K92 Mining Inc.

Thank you for standing by. This is the conference operator. Welcome to the 2023 first quarter financial results conference call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to David Metalik, President. Please go ahead.

Thank you, operator, and thanks, everyone, for attending K92 Mining's first quarter 2023 results conference call. We hope you and your families are doing well. In addition to myself, we have on the line John Lewins, Chief Executive Officer and Director, and Justin Blanchett, Chief Financial Officer. I would also like to remind everyone that after the remarks from management, the call will be followed by a Q&A session. As we will be making forward-looking statements during the call, please refer to the cautionary notes and risk disclosure in our MD&A and slide 2 of the webcast presentation. Also, please bear in mind that all dollar amounts mentioned in the conference call are in United States dollars unless otherwise noted. Now, I'll turn over to John to provide you with an overview.

Well, thank you, David, and welcome, everyone. So, during the first quarter, the operation continued to progress on multiple fronts, performing strongly in all areas other than greater. And that was due to some unexpected short-term challenges, which will go into this presentation. So I was in Papua New Guinea late last month. The operation is certainly on top of those challenges, and the mine has performed well since mid-April. There is a major focus on increasing our operational flexibility on multiple fronts, and this is obviously something that will continue. I think it's important to highlight that we've got a strong mining track record, having successfully mined core of five years. and Judd for almost three years, while at the same time successfully expanding our whole operation during this time, increasing throughput by 250% in a pandemic environment. There are multiple positives from Q1 and we'll continue to build off those. Process plant performance has been very strong, exceeding our expectations and continuing to set throughput records. which has been a major focus, delivered another consecutive quarterly development advance record. And then finally, K92 achieved multiple growth catalysts and milestones during the quarter, including strong exploration results on Cora, Cora South, Chad South, and also commencing exploration drilling for the first time ever on the A1 copper-gold porphyry target, which we see very much as our number one target. So on the safety front, we recorded no lost time injuries during the first quarter. And as the chart shows, since commercial production commenced in 2018, K92 has operated with a lost time injury frequency rate well below industry average. However, as previously reported subsequent to the end of the quarter, with some profound sadness, we had to report that on May the 2nd, two individuals were fatally injured during a vehicular accident. Now, the accident occurred offsite, so it wasn't on the mining lease area. In fact, it was on a remote country road, some distance from the mine. So mining operations were not impacted. I would like to say on behalf of K92 Mining to the family, the friends, the co-workers of our two colleagues, we offer our sincerest condolences and heartfelt prayers during this time. Safety has been, always will be, a major focus for K92. On the ESG front, I'd like to begin with providing very positive progress update on our tax credit scheme. So after multiple meetings last year, the committee has now been formed and the endorsement of the first round of projects is planned in the near term. So for clarity, tax credit scheme allows for 2% of K92's accessible taxable income to be allocated to eligible projects, primarily focused on infrastructure. and then we get a commensurate tax credit granted. So the program effectively partners with government to deliver even more projects and benefits to communities. And multiple priority targets have been identified. Importantly, the tax credit scheme is in addition to our existing community programs. Now, while in Papua New Guinea in late April, we had the pleasure of hosting the Board of Directors of K92 for a site visit to our operations, plus meetings in Port Moresby with a wide range of stakeholders, including representatives of the government, Papua New Guinea Chamber of Mines and Petroleum, suppliers, service providers, industry, academia, and, of course, the media. The picture here shows our chair, Angie Ardini, with this year's recipients of our K92 Mining Tertiary Scholarship Program, plus two recipients from a scholarship from our JV partner, Pagini. Now, each K92 scholarship recipient receives a medal, which honors a senior Papua New Guinean leader within K92. The program itself is an annual program. and it's to third year students in the study of mining, metallurgy, geology. This year we added women in mining. Scholar recipients also, when they complete their fourth year, they then join the mine and go into our two-year graduate training program. I'd also like to announce that this coming year we will be adding a further scholarship, which will be a postgraduate scholarship, which will be the Tukey Angus Memorial Scholarship in honour of having dinner with the Prime Minister of Papua New Guinea, the Honourable James Murapi, the Governor of Eastern Highlands Province, the Honourable Simon Sear, and Member of Parliament for Penantu District, the Honourable William Hagahuno. And of course, the support of government continues to be a major factor in our success. Now, moving to operational performance during the quarter, we produced 21,488 ounces of gold equivalent. with 117,903 tons processed at a head rate of 6.35 grams per ton, gold equivalent. Now that compares with Q1 2022, all process increased 18%. Cash costs $758 per ounce, and all in sustaining costs $1,506 per ounce. Production during the quarter, as we've alluded to, was impacted by two short-term issues, which gave us eight days of unplanned plant maintenance, and then the challenging ground conditions localized area at Cora, which I will discuss in some detail later in the presentation. In terms of the key operational quarterly physicals, Kenantu delivered near-record wartime process and mine, plus record development. which we see is particularly strong when you consider the short-term challenges it faced during the quarter. As noted in previous conference calls, increasing our development rate continues to remain a major focus as we catch up on the development that was impacted due to COVID and, of course, subsequent to COVID supply chain issues. Therefore, I'm really pleased with the development rates that we've achieved in the past two quarters with the arrival of another jumbo during the last quarter. And then we have a further jumbo to mid-year and another one by the end of 2024. So we'll be looking to build on these two quarters and continue to expand and increase our development rates. Now, in addition to the strong development advance rates, a major positive in the first quarter has been the performance of the plant. In March, we set a new monthly record, averaging 1,490 tonnes per day. That's 9% above the Stage 2A expansion rate. The plant also set four new daily records during the quarter, as shown on the chart here, with the current record now standing at 1,815 tonnes processed in a single day. So Stage 2A expansion is currently undergoing its final commissioning, and we see the potential for a further throughput upside with this. As previously reported during the first quarter, unexpected operational challenges occurred in both the process plant and the mine. At the mine, notably more challenging ground conditions than expected were encountered in the localized area in late February, and that impacted on production stoping rates and access to a large high-grade Volca stoping area, which is circled here in the diagram. Generally in this situation, the mill feed will be supplemented by mining from additional higher-grade mining fronts, as we mine through this diagram. Our backup stops would have been located on the 1285 level at Cora, but that top access for a Volca The 1305 level was not yet completely developed, and that really comes down to below-budget development rates for several quarters during COVID, which we've shown previously. And you saw in our operating results. So as a result, the meal feed was supplemented with lower-grade material from underground as well as some low-grade stockpile material that we maintained. I think it's important to highlight, firstly, that we do intend to mine this area in the future. So it will come back into our production. And that when we introduce paste fill, which is part of that stage three expansion, that will provide a big boost to our geotech and mining sequence flexibility and better enable us to manage any future situations such as these. I think for our stopping sequence, it's also important to highlight that Judd has extremely and so we will have multiple large stopping areas going forward, as you can see in this diagram, which does drive our guidance. Looking at the underground line performance for QT, moderately impacted first half of the vehicle due to the challenges noted in the previous slide, however, Since then, the mine has been performing well. The stopping sequences set ourselves up for a strong second half of the year. On the process plant front, as previously mentioned, there were a total of eight days of unexpected plant downtime. Now, that was due to a mill trunnion bearing failure and a limited electrical fire in a cable tray in the wet section of the plant. Pleased to report that post those, the plant has performed extremely well. and in fact to set new records on the throughput front. I think it's also important to highlight that we see the underground mine continuing to strengthen as the year progresses. There are multiple positive factors driving this. Firstly, our development rates have been very strong for each of those last two quarters, each one being a new record. And we see that very much as a leading indicator. Secondly, we've received key pieces of equipment already this year to date and more expected going forward. And that provides a boost to our capabilities underground. We'll show some photos later in the presentation on that. And then lastly, after commencing underground development of the twin incline in 2020, we expect to mine the first ore tons from the lower mine in Q4. Now that is well ahead of schedule and that's been driven by strong advance rates in between incline. So four tons from this area were not planned until 2024. Now we will actually see our first tons come out in 2023. So that establishes a major mining front to debt and supported by obviously the large and very efficient infrastructure. I'd also like to highlight that the localized area of challenging geotechnical conditions that we faced in Q1, there is also an opportunity there for us. And as much as the subparallel structure is mineralized, it's not currently in any of the mine plans in the DFS, the PEA, and potentially provides us with a significant upside in throughput. So we're working with our own people and consultants to determine its resource potential and the best way to unlock it through the mining. Lastly, I'd like to reiterate that K92 has a significant plus five-year track record of mining and expanding operations. Long-haul stopping commenced in early 2020 and has been successfully executed and ramped up. We maintain our outlook for production to be within our guidance range, albeit in the lower half. So I'll now turn over to our Chief Financial Officer, Justin Blanchet, to discuss our financial results for the first quarter. Thank you, John.

And hello, everyone. During the first quarter of 2023, we had revenue of $40.4 million, a 23% decrease from prior year. We sold 17,602 gold ounces at an average selling price of $1,807 compared to 26,471 ounces at an average selling price of $1,769 in the prior year. as at March 31, 2023, there was 3,292 gold ounces in inventory, including both Concentrate and DORE, a decrease of 320 gold ounces when compared to December 31 due to timing of sales. Q1, 2023 cash flow from operating activities before changes in working capital was 16.5 million, compared to 22.5 million in the same period prior year. As of March 31, 2023, we had $88.6 million in cash and cash equivalents. The decrease in cash and cash equivalents when compared to December 31 is primarily a result of spending $12.7 million on expansion capital, decreasing our accounts payable other than landowners' accrual by a net $7.3 million, and increasing our mine supplies, consumables, and fuel by a net $3 million during the quarter. As at March 31st, K92 had one of its strongest reported working capital balances of $117.3 million, despite record expenditure of $23.5 million for property, plant, and equipment during the quarter. Further, as at March 31st, receivables had increased to $35.1 million from $29.3 million at December 31st. Inventory had increased to $31.9 million from $28.5 million and accounts payable had decreased to $29.8 million from $37 million. The company has no debt on the balance sheet. Q1 cost of sales was $23.7 million compared to $22.5 million in the prior year or $16.7 million compared to $17.7 million when you exclude non-cash items. Despite an overall increase in cost of sales, the company achieved better economies of scale and lower unit costs when measured for each ton of ore produced, attributable to the successful ramp-up of the Stage 2 expansion with ore tons mined increasing from 100,124 in Q1 2022 to 117,865 in Q1 2023. As John mentioned, during the first quarter, the Kanantu Gold Operations produced 17,593 ounces of gold, 1,651,297 pounds of copper, and 29,859 silver ounces, or 21,488 ounces of gold equivalent. We sold 17,602 ounces of gold, 1,538,590 pounds of copper, and 29,164 ounces of silver. We incurred a cash cost of $758 and an all-in sustaining cost of $1,506 per ounce of gold, which was significantly below our selling price of $1,807 per ounce. Our Q1 cash cost per ounce of gold increased to $758 from $536 in Q1 2022. The increase in cash cost was primarily due to the lower head grade material compared to prior year, as John mentioned. Our Q1 all-in sustaining cost per ounce of gold increased to $1,506 from $788 in Q1 2022. The increase in cost per ounce, in addition to the lower head grade material, can be attributed to the $11.2 million spent on sustaining capital as compared to $5 million in the same period prior year. The increase in sustaining capital is a result of increased capital development when compared to prior year, as well as replacing some equipment during the quarter. It is important to note that after commissioning the stage two plant expansion in late third quarter 2021, we have seen a significant compression in our total unit cost per ton processed. We continue to see downward pressure on costs via economies of scale as operations ramp up. I will now turn the call back to John to continue with the rest of the presentation.

Thank you, Justin. So for the exploration and growth section, we begin with the Kanantu mine strategy growth pipelines. On stage 2A, we're pleased to be in the final commissioning stage with the last item being the rough of flotation currently being wet commissioned. Stage 3, we've made considerable progress on the tenders. We'll be awarding the various long lead items by the end of the month. And we're currently out on tender for the EPC for process plant and the pasteful. And we'll be looking to award these by mid-year. After completing that tender process, we plan to release a growth capital guidance update and schedule update. Next lift on the tailings dam has already commenced. That's well ahead of when it's required, and it's already 20% complete. Now, the video that you see here was taken last week, and that's the wet commissioning of the stage 2A rougher flotation circuit expansion. So that expansion, an additional two cells, but those additional two cells are far larger than the existing cells, and that more than doubles our rougher capacity. With these commissioned, we believe we'll see one, two percentage point at least improvement in our recovery, as well as providing us with potentially further ability to increase our throughput. Over the last few months, We're obviously pleased to have received quite a number of pieces of key equipment, underground equipment. This particular image shows our new jumbo in action. That arrived in the first quarter. We've got another jumbo due mid-year, and then a third new one is then due before the end of the year. Also in Q1, we received a new long-haul rig. So that's our second long-haul rig. And so that's an important addition because obviously it doubles the size of our fleet. provides us with greater flexibility and ability to steadily grow our drill stocks. During the quarter, other equipment arrivals included a new loader as shown here, two integrated tool carriers, cement agitator, normal charging machine. That equipment is designed obviously to expand our fleet, improve our productivity by replacing some additional equipment as well. More equipment is on the way. The two cat trucks you see here, they are currently on the water between Brisbane and Ley. And we expect these to arrive in country by the end of the month. So that significantly enhances our truck fleet. So now on the twin incline, the furthest incline has now achieved 2,315 metres as at the end of April. So that's a couple of weeks already ago. And that's tracking well ahead of schedule. Incline development is now something like 80% complete. And as you can see from the diagram, the twin incline advance is now getting very close, or in fact, it's within the Cora Judd deposits. Q4, we actually plan to commence mining from the lower portions of the Cora resource from the twin incline, which is well ahead of schedule. That was only planned for next year, and it's a result of the twin incline being significantly ahead of schedule, as we've mentioned. Importantly, it creates a significant boost to our operational flexibility as we're now establishing a new mining front at depth and obviously located in that new infrastructure area. In terms of the vein field exploration, drilling is underway at Cora, Cora South, Judd, Judd South, Northern Deeps, and shortly it'll be Cora Deeps. We're now looking at a long section here of Cora, Cora South. And to date, we've defined a potential strike length of something like 2.65 kilometers with exploration from the surface focusing on Cora South. Underground exploration is targeting Cora, Cora South, and as I mentioned imminently, Cora Deeps. With the twin incline significantly advanced, as shown by the arrow here in the diagram, we're in the process of moving a second diamond drill rig into the twin incline. And that drilling is to advance basically from north to south. And obviously, this is one of our most highly prospective targets and importantly is within the mining lease. So it's adding ounces that are within the mining lease. Additionally, Cora South, Judd South drill drive has made significant progress advancing to the south. Drilling is underway from that drill drive and we're certainly excited to be testing that down-dip extension of Kora Scythe from underground, including importantly that dilatant zone that we've reported previously and you can see some of the numbers that we've had there. When we look at Judd Scythe, again shown in the long section, today we've defined something like 1.7 kilometers of strike length. Judd Scythe is open in multiple directions. And like the Cora Cora South, we've intersected mineralization in almost every drill hole to date. Again, like the Cora Cora South, the advancement of the underground infrastructure is opening up highly prospective drill platforms to explore at depth. And we plan to provide the exploration update of our vein drilling later this month. On the porphyry exploration, after announcing that Maiden Blue Lake inferred reserves of 10.8 million ounces gold equivalent, or 4.7 billion pounds copper equivalent, which is the fifth largest known porphyry in Papua New Guinea. We have now got drilling underway at A1. A1 at this point in time is our number one porphyry target based on our airborne advanced mobile MT2 physics, which was flown in late 2021, and also from our surface mappings. As you can see from this image, A1 is interpreted to be part of the same large lithocat complex that hosts Blue Lake and also the IANA target. So we're currently drilling our second hole at A1 and look forward to providing an update on that in due course. So with that operator, we'd like to commence the Q&A session. Thank you.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question comes from Alex Tarantew of Stiefel. Please go ahead.

Good morning, everyone. Just a couple of questions from me. First, I know that the mill capacity is the ultimate bottleneck, but when it comes to the mining, the lower levels of the mine that the incline is going to connect to in Q4, how should we think about the production potential from that incline as we look into 2024? I'm just wondering, do you have the equipment and the people? I know we're still talking six-plus months away. But I'm just trying to get a sense of what mining rates we could see from the mine on an overall basis once you guys get into that zone.

Okay. You said a couple of questions. Alex, was there another one?

Oh, sorry. Yeah, the other one is just more on the Phase 3 expansion. Just wondering if you can give us some color on timing of that spend over the next couple of years. I know a lot of the cost is development, and you guys are spending as you go along on that. But just kind of just trying to think of spending over the next two years as something to kind of put into our model to better forecast cash flows.

Okay, thanks. Thanks, Alex. Look, in terms of the, first of all, the capacity from the lower levels coming out of the twin incline, I guess there's a couple of things that are important there. One, as we reported, we do have now a second long-haul rig. So we actually have an ability to operate in two different areas in the mine in terms of stopping. And that's only recently happened. That was only in the last quarter. As I said, right now, there is nothing in the schedule at all for tonnage from that lower level. Right now, we just don't have an actual schedule of what we would mine. Realistically, you're opening up a new area. You've got to do development along strike. And of course, you've got to develop multiple headings within the actual ore bodies themselves. So we're not looking for a lot of tons this year. Quite frankly, if we got 10,000 tons or thereabouts out of it in the fourth quarter, that would probably be a reasonable number. Next year, the vast majority of our tons come from the existing mining areas. That's both Cora and Judd. And I certainly wouldn't see more than around 20% of our tons tops coming out of that lower area. And that really would be the top end of our expectations. As you said, ultimately, the plant right now is our bottleneck. But it seems to be an expanding bottleneck. Quite frankly, the plan continues to surprise us with the capacity that we are getting from it, and certainly it's something that we're going to be looking at in our budgeting process next year. In terms of the Stage 3 expansion spend, As we've said, we will give guidance on that around the end of this quarter. We've got the tenders due in, I think, actually next week. I think we have a series of calls with the tenderers next week going through their detail. So we should be able to provide some detail to assist with the cash flow models by providing by the end of this quarter, but obviously there are two aspects to it. One aspect is