over to prices, K92 Mining reported all-in-sustaining prices of $893/ozin Q2 2022, a big enchancment from $1,057/ozwithin the year-ago interval. This was partially attributable to being up in opposition to simple year-over-year comps. Nonetheless, these are phenomenal outcomes on condition that inflationary pressures definitely have not eased over the previous yr, even when productiveness has improved as journey restrictions have been relaxed. From a margin standpoint, the decrease prices mixed with a barely greater common realized gold value helped K92 Mining to take pleasure in a 27% enhance in margins year-over-year, permitting the corporate to buck the industry-wide pattern of margin compression.

K92 Mining – Prices, Gold Worth & Margins (Firm Filings, Writer’s Chart)
Whereas these margins are properly above the {industry} common AISC margins of ~$600/ozin Q2, there’s additional upside to those margins, as I mentioned in my earlier replace. It is because K92 Mining ought to see its all-in-sustaining prices steadily decline because it ramps up manufacturing at its Kainantu Mine, whereas industry-wide margins may decline once more in FY2023 if we do not see a rebound within the gold value. The reason being that whereas it seems to be like now we have seen peak prices for some objects (cement, diesel, metal), the profit to all-in-sustaining prices might be offset by the decrease gold value year-over-year, and I would not anticipate a lot enchancment in labor, the best enter price for producers.

K92 Mining AISC Margins vs. Database of Producers (Firm Filings, Writer’s Chart & Estimates)
Happily, K92 Mining will proceed to buck this pattern, with AISC that might dip to sub $650/ozin FY2026 if its Section 3 Enlargement plans meet projections, even after accounting for some inflationary pressures. So, whereas I’d anticipate K92 Mining’s AISC margins to enhance considerably from FY2021 ranges even at a decrease gold value assumption of $1,750/ozattributable to its bettering price profile, I’d anticipate industry-wide AISC to extend from $1,120/oz (FY2021) to $1,290/oz (FY2026), pointing to minimal margin growth for the group as an entire except the gold value heads above $1,900/oz. Given this differentiator, K92 Mining is much less delicate to price pressures than its friends.
Clearly, with destructive actual charges and sentiment for gold within the dumps, one may argue {that a} gold value of $1,900/ozis a really conservative assumption, and I’d agree. On this state of affairs, or the next gold value state of affairs, the inflationary pressures sector-wide are fully offset, and the margin compression we’re seeing throughout a universe of 70+ producers I monitor reverses to margin growth. That mentioned, on condition that we can not depend on the gold value, K92 Mining is a defensive method to get publicity to the steel, with the corporate not needing greater gold costs to extend earnings and money stream per share considerably. Let us take a look at the valuation:
Valuation & Technical Image
Primarily based on ~237 million absolutely diluted shares at year-end and a share value of US$5.90, K92 Mining trades at a market cap of ~$1.40 billion and an enterprise worth of ~$1.29 billion. At first look, this will look like a really steep valuation for a junior producer, particularly when different junior producers like Karora (OTCQX:KRRGF) and Victoria (OTCPK:VITFF) are buying and selling at sub $500 million market caps. That mentioned, whereas Victoria and Karora each supply progress, K92’s natural progress profile is sort of unparalleled, with the potential to triple manufacturing to 350,000 GEOs in 2026 and north of 375,000 GEOs in FY2027 (assuming two mills at full capability – ~1.75 million tonnes each year).
Given this unbelievable progress profile that may be absolutely funded with out dilution following the latest financing (new money stability: ~$120 million), K92 Mining can simply justify buying and selling at a premium to its peer group. So, with an estimated asset web asset worth of $1.96 billion and a P/NAV a number of of 1.0, K92 Mining continues to commerce at a reduction to honest worth (~$1.96 billion), with honest worth sitting nearer to US$8.30 on a fully-diluted foundation. Primarily based on K92’s means to over-deliver on guarantees thus far and significant upside to honest worth, this units the inventory as much as re-test its all-time highs earlier than year-end 2023 if the gold value can cooperate, translating to a 40% upside from present ranges.

KNTNF Day by day Chart (TC2000.com)
From a technical standpoint, K92 Mining has seen a number of key assist assessments at US$5.35. Nonetheless, whereas the latest undercut of this assist led to a brand new low, the bulls instantly recovered their fumble and drove the share value again above this pivotal degree. The truth that K92 Mining has been unable to interrupt down regardless of a violent bear market within the Gold Juniors Index (GDXJ), softening gold value, and a weak normal market means that the US$4.50-US$5.00 degree might find yourself being the ground for the inventory. So, if I have been trying to begin a brand new place within the inventory, this assist zone seems to be to be essentially the most favorable space to begin new positions.
Abstract
K92 Mining continues to execute flawlessly, and whereas H1 manufacturing is properly under the steering mid-point, the corporate should not have any problem reporting manufacturing of 120,000+ GEOs this yr, delivering into steering. The larger information is that the corporate seems to be absolutely funded for its Stage 3 Enlargement and might be able to safe its renewed mining lease forward of time (October 2024) to take any uncertainty off the desk. If we see significant progress on these developments (license renewal, progress on development of Stage 3), I anticipate to see a check of the prior all-time highs within the inventory (US$8.30).
That mentioned, whereas K92 Mining has a 40% upside to honest worth and is arguably a top-12 gold producer, I see extra relative worth in different names, with names like Karora providing considerably extra margin of security attributable to share-price underperformance. This does not imply that K92 Mining cannot carry out properly, however I favor to take a position the place I see the very best reward/threat, and Karora stays extra enticing at present ranges (not less than in my opinion). Nonetheless, if I used to be on the lookout for progress on this sector and did not thoughts proudly owning a single-asset producer, K92 Mining stays a prime concept on any pullbacks under US$5.00.