Karora Resources (TSX-V: KRR) - Gold Producer Continuing to Deliver Growth

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 seven years following his experience in the industry as a Mining Engineer with 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 is a mineral resource company that is executing its growth plan to double its expected annual gold production to approximately 200,000 ounces by 2024 compared to 2020. At the same time, the company is looking to reduce costs at its integrated Beta Hunt Gold Mine and Higginsville Gold Operations in Western Australia. The Higginsville treatment facility is a low-cost 1.6Mt per annum processing plant which is fed at capacity from Karora’s underground Beta Hunt mine and Higginsville mines. The company was founded in 2006 and is headquartered in Toronto, Canada. Hill 51 Pty Ltd, Salt Lake Mining Pty Ltd, Magneto Investments Limited Partnership, VMS Ventures Inc, and Corona Minerals Pty Ltd, are the company’s subsidiaries. It is listed on the Toronto Stock Exchange (TSX-V: KRR) and the OTC Markets (OTCQX: KRRGF).

Karora Resources is a Western Australian domiciled gold producer that has produced between 120,000oz-135,000oz in 2022. The company is looking to increase production to 200,000oz by 2024. It has 2 mills and 3 mines along with a nickel by-product that generates a substantial cash flow.

Despite the ongoing inflationary environment, the company’s operations team has carried out an excellent job. Over the course of the last 2-2.5 years, the team has been successful in bringing the costs down, delivering ounces, and delivering the growth plan that was outlined 1.5 years back. The company has achieved record numbers this quarter and it expects to continue delivering over the next year.

The current market landscape is challenging for a lot of projects, especially for un-financed developers. Karora Resources is in a fortunate position where it has 3 operating assets that are delivering profitable gold ounces to two centralised mills. Over the past 2 years, Karora Resources has been one of the rising stars in Western Australia thanks to its readiness, operational strategy, and a highly-dependable workforce. So far, the company has been successful in attracting top-tier talent to the operation. Back in 2020, no one had envisioned that the market will face high inflation. Karora Resources had already positioned itself to have long-term durability.

A New COO

Karora Resources recently hired Bevan Jones as its Chief Operating Officer. Bevan has been in the position for about 6-7 weeks in Western Australia. He brings experience from the St. Ives mine, which is located across the fence from the company’s operations. Notably, the St. Ives mine is the largest mine in Goldfield’s portfolio. Bevan is a mining operator with extensive experience in managing large, complicated operations. At the St. Ives mine next door, Bevan was responsible for increasing production by about 20%-30% while simultaneously reducing all-in costs encapsulating all capital spends by about 25%. Furthermore, he was also responsible for improving the operation’s safety record over the last 4 years.

Bevan brings a new level of efficiency along with organisational optimization and strategy to the role. He has put forward a growth plan that was announced to the market. He is also adding an additional layer of capability and strategy in order to execute the plan in the current environment.

Graeme John Sloan, Former Managing Director of Australian Operations for Karora Resources recently retired from his day-to-day operational role at the company. Graeme has done an exceptional job over the past 2 years. He continues to provide strategic input to the company and also brings with him a large network of connections. He brought an excellent team to the company. Bevan is expected to bring in even better operators to navigate the current inflationary environment.

Ongoing Operations

Karora Resources published a PEA (Preliminary Economic Assessment) on Beta Hunt’s nickel operations a couple of months back. The PEA features some phenomenal numbers with extremely low upfront capital requirements. The Beta Hunt mine provides access to both gold and nickel by way of the same infrastructure. Both deposits are located immediately adjacent to each other.

The company has also faced inflationary pressures along with retention issues. In the current environment, sourcing skilled labour can be challenging. Bevan is working on retaining employees and attracting new talent. At the same time, he is looking to ensure that the team is focused on delivering 200,000oz per year by 2024, which is in line with the company’s growth plan. Executing this growth plan is extremely challenging and the company is looking to ensure that it does not lose focus. At the same time, Bevan was able to bring in a project team that was focused on delivering the nickel PEA.

Following the PEA, the company intends to carry out about a year’s worth of minor development to ramp up the nickel tons by 2024. Over the course of the next 14 months, the company is looking to ramp up the nickel tonnage coming out of the Beta Hunt mine. In the past 2 years, the company has been carrying out nickel mining on a smaller scale, which is more labour-intensive and has a higher cost. This has enabled the company to generate $20/oz-$30/oz in nickel by-product credits.

Combining the current output with the new output from the Gamma Zone, the nickel PEA zone, the company is looking at about 2,000t nickel coming out of the second decline by 2024-2025. The company has factored in highly-conservative nickel prices at $19,000/t. It anticipates that nickel prices will continue to trend upward over the next couple of years. Material shortages will be a major factor in driving up the nickel price, especially in the case of nickel sulphide. The company expects that the 2,000t nickel will translate north of $100 in by-product credits, if not more. This will provide the company with extensive margin protection once the inflationary pressures start to ease. Karora Resources has a project-level team executing the nickel operation and a separate project-level team that is executing the gold expansion study.

The Beta Hunt Mine currently has a single decline that produces 1Mt per annum. Last month, the company was able to produce 100,000t a month out of a single decline, which comes out to 1.2Mt a year. It is also working on a second decline which is currently ahead of schedule. The second decline is expected to be completed by the first quarter of next year. The second decline will essentially double the company’s trucking capacity from the underground portion of the Beta Hunt mine to 2Mt per annum by 2023-end or early 2024.

Utilising the throughput rates, the company has demonstrated that it will be able to deliver nickel ore and gold ore out of the two declines at a 2Mt+ per annum mark. Following this, the company will work on installing additional underground equipment. Ventilation can be a limiting factor when ramping up underground mining operations. The company is looking to install a new ventilation shaft in the next phase of operations. The ventilation upgrade is expected to be completed in summer, around mid-year to the beginning of the third quarter.

Next, the company will start working on development for the additional gold stopes. At this time, the company will kick the nickel development into high gear. It is looking to spend $7M on the nickel operations in the first year. Notably, this would be one of the only projects in the world where the initial capital to bring a nickel project is $7M. By 2024-2025, the company will start ramping up the gold ounces and nickel production simultaneously.

Guidance Metrics

The project’s capital requirements were highlighted in the company’s guidance numbers that were published 1.5 years back. The company has already determined the growth capital and sustaining capital estimated for 2023. The estimate incorporates the additional development needed to bring in the extra ore blocks in the gold space.

On the nickel side of operations, the company has already published a PEA. It plans on deploying $7M in the nickel operation and carrying out development in order to mine ore blocks. It plans on working on the additional stopes for both gold and nickel, which will generate free cash flow for years to come.

In order to expand production on the existing asset, the company has carried out 3 internal studies looking into Beta Hunt’s throughput expansion. The company considered various options and ended up selecting a twin decline scenario. The second decline was selected based on the internal work, where the company used it as a basis for the 3-year guidance that was published 1.5 years ago. Notably, the Beta Hunt mine has an estimated nickel production life of 35 years.

The company is currently working on actual costs with the contractors. The input data in the PEA is based on recent metrics. The company is taking a study-based approach in order to forecast future costs. It plans on updating the input assumptions as it moves into 2023, comparing the deviations from the Q3 2020 study. At this point in time, Karora Resources is not in favour of conducting a full Feasibility Study as it will delay its ability to achieve its goals. The company has a reserve model in place, where it intends to mine the material into the reserve and move forward.

In 2020, Karora Resources bought the Spargos Gold Mine for AUD$4.5M. It has already extracted over 40,000z from the mine. The mine has paid for itself many times over and has enabled the company to generate a healthy cash flow. Interestingly, the Spargos asset is essentially a restart of a former underground mine. The company is currently evaluating the underground potential of the Spargos Gold mine internally. It has received phenomenal drill results at depth, with grades of 1oz/t over 20m. The company believes that the mine has exceptional underground potential. It is currently analyzing the mine and intends on publishing a technical report if it decides to go ahead with the operation.

In order to operate a running mine and plan a potential expansion, a company needs a tightly controlled resource model. The company has a long history of mining gold at the Beta Hunt mine, which makes it easier to predict the sheer zones. The company has added a lot of new ounces, a large part of which have been already mined. It has been working off a lot of past experience on the asset, which has paid dividends over the course of the last 2 years.

Next year, the company will have analysts carry out site tours, which hadn’t been done since covid. The mining engineers and geologists will analyze the asset along with the resource and reserve model in order to determine the amount of resource that can be converted into reserves based on past conversion rates. The analysts will also forecast the mine’s life.

The Market Landscape

Karora Resources has experienced a violent pullback in its share price, a trend that is seen across the mining space. Despite the pullback, Karora Resources is in a strong market position. It is generating cash every single quarter and has the flexibility to allocate dollars to new projects, expansion, and new studies. Over the next 2 years, the company is looking to double its gold production to 200,000oz per year. This is a massive increase in production that will be achieved by deploying additional capital into the project. The company is currently generating cash and as it starts delivering into the growth plan, it is looking to further expand the margins over time.

Mining is a tough activity as it poses technical challenges and uncertain markets. No two projects are the same. Even when the market environment is desirable, it can be tricky to execute plans. When it comes to M&A (Mergers and Acquisitions), it is important to focus on major ounce replacement in terms of replacing the reserve life. Senior gold producers are valued on the asset’s reserve life, which requires continuous replenishing. There have been a number of new discoveries since 2000 that have plummeted. People are venturing into trickier jurisdictions in order to find large deposits. It is becoming harder to find new ounces and as a result, companies end up purchasing these ounces. This is done due to the cyclical nature of the industry, where margins can contract and expand, and gold prices can move in any direction. Companies are buying ounces with expectations that the market conditions will get better at some point.

Karora Resources is operating in a highly-favourable jurisdiction. Since 2019, the company has realised the enormous scale and potential of the Beta Hunt mine. It isn’t focused on the Higginsville asset at the moment. As a junior gold producer, the company is focusing on one asset at a time, executing it before expanding its purview to other assets. The Beta Hunt mine offers tremendous potential and the company has worked hard on unlocking its value over the past 2.5 years.

There are very few single asset companies that are producing 200,000oz-250,000oz in a low-risk jurisdiction. There are only a few other companies that also have a strong by-product credit. Karora Resources is one of the few companies globally that has both. The company’s operations are based in the backyard of the largest mining jurisdiction in all of Australia.

A lot of companies have been following Karora Resources’ operations with keen interest. The company has received a lot of inbound interest over the last 2 years. Karora Resources is looking to become a 200,000oz a year company within the next 1-1.5 years. Following this, it will look into resource expansion and potential growth strategies. Despite its size and scale, Karora Resources has a combined workforce of only 600 people that includes miners, contractors, on-site personnel, and office staff. Karora Resources is small in terms of headcount but has a large company mindset in terms of the execution of development strategy.

According to the company’s Chief Geologist, the Beta Hunt mine is a multi-generational asset that will continue operating for years to come. The company is currently looking to ramp up yearly production to 200,000oz. In the future, the company will consider further increasing the production output. Mining is based on efficiency. Even small bumps in grade at these tonnages can make enormous differences to a company’s bottom line and ounce production. The company is cognizant of this fact and understands that there is still a lot of work that needs to be done.

To find out more, go to the Karora Resources website