Karora Resources (KRR) - Smart Return on Capital Invested

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 Paul Huet, Chairman, and CEO, and Oliver Turner, Executive Vice President, Corporate Development, Karora Resources.

Paul Huet is the Chairman and CEO of Karora Resources. He previously served as the President, CEO, and Director at Klondex Mines. Paul also serves as a Director at 1911 Gold. He has extensive experience in the capital markets, along with engineering and operations in mining. His educational credentials include a Mining Engineering Technology program at Haileybury School of Miners, Ontario, where he graduated with Honors. He also completed the Stanford Executive program at the Stanford School of business. He is currently a member of OACETT as an applied Science Technologist and an Accredited Director.

Oliver Turner 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 gold producer based in Western Australia. The company had an amazing second quarter where it delivered just under 30,700oz. The Q2 output is the highest it’s ever been since the acquisition of the Higginsville mill.

Notably, the Higginsville mill was acquired in June 2019. The company recently completed its second year since the mill’s expansion and it continues to break production records each quarter.

Operational Challenges

Karora Resource’s team had to overcome significant challenges to continue operating through the covid restrictions. In Q1 2022, there were significant obstacles as a result of the ongoing pandemic that continued into Q2. In April, the company had only 50% of the Jake Lake miner workforce available. This shortage lasted for 6 weeks.

The company has placed a lot of processes in place to secure employees and ensure their safety. The company is cognizant that covid is here to stay and the world needs to learn and live with it. The world needs to learn to live with covid. It is looking to ensure that the pandemic-related restrictions don’t have a tremendous impact on the costs and productivity rates.

Production Metrics

Karora Resources was producing about 30,000t/month from the Beta Hunt mine 4 years ago. This was achieved through a single decline. The company is currently in the process of putting in a second decline which is ahead of schedule. The second decline is expected to be installed by Q1, 2023. It was able to achieve 80,000t/month out of the single decline, an exceptional feat. Furthermore, the company was able to sustain the increased production for 9 consecutive months between 2021 and early 2022. In the past 2 months, the company has achieved a production capacity of 100,000t per month. This comes out to 1.2Mt ore from the decline that was originally producing 360,000t annually.

The company is looking to scale up the Beta Hunt Mine’s annual capacity to 2Mt. It has already been proven that an 80,000t-100,000t production range can be achieved using a single decline. It is important to note that the production capacity can fluctuate based on the material grades. Working with 2 declines, the company can easily achieve the 2Mt annual target, since the average grades are highly consistent.

The company finished the acquisition of the Lakewood Mill 2 weeks back. This acquisition has enabled the company to accelerate ongoing processes. The company had set an objective to increase the mill throughput at Higginsville by Q4,2023. It was able to achieve this goal a year in advance while simultaneously raising capital. The capital was raised through a bought deal which was oversubscribed. The capital raise helped Karora Resources in mitigating the biggest risk for its asset.

The company has an organic growth plan within a great jurisdiction. The project largely had 2 major risks, one of them being the milling and mining. It successfully demonstrated that the desired production capacity can be achieved through milling operations. The company is confident that it can achieve a 2Mt annual production capacity through the second decline.

The second project risk was mill expansion. The current inflationary environment has led to increased capital costs and extensive labour shortages across Western Australia. Notably, the original expansion costs were estimated within the US$60M-$70M range. The current inflationary environment has caused dramatic increases, leading the estimated costs to reach the $100M mark. The company anticipates that the costs continue to grow and could possibly be much higher. Potential delays can also cause a further increase in costs. The company accelerated the expansion by a full year and mitigated the cost inflation and possible delays. This led to significant de-risking for the company.

An expansion was always on the cards, but the company was looking to find the ideal mill. The company had 3 mills under consideration and ended up choosing the Lakewood mill, which was the best of the bunch. Q2, 2022 has been an explosive quarter for the company. Within these 3 months, it successfully broke production and processing records. It closed the Lakewood Mill deal and attained financing through a bought deal while simultaneously reducing its AISC (All-in Sustaining Costs) quarter-over-quarter by 15%, bringing it to $200/oz.

In Q1, 2022, the company was able to reduce the $1,398 AISC to $1,190. The company is set for a highly successful 2022. It is looking to continue its focus and deliver exceptional results throughout 2022.

The Beta Hunt Mine

A few weeks back, the company published the results of its first nickel PEA (Preliminary Economic Assessment). The PEA makes the company stand out among its competition. It is based on the first resource that was published in January. This 20,000t resource has 3% nickel content in the M&I (Measured and Indicated) category. Based on the resource development and PEA, the asset currently has an 8-year mine life. The investors need to focus on the first 3-4 years because the company intends to extend the mine life and backfill it in the later years of operation.

A nickel PEA provides downside protection. While the company continues to be bullish on gold, if gold observes a downturn, nickel will serve as a backup. From a macro perspective, there isn’t any investor in the world that is bearish on EV demand over the next several years. The Beta Hunt mine is located next door to one of the largest miners in the world, a newly restarted nickel facility by BHP. Notably, BHP had signed an off-take agreement with Tesla. The former was in search of high-grade green nickel.

Karora Resources seeks to produce close to 4,000t/year of nickel in the future. Currently, the company is producing about 450t-550t nickel per year from the remnant mining areas. The company seeks to achieve the 4,000t yearly nickel target by mining brand-new, virgin areas. The current infrastructure at the Beta Hunt enables the company to mine both nickel and gold. As a result, capital costs associated with the operation are significantly lower. The high-return nickel projects add a new dimension to the Beta Hunt operation. It will provide higher margins, while simultaneously bringing down the per-ounce costs.

The company’s recent press release takes the best case scenario, where a $19,500/t nickel price is taken as a base case. Notably, the current nickel spot price is $23,000/t.

The company is also expected to make an additional $80-$100/oz in by-product credits. The initial mine life years are accurate and the company is looking to extend the zones in the future through backfilling. Karora Resources is looking forward to moving to the next level of the study in order to advance the project.

The Market Landscape

Both mining companies and mining equities continue to deliver at an operational level. While the revenue continues to grow, a lot of gold companies aren’t satisfied with the current market pricing. According to the company, the cost side of the equation has been squeezed for the entire sector. It is important to note that each sector has succumbed to global inflationary pressures.

Karora Resources remains committed to delivering a sustainable profit-generating business at the operational level. A year back, the company was trading at a similar share price. Later in the year, the shares were trading north of $7.50c. During this time period, the management team helped the investors and shareholders make a lot of money.

Last year, the company had the best performing gold stock in the world over the trailing 12 months. The stock was trading at a premium and was well-valued. During this time, it was the first gold stock to be liquidated by shareholders and senior fund managers. The company was valued for a considerable amount of its growth profile. The change in the macro situation was a boon for the stock, which has since observed a strong retrace.

Based on the evaluation by fundamental analysts, the company’s relative valuation basis compared to the group is about 0.4 times the NAV (Net Asset Value). The company traded well ahead of the group and is now retracing to be in line with the average group.

In order to move forward, the company is looking to ensure that it can deliver operationally and communicate the development to the market. This is important because the markets are known to change fairly quickly. The company is looking to publish regular news flow from a quantitative perspective in order to keep the fund managers and retail shareholders up-to-date on the available opportunities. This will enable the inflow of funds back into the sector. The company is looking to become the first port of call for the capital.

Karora Resources is in a significantly stronger position than it was a year ago. While the share price valuation basis is lower, the share price has returned to its previous level. Investors looking to gain exposure to gold should pay attention to a company’s fundamentals.

It is focused on finding additional gold in order to replenish the depleting reserves. It has plans to invest continuously in order to find more gold and prioritise its project. This investment is expected to continue several years down the road.

Mines aren’t easy to expand. Finding new, economic gold ounces is even harder. Even from a share price perspective, companies need to continuously reinvest in the business. A company’s valuation is based on its future production profile, which is then discounted back to the current day. While the ongoing operations account for a part of the value, the future margins and potential increases in the net asset value of the company are also a part of the evaluation. As a company builds its future profile, adding ounces and building out the mine life helps increase the NAV.

Karora Resources has offered cash returns to its shareholders in some areas. It has an active NCIB (Normal Course Issuer Bid), which is issued during non-blackout periods. The only case when the NCIB is executed is at a time when the stock is trading at a level where a dollar spent here has a higher return than a dollar spent on fundamental projects.

The company made fantastic use of proceeds through the Lakewood Mill acquisition. The nickel PEA is expected to cost about $7M in the first year of investment. Karora Resources’ nickel asset is the only project on the planet with a $15M capital outlay. It will enable the mine to get closer to 10,000t nickel. This still holds true even if the entire capital costs over the 8-year mine life are taken into consideration. The nickel investment will enable the company to enhance its margins by generating additional cash flow. The additional cash on the balance sheet will enhance the company’s future options. The company is also deciding on potential dividends or stronger buybacks down the road. Currently, it is focused on building out the business.

The Nickel Market

It is expected that the demand for nickel and lithium will grow alongside the EV (Electric Vehicle) market. Karora Resources is in a unique position where it has both gold and nickel as a by-product credit. The Beta Hunt was operated as a nickel mine for 40 years. The entire cost of the operation was paid for by nickel. The company is now focused on ramping up nickel production. It has plans to expand the nickel resource by targeting the remnant areas. According to the company, expanding nickel operations to new areas can lead to increased productivity and an increase in material grades. Bulk purchases can serve as an advantage for the company despite the inflationary environment. As it has 2 mills currently in operation, the company can buy commodities such as bolting supplies in bulk. This aspect alone can be a huge differentiator when it comes to cost reductions. At the same time, the company is benefiting from the current metal prices.

In 2022, the company has planned resource replenishment along with reinvestments into the asset. The second decline is being funded through reinvestment and is expected to cost between $50M-$60M. The infrastructure is expected to depreciate over the next 20 years. Once this happens, the company would need to install a new ramp along with a completely new ventilation system. These renovations are expected to last for over 20 years. In 2022, the company is looking to put money towards the ramp. Following the acquisition of the Lakewood Mill, the company has a strong focus on mill expansion. According to the company, there are some tremendous synergies between gold and nickel. Any infrastructure built by the company will provide access to both commodities.

Cash Position

Karora Resources’ original debt was at a 10% interest rate. The company was able to restructure the debt to 4.5%. Additionally, the company also set up a line of credit. According to the company’ the best time to raise capital is when it isn’t required. Essentially, the company successfully halved its debt and put a credit facility in place in case of an opportunity. Having a cash reserve enables the company to explore new opportunities that can potentially provide a strong ROI (Return on Investment). It is currently in a strong cash position, and it is looking to continue building cash throughout the remainder of the year.

Following the Lakewood Mill acquisition and the capital raise, the company is now ready to spend money on the ramp. The original plans were to spend $60M on the Lakewood Mill, however, the amount came out to be much lower than anticipated. In late 2022 or early 2023, the company is also looking to spend between $3M-$5M on tailings work.

The company is currently evaluating whether it’s better to spend on the NCIB or the tailings. It is actively seeking an opportunity in the current market environment. The company is focusing on business decisions that are accretive for its shareholders. It is looking to continue the organic growth plan that was first put in place back in June 2021. The plan is going as per the schedule. It anticipates that the share price will self-correct in due time. The company intends to continue delivering at the right costs and expects to be rewarded as it has been in the past.

Karora Resources has seen support from institutions. As these institutions have made money in the past, they are now coming back to the story. The company recently had meetings with 2 institutions that are looking to come back into the story. It is also in regular discussions with big investors that continue to support its stock.

Quantitative analysis is currently one of the company's biggest challenges. When it comes to momentum in index trading, the inflow and outflow of capital are based on quantitative indicators. It has taken the company between 2-3 years to build a shareholder base. The company has built up its shareholder base over a 2-3 year period. One of the company’s top-5 shareholders participated in the recent financing. It is a $1.5Bn mining fund. The company has a call scheduled with the institution later in the week for further discussions. The said institution is looking forward to the nickel PEA.

There are 2 major ways to increase ROIC (Return On Invested Capital), either increase the operating profit or reduce the equity investment in the lower half. The nickel project is a high-ROIC asset.  In order to generate free cash flow, the nickel project requires an $18.7M investment over the life of the asset. According to base case assumptions, the nickel operation is expected to generate about $20M annually in cash flow.

A 20% increase in nickel’s market price can potentially increase the value of the project by over 60%. This results in an exceptional 230% IRR, making it a very-high return project. In the previous month, Karora Resources had the highest cash balance amongst active money managers worldwide since 2001. As per the company, there is a lot of cash sitting in the mining sector waiting to be deployed. Some of the capital has started to come back in. One such example is Comex, which observed a downward trend since the beginning of 2021, but has now started trending positively once again. This demonstrates that the capital has started flowing back into the mining domain.

Karora Resources is looking to develop a stable shareholder base. The company seeks to regain its $7.5 share price. This can be achieved through the continuous building of business, which in turn, will help achieve the appropriate market evaluation.

Targets 2022 and Beyond

Karora Resources is in a very strong position to end 2022. It was successful in tightening the guidance from 110,000oz-135,000oz to 122,000oz to 135,000oz. The company is confident that it will be able to achieve the guidance numbers in the second half of 2022. In the first half of the year, the company had a per-ounce cost of around $1,200. In the second half, the company is looking at $1,100/oz- $1,200/oz or lower costs. The guidance numbers were published 2 days back and the company is looking to perform much better in order to achieve its goals.

To find out more, go to the Karora Resources website