K92 Mining Inc.

K92 Mining Inc. (TSX: KNT) is engaged in the production of gold, copper and silver and operates in the Kora deposit at the Kainantu Gold Mine, which is located in the Eastern Highlands province of Papua New Guinea. The group also conducts exploration and development of mineral deposits in the immediate vicinity of the mine.

Key Highlights:

• 25% increase in annual throughput: Recently, the company confirmed its Stage 2A expansion, wherein the company would increase annual throughput roughly by 25% to 500,000 tonnes per annum (tpa) from the current 400,000 tpa. The above expansion plan was supported by strong exploration and development results from the Judd Vein System, which represents a new mining front, and is expected to boost the overall operational flexibility and mining efficiencies, resulting in minimizing costs. Capital involved for the above expansion is nearly USD 2.5 million, and full commissioning is likely to be in Q3FY22.
• Debt-free balance sheet: The company has prudent capital management and operates through its cash from operations and has negligible borrowings. Moreover, the company has constantly lowered its total debt in recent quarters, which is a key positive considering the capital-intensive sector in which it operates. Notably, at the end of Q2FY21, the group reported its total debt of only USD 2 million, significantly lower than CAD 10 million in Q2FY20.
• Impressive drilling result: The company conducted drilling activities for diamonds across its Kainantu gold mine, located in Papua New Guinea. The results indicate a possibility of high-grade and continuity of Kora, with intersections largely concentrated on increasing drill density up-dip, down-dip, to the south and near surface to upgrade resources for the Stage 3 Expansion Feasibility Study. 

Q2FY21 Financial Highlights:

• KNT announces its quarterly results, wherein the company posted its revenue of USD 35.518 million, as compared to USD 47.857 million in pcp. The decrease was primarily attributable to lower gold sales of 18.939 oz, as compared to 27.149 oz in pcp.
• Earnings from operations stood at USD 9.237 million, down from USD 26.291 million in the previous corresponding period (pcp). The company reported a surge in general & administrative costs, higher exploration and evaluation expenditures and higher share-based payments.
• The company reported its bottom-line at USD 4.403 million, as compared to USD 16.905 million in pcp. The decline was primarily attributable to a lower income from operations, partially offset by lower interest and finance expenses.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s operations are directly correlated with the international gold prices, and volatility in the commodity prices would likely to impact the company’s overall performance.

Valuation Methodology (Illustrative): Price to Cash flow 

Stock Recommendation:

On a sequential basis, the company reported improved operating profit margin and net margin, which indicates a revival in the cost center along with operational efficiency. Notably, operating margin and net margin stood at 26% and 12.4%, respectively in Q2FY21, significantly higher than 9.6% and 7.4%, respectively, in Q1FY21. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Karora Resources Inc, B2Gold Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 6.69 on October 12, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on October 12, 2021). Source: REFINITIV, Analysis by Kalkine Group 

*The reference data in this report has been partly sourced from REFINITIV.

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