Karora Resources (KRR) - BlackRock Increase Their Investment

Karora Resources Inc. (formerly known as Royal Nickel Corporation or RNC Minerals) is a multi-asset mineral resource company focused primarily on the acquisition, exploration, evaluation, and development of precious metal properties. The company's vision is to become the next sustainable high-quality, mid-tier producer. 

Matt Gordon caught up with Oliver Turner, Executive Vice President, Corporate Development, Karora Resources. Oliver has over 10 years of experience in the mining industry. He previously served as the Senior Vice President of Precious Metals Equity Research at GMP Securities for 7 years. He also worked as a Mining Engineer for Wardrop Engineering. His educational credentials include a Bachelor of Science degree in Mining Engineering from Queen's University. He is also a CFA charterholder. 

Company Overview

Karora Resources was founded in 2006 and is headquartered in Toronto, Canada. The company is listed on the Toronto Stock Exchange (TSX-V: KRR) and the OTC markets (OTCQX: KRRGF). Salt Lake Mining Pty Ltd., Hill 51 Pty Ltd., VMS Ventures Inc., and Magneto Investments Limited are the company's subsidiaries. The company's major assets include the wholly-owned Beta Hunt Mine and Higginsville Mine in Western Australia. 

Karora Resources is a producer focused on Western Australia. The company has 3 assets, Beta Hunt, Higginsville, and Spargos, that feed a centralised mill. The company produced 120,000oz gold in 2022. The production metrics are the midpoint of the company’s guidance numbers. It has plans to increase production to 200,000oz/year by 2024. 

Consolidated Gold Production Guidance

Karora Resources recalibrated its gold production guidance for the year 2022 while retaining the existing metrics for the years 2023 and 2024. It has plans to ramp up gold production to 200,000oz/year by 2024. In 2022, the company widened the range of its produced ounces. The top end was decreased by 5,000oz, a move that directly reflects the current state of affairs in Australia. Notably, the ongoing supply chain restrictions have had an adverse impact on the mining industry across various jurisdictions.

Last year, the company talked extensively about the ongoing supply chain issues. It successfully delivered on its 2021 guidance numbers. In 2022, the company reiterated its guidance numbers after discussions with the top vendors on cost escalations. The company is also dependent on the labour market to achieve its production goals, an ongoing issue that has affected the industry as a whole. 

Cost Escalations and Mounting Pressures

Based on Karora Resources’ discussions with its top vendors, the company realised that the input costs are likely to increase by 7%-15%. As a result, the costs were recalibrated by about 12%. Interestingly, almost all of the company’s peers that are based in Western Australia have recalibrated their guidance metrics. This year, the companies are facing increasing cost pressures. 

The labour market situation has led to challenges in ongoing operations. These challenges are largely a result of longer assay turnaround times, recruitment difficulties for top-tier talent, and ongoing covid restrictions. The company increased its cost expectations while staying within the original guidance range. As a result, the company’s guidance midpoint did not shift by a significant margin. This move allowed the company to capture the ongoing capital pressures as it operates in a challenging cost environment. 

A few days after the revised guidance was announced, the Governor of Western Australia opened up the borders. As of March 3rd, 2022, people can enter and exit Western Australia interstate without needing a mandatory hotel quarantine. This announcement had a positive impact on the operations as 40% of the workforce that is involved in the Western Australian mining industry comes from either other parts of Australia or outside the country. 

Notably, the covid border restrictions had stopped the labour movement from outside for a period of 627 days. As the travel restrictions have now ended, the labour force can come back and continue working. For mining companies, this announcement has had tremendous inflation on salaries and input cost pressures. Karora Resources anticipates that there’s going to be a 3-6 month lag before the cost pressures start easing up. 

Amidst the challenges, the company published its 2022 nickel production guidance. Notably, this was the first time that the company has stated the nickel guidance under Karora Resources. The company has a history of nickel production under its former name, Royal Nickel Corporation. 

AISC Metrics

Based on the revised production guidance, Karora Resources’ new AISC (All-in Sustaining Costs) ranges between $950/oz-$1,050/oz, while the midpoint of the guidance is around the $1,000/oz mark. Given the recent price acceleration in nickel, the company anticipates a potential movement in the AISC numbers. The company has put forward a very conservative price of $1,600/t nickel that is based on the new nickel prices. This comes out to about $60/oz for the midpoint of the company’s guidance for 2022. Moving into the low 20s, the price increases by $40/oz. At this point, the midpoint guidance stays near the $1,000/oz mark. The company expects a reduction in the cost pressures over the course of this year, making it possible to achieve a sub-$1,000 AISC. 

Cash Position

 Karora Resources exited 2021 with $91M on the balance sheet. The company is looking to publish the complete 2021 financials next week. 2022 is slated to be a year of development, construction, and expansion for the company. This also means that 2022 will be the year of cash consumption. 

The company is currently working on the second decline and has started implementing it from both the underground and the surface. Notably, the underground area work commenced a month and a half back. In mid-February, the company also initiated the surface construction work. The plan is to work on both the underground and surface areas and meet in the middle. The company set an AUD$45 budget for the second decline. The operations are currently running slightly ahead of schedule and are well within the allocated budget. 

On the milling side of operations, the company is working on expanding the capacity from 1.6Mt to 2.5Mt. This will allow the company to work towards the 200,000/oz yearly production target for 2024. The project’s advanced engineering is also nearing completion. The company is almost at the point of ordering long lead-time items. It is currently on track with the milling operations, which has a budget allocation of $AUD50M.

Over the course of 2022, the company plans on running natural pit sequencing and benching at some of the earlier stages of the Spargos Reward Project. The production here is expected to be back-end weighted. It plans on attaining higher grades by the end of this year. As per the company, there will be a major difference between the first two and last two quarters of 2022. The work is tracking really well and the company is very comfortable with its guidance metrics. 

Being a highly cash-generative producer, the company has allocated a $AUD20M budget for exploration. It is important to note that the company is open to budget expansion based on success. Aggressive drill operations are underway and the company plans to continue the ongoing news flow. 

By the end of Q1 2022, the company will have a gold resource update, with a major focus on the Beta Hunt mine. Notably, the Larkin Zone will have its first resource published this year. By mid-2022 or the end of Q2, the company will also publish an update on its nickel resource. This resource update will include the first estimates from the 50C, 10C, and 30C zones. The company is looking to publish 2 major updates this year, establishing the foundation for the future as it focuses on increasing production. 

Ever since the new management team took over Karora Resources, the company has focused on making the most of the positive cycles while preparing for the worst. Over the past 2 years, the company has built a strong balance sheet and currently has $90M in cash flow. It is looking to utilise the capital towards a growth plan, which will add significant shareholder value. 

Karora Resources is pleased with the current gold and nickel prices. However, as a business, the company has plans to tackle the challenges in case there’s a drastic price change next year. 

The company is focused on strengthening and bolstering its balance sheet during positive runs as the cost of capital on debt and equity is lower. This helps prepare for the future ahead by building a rock-solid foundation. Global financing situations may change over the next few years, hence it is important to eliminate any potential pitfalls that might lie ahead. 

Karora Resources is in active discussions with various parties for debt refinancing. The recent global events have shifted the credit market. The company is looking to approach the lenders in order to renegotiate a better rate based on its growth plan. This would lead to a lowered cost of capital on the debt side. The company is looking for ideal ways to leverage the existing cash flow. It seeks to conserve the cash and deploy it into opportunities that offer stronger returns on investment. 

Resource Reserves

Karora Resources has been increasing its resource reserves. Based on the deposit’s geology, the company’s focus is on the repeatability of the shear zones at Beta Hunt. 

The Larkin Zone was discovered by the company in September 2021. Over the course of the last 1.5 years, the company has made significant additions to the existing resource. The company has drilled off over 1km in strike length along with 150m of vertical extent. It would take the company 2 years to achieve similar numbers for the underground mine, with development cost estimates ranging in tens of millions of dollars. 

As the development was in place, the company was able to conduct systematic drilling, which ultimately led to a resource. Based on past success, the company expects to find additional gold ounces here. In fact, it anticipates that the additional gold ounces will be more than the existing resource. These gold ounces will be added to the resource model, which, in turn, will help drive company valuation. 

As an underground operation, the company plans on maintaining a rolling reserve life. The company seeks to replace the ounces each year in a systematic manner. This strategy will lead to an increase in ounces despite the depletion. 

Risk Assessment

When the Higginsville mill was purchased, Karora Resources was in a different financial situation. Back then, the company had $1M cash on the balance sheet and $8M in working capital. At the time, Cortland Credit was the company’s acquisition debt provider. This facility came with a few covenants and light security. In essence, it provided the company with a “loan to own” facility. Back then, the debt came with some hedging requirements as the gold pricing environment was starkly different. The company was looking to refurbish a mill that hadn’t been in operation for quite some time. 

The company has retained this facility with Cortland Credit and is currently planning a refinancing. The jump in gold prices along with the cash profile makes it an ideal environment for the company for debt refinancing while carrying a potential standby facility as a backup. The company is looking to be fully leveraged to the gold price instead of hedging with gold. It is highly secure with its current position and growth plan. 

Listing Considerations

Over the past 2 years, the company has considered a listing on the ASX (Australian Stock Exchange) multiple times. In the case of a compliance listing, there are 2 major windows that the company is looking to hit. However, in this scenario, it would have no liquidity as all the real trading would migrate over to the TSX, the parent exchange. In the second scenario, the company would generate actual liquidity on the ASX by way of a capital raise on the exchange. 

The company wanted to ensure that it had additional uses for the capital that would potentially be raised. It has taken the ASX listing into consideration for quite some time. However, the company realised that it was well-capitalised for the growth plan.  The company will consider an ASX listing in case the company decides to invest in other projects that offer high return thresholds. It plans to approach the market with a suggestion to bring value that would enhance present returns. 

Nickel Operations 

Karora Resources has hit tremendous grades at its nickel asset. The company is expecting significant by-product credit in nickel. This week, the nickel pricing hit $100,000/per ton, a 66% jump that set a new benchmark. The company plans to leverage this price appreciation with its Beta Hunt asset. 

The company recently published a press release that focused on expanding the 50C zone. It has identified high grades and good intervals in the area. The project is currently under review for acceleration. The company has plans to allocate as many people as possible within the 50C zone. Here, the company is focusing on nickel, specifically at the south of Gamma Island Fault within the 50C zone. This zone is called the Gamma Block, which is highly profitable. In fact, this is the most interesting economic block in the entire operation for both gold and nickel. 

The company drilled a 40g intercept just below the 50C area which led to the discovery of high-grade gold. Similar to other regions within Beta Hunt, the company found that nickel was sitting on top of gold. Being a gold-focused company, it has plans to extract the gold once the findings are proven. 

On the nickel side of the equation, the company has extended the 50C zone to a 200m strike length and 120m width, making it a very wide zone. The company anticipates that this area has significant tonnage. Between the Gamma Island Fault and the property boundary is a 2.6km area, which could potentially feature a major fault line. Meanwhile, at Beta Hunt, the company has 2 major faults, the Alpha Island fault, and the Gamma Island fault. Both of these are fault offsets that truncate the zone and continue on the other side. Based on the indications, the company anticipates that there might be a fault present within the 2.6km area. However, this area is currently unexplored. There is a historical nickel drill hole 1km away from where 9.5g of 11% nickel was found. This area was expected to feature a continuation of the trough, which was later confirmed. Karora Resources has plans to conduct aggressive drill operations in this area. However, it is currently limited by the available ventilation. This inhibits the company from deploying a major mechanised jumbo down below. The company plans to improve the area’s ventilation, similar to the Larkin area, and then accelerate the drill operations over the course of 2022. 

The company has put forward its 2022 guidance numbers, however, it believes that 2023 could be a different story. It is looking to understand the scope and scale of nickel presence in the area by the end of the second quarter. Following this, it will work on developing a mining plan going forward. Later this year, the company seeks to provide 2023 guidance numbers on nickel. Based on the current numbers, the company anticipates that the next year’s guidance numbers will be a step up. This would serve as a strong economic driver for the company in both gold and nickel. 

Budget Allocation

Karora Resources has plans to allocate a big portion of the budget to Beta Hunt. It has set aside $20M to spend across its properties. The company is also carrying out aggressive drilling in the Higginsville area, a small property towards the south. For the past 1.5 years, this area was believed to have the second-largest coverage in the Kalgoorlie Belt. It was recently confirmed that this is the largest property on the Belt.

The company is also looking to spend several millions of dollars on the 50C zone. This area currently has 1 drill rig employed. Based on drilling success, the company will allocate additional resources. It needs more drills for other parts of the property. It continues to expand the resource base at the Larkin zone, the A zone, and the Western Flanks. The success will determine the acceleration of the drill program. 

Targets 2022 and Beyond

Karora Resource is looking to publish a resource update on gold by the end of this quarter. The nickel resource update on the 50C, 10C, and 30C zones is planned for mid-2021. The nickel update will form the basis for the company’s mine plan and 2023 guidance metrics which are set to be released either by the end of 2022 or early 2023. The updated guidance is anticipated to be a significant step up from the current year. 

Sustainability Efforts

Karora Resources started working towards net zero emissions in 2021. The first announcement was made in mid-2021, however, the company was already working on it for a year prior. The company noticed that the market was seeing an increase in capital flows towards ESG (Environmental, Social, and Governance) and ESG-focused investments. The company announced its partnership with Invert Inc. (formerly known as the Net Zero Company) in mid-2021, grabbing the attention of the investment community and corporates. 

In fall 2021, the company announced carbon neutrality through investment in an Australian forestation and conservation project. This development was important for the company since the project was based on local land. The indigenous land employed the local community. This enabled the company to have a positive impact on the 2019 bushfires recovery in Western Australia. 

Karora Resources is actively working with Invert on a long-term emissions reduction plan. This plan will evaluate a complete suite of technical changes and decisions that will be incorporated into future capital allocation decisions. The company is also rethinking its power options, moving from diesel gen-sets to more sustainable alternatives for its Higginsville asset. The company is looking to employ biodiesel fuels for the additional fleet needed for the Beta Hunt expansion. The long-term reduction plan is focused on carbon neutrality through sequestration investment to ultimately reach net-zero emissions. 

The Net Zero Asset Managers Alliance is a group of the world’s largest capital controllers that are focused on investing in sustainable projects. As of December 2020, the fund was valued at $9Tr. As of 2022, this fund stands at $57.5Tr. This means that more than half of the world’s actively managed funds are now mandating environmentally-conscious projects. Investco, Fidelity Investments, and Black Rock are some notable funds that have invested in this space. Interestingly, Black Rock has been buying more Karora Resources shares than previously owned. This is because the latter has shown initiative in both carbon reduction and in the ESG space. 

Although the company is still working on a defined plan, it is looking to publish an inaugural ESG report by the end of Q1 2022. This document will aid the company in sourcing additional investments from major institutions. Notably, one such large US institution, a $2.5Bn mining fund has been a leading investor in the company in the previous fall, and into 2022. This investment caused meaningful purchases of Karora’s shares, and as a result, a lot of liquidity was soaked up in the low $4 range, leading to an increase in the company’s share price. 

Working towards a sustainable operation is also important for attracting new investors. Interestingly, a lot of the solutions here are cost positive. There are plenty of decisions that can be implemented on the sustainability front that have a positive ROI (Return-on-Investment). For instance, electric vehicles have now become far superior and efficient to their diesel counterparts as they have a lower per kWh (kilowatt-hour) charge. Karora Resources is working closely with Invert Inc to implement these changes. This initiative is important for the company as a private business. It has also translated into additional buying and an increased share price. 

According to Karora Resources, every company should consider building the price of carbon into business planning. Given the increase in carbon-based taxes across jurisdictions, inaction on this front will likely cost companies more in the long run. Given the current business environment, it is paramount for companies to secure a future cost of carbon and reduce emissions to pave way for smart future planning.

The investment landscape has drastically changed in recent times. Fund managers and companies such as GMP Securities now need companies to meet certain ESG-related criteria in order to invest in scale and in size. Companies such as Black Rock have substantially increased their position in this space.

To find out more, go to the Karora Resources website