K92: Jim Rickards Gold Speculator with Byron King just wrote an in depth article on K92 suggesting buying upto 5% of your portfolio with K92.
May 11, 2017
New M.I.D.A.S. Buy:
This Tiny Unknown Miner Has
Explosive Upside
Dear Gold Speculator,
Deep in the jungles of one of the world’s most remote, least
explored countries, there’s a fully operational gold mine.
But, almost no one knows it’s there. That translates into a
fabulous opportunity for you.
The mine itself is built to superb specs.
All of the initial shafts and declines are already constructed. There’s also a
nearly brand-new mill topside. Along with all of the necessary equipment
already installed.
This up and running, functional and permitted mine is hooked into electric
power. So it’s running around the clock processing ore and delivering gold
concentrate to buyers. The owners are getting paid, and there’s solid cash
flow. All in all, this is a gem of a gold mine.
The thing is, almost nobody knows about this fully-functioning mine and its
intriguing mineral concessions, including a vast area, surrounding the
existing mine, with high exploration potential. Right now, the entire project
is wholly owned by a small company whose shares trade for the
astonishingly low sum of $0.55 each. The company’s market cap is tiny;
about $85 million.
Right away, just these two metrics – low share price and low market cap –
make this company a great find. It’s a bargain. There’s immense upside,
here. And there’s a great story behind it all. Indeed, there’s much more…
A few years ago, this particular mine, nestled into a distant jungle, was
built to world-class standards by a well-known titan of the mining industry.
In total, from the days of early exploration to turning the keys and startingup
the mine, the capital invested into the project was about $400 million.
Yet in the period 2014 - 15, something very odd occurred – almost
unprecedented in a business-sense. The small company that now owns
the project paid the large mining concern all of $2 million for it.
Yes, the small company bought this $400 million asset for $2 million. No
typo. Not $200 million. Not $22 million. The number was $2 million. That’s
about half-a-penny on the dollar. It was a total steal, because here’s what
that small buyer received from the big seller, in return for the $2 million
check…
•Over 400 square kilometers (about 155 square miles) of fullypermitted,
mining concession area, smack on top of one of the
most prolific, gold-copper bearing trends in the world. Indeed, not
too far away is one of the world’s largest copper-gold mines.
•Paved road access, nearly straight to the front gate, from a militarygrade,
international-capable airfield.
•Access to low-cost hydro-electric power.
•A fully-built mine, with low-angle “declines” into the heart of a
certified, regulation-compliant, 2-million-ounce deposit. The
entryway to the mine is a tunnel that measures five meters by five
meters (over 15 feet by 15 feet).
•A fully-constructed processing mill, topside. Here it is.
•A fleet of mining equipment, suitable for the climate and this
particular project.
•A fully-built mining camp, with housing for workers, a mess hall and
kitchen, laboratory and assay benches, geological offices, with
storage space for rock samples, cores, etc.
•Warehouses filled with spare parts, repair components, various
chemicals and industrial supplies. In fact, if the new owners had
just posted these goods for sale on e-bay, they’d have quickly
recovered their initial $2 million outlay. But instead, they are using
this swag to help run the mine.
The lucky buyer of this mine is a company called K92 Mining Inc.
(KNTNF: OTCBB), with headquarters in Vancouver, and a mine on the
island-nation of Papua New Guinea, in the southwest Pacific Ocean
region. Shares of K92 trade on the Toronto Venture Stock Exchange
(TSX.V) and also Over the Counter (OTC). I’m adding K92 to our Gold
Speculator portfolio, in the “producer” category. For our purposes, we’ll use
the OTC ticker.
K92’s Lucky Break
Here’s more background on how K92 got so lucky. Let’s begin with pure
geography. Papua New Guinea is a tropical island nation, north of
Australia, at the southwest end of the South Pacific/Pacific Ocean region.
Here’s a map…
The western half of the island is part of Indonesia. The eastern half is the
nation of Papua New Guinea (PNG), which has a British Commonwealth
heritage, and British-style legal system.
Overall, the island is highly volcanic, with many faults and plenty of
geological activity in the past 30 million years or so. It’s part of the Pacific
Ocean’s well-known “Ring of Fire.” In essence, all of Papua New Guinea is
mineral-prospective.
Over to the west, on the Indonesia side, is the Grassberg Mine, owned by
Freeport McMoRan, which is among the world’s largest copper-gold
projects. The rest of the island hosts many more mining camps, and
exploration-development projects, too, as the map above indicates.
The area in which we are interested is in the Eastern Highlands of PNG, at
a site called “Kainantu” by the locals – hence, the name K92, because of
the similar sound. The Kainantu property covers a total area of about 400
square kilometers. From 2006 – 15, the area was prospected and
developed by a previous owner called Highlands Pacific, which was bought
by Barrick Gold.
Barrick took the Kainantu project, and finished work on the actual mine,
which is why this is a world-class mine. That is, everything is “Barrickquality.”
The design and layout is exceptional. Barrick typically uses the
best of everything – the best engineering and design talent, the best civil
engineering, the best concrete and steel, the best equipment, the best
housing facilities, the best… you name it. It’s just plain “Cadillac,” as the
saying goes in the mining industry.
As Barrick built out Kainantu, the company was focused on two things.
First, Barrick was building a gold mine; but then again, not really. That is,
Barrick identified about 2 million ounces of gold reserves at Kainantu, on
which Barrick built this mine; but Barrick doesn’t build mines for 2 million
ounces. Maybe 10 million ounces, or even 8 million or 6 million ounces; not
for 2 million.
Barrick’s true goal, at Kainantu, was to get established on PNG, because
underneath those 400 square kilometers, there appears to be a massive
copper-gold porphyry deposit. It’s not well-explored, even now.
But Barrick’s geologists had enough of a sniff of prospectivity that they
wanted to set-down roots in PNG and plan for the future. Thus, we have
that “Kainantu” gold mine that was, in actuality, the first move in a much
larger, long-term effort to explore and develop a copper-gold porphyry.
Then, in 2012, the roof caved in for the mining sector. The Mining Zombie
Apocalypse kicked off in 2012, as prices for gold and copper fell, along
with much else. Indeed, prices fell, fell and fell some more, from 2012 to
early 2016.
By 2014, Barrick was in deep financial distress, and hemorrhaging money.
Barrick was over $14 billion in debt, back then, with absolutely no way ever
to pay the money back on terms under which it was borrowed.
Basically, Barrick hired bankruptcy lawyers, who told management to
divest everything that was not up, running and making money. Barrick cut
headquarters costs, and laid off other staff worldwide. The company began
to divest assets across the globe. Everything was at risk. Barrick could
have filed for bankruptcy, literally any day.
On the far-off island of PNG, Barrick had the Kainantu project. But, at 2
million ounces, non-core and not up and running as a profitable mine, it
was definitely expendable. It didn’t matter that Barrick and its predecessors
had put in the range of $400 million into past exploration or development.
The site was costing money, not making money. Kainantu had to go; so, in
2014, Barrick put out feelers, looking for a buyer.
Along came a management team, comprised of Tookie Angus, Ian Stalker
and Bryan Slusarchuk, all of whom have done well during their respective
careers, and established superb reputations in the mining space. They sat
down with the Barrick reps and the lawyers. They made a pitch for the
mine and its exploration acreage.
Now, consider this… When you are $14 billion in debt, as was Barrick in
2014, you’re worried about billion-dollar assets, not million-dollar assets. In
other words, to Barrick, Kainantu represented a couple of hundred million
dollars of sunk cost; of which, there was no way Barrick would ever see it
again. For Barrick, it was better just to move the Kainantu project off the
books, and show the world that Barrick was disposing of assets to solid
players, in a responsible manner. It was more about reputation than
money.
By early-2015, Barrick and the new company, K92, made a deal. For a
mere $2 million, Barrick passed title to the new owners. Barrick was
looking for good people to run the Kainantu project, and K92 management
fit the bill.
In a recent discussion with K92 president, Bryan Slusarchuk, he told me
what happened next. “After we signed papers and closed the deal, we
went to the site, and walked in,” he said. “There was all this big mining
equipment, excavation machinery and trucks, just sitting in the sun. It was
ours. The warehouses were full of spare parts. Full of tires for trucks, with
extra batteries, and spools of copper wire, bags of cement, barrels of
chemicals. The kitchen was fully functional. The berthing areas had air
conditioners. The water filtration system worked. It was all ours.”
As I noted above, K92 could’ve just sold all this material on e-bay, and
recovered more than its $2 million. But instead, per Bryan Slusarchuk, “We
went immediately into the gold mining business.”
Still, you need to understand that you can’t just “flip a switch,” and turn on
a mine. From the time K92 bought the Kainantu project from Barrick, it took
more money to get the mine back into trim. There were legal issues to
square away with the government. K92 had to hire and train a labor force.
The new owners had to perform repairs and tests on equipment.
By early 2017, the Kainantu mine was ready to function. Early this year,
K92 began to process initial amounts of ore, and is now up and running.
The first goal was and remains 5,000 ounces of gold per month, or about
60,000 ounces per year. K92 is well on track to that output, right now, at an
all in sustaining cost in the range of $700 per ounce, which puts K92 in the
lowest quartile of industry producers.
In a recent discussion with management, I learned of several other
serendipitous aspects of this project. In 2014 and earlier, Barrick engineers
evaluated the Kainantu ore grade in the range of 8.5 to 9.5 grams of gold
per tonne (g/T). As it turns out, that ore is certainly there, where it’s
supposed to be. But there’s other rock as well, which Barrick categorized
as “waste,” that contains 4 to 5 g/T gold. So, in early mining, there’s more
gold and better recoveries than forecasted.
Second, when Barrick sold Kainantu to K92, in 2015, the former had
already done extensive drilling adjacent to the existing ore body. However,
Barrick had not performed full engineering analysis on the drilling results. It
now appears that, with a relatively small investment of time and resources
by K92, to process the Barrick drill results, K92 will be able to add another
1.5 million ounces of gold into the “reserve” category, likely in 2017. So,
the 2-million-ounce deposit is more like 3.5 million ounces.
Plus, it's fair to say that the initial, two or three-year life of mine, is
stretching to seven or more years’ life of mine; possibly to 10 years.
Meanwhile, K92 is conducting its own exploration program, adjacent to the
existing deposit. Much of the drilling is occurring from underground, where
mining is ongoing. It means that there’s no need to build roads, or drop a
rig by helicopter, in otherwise tough terrain. This new drilling, too, is
promising. As I mentioned above, Barrick doesn’t build 2 million ounce
mines; and K92 is poised to find those missing, four or five million other
ounces.
All of this takes us back to the current K92 share price of $.55, and $85
million market cap. That’s “too low” for a company with a working gold
mine, producing 60,000 ounces per year, with that number creeping
upwards, at an AISC of $700. It’s too low for a company that’s on the cusp
of moving from 2 million ounces of reserves, to 3.5 million ounces, with a
new engineering report. It’s too low for a company with an aggressive
drilling program that’s expanding the limits of known resources, from the
underground rock face, into new-zone prospectivity.
Looking ahead, K92 has wide-open, blue sky upside. This company may
be located far away, and few have heard of it yet; but it’s going places. So,
let’s be diligent, and take K92 through our M.I.D.A.S. steps.
As a quick reminder, if you recall from your introductory report, The
M.I.D.A.S. Touch and Speculation as an Art Form, M.I.D.A.S. stands
for Mining Information to Develop Assets and Secure gold production.
M.I.D.A.S. is a five-step system Jim and I developed to vet each and every
idea in Gold Speculator.
Now let’s get to it…
Step 1: Kick Around the Rocks
I have to tell you, up front, that I have not been to Papua New Guinea; not
yet, anyhow. It’s a long haul, to the other side of the world, although it’s
doable. I’ll get there, eventually. Still, I’ve spoken with people who have
traveled to and worked in PNG.
Based on what I know, from research and from people who have been
there, I’m sure that the island is a treasure house of mineral wealth. I have
spoken with K92 management, and other reps. I’ve reviewed published
data on the Kainantu project. I’ve spoken with Barrick reps, too, who were
candid enough to mention that they “wish that this one had not gotten
away.”
From what I can gather, this is as real as it gets – an up and running,
“Barrick-quality” mine, atop at least 2 million ounces of gold, and likely
more, with vast exploration upside, for gold, and later for a copper-gold
porphyry.
Step 2: Management
I’ve had several discussions with K92 president, Bryan Slusarchuk. Over
the years, I’ve met and talked with Tookie Angus and Ian Stalker. They all
are solid businessmen, with excellent reputations. Tookie, for example,
was instrumental in building Nevsun Resources (NSU: NYSE), through its
work in Eritrea and now in Serbia.
Another way of looking at this is through the eyes of Barrick. For as much
trouble as Barrick was in, back in 2014 – 15, Barrick could not “afford,” in
any sense of the word, to let Kainantu go to a group that would make a
mess of the project. Barrack has other, billion-dollar assets to sell, across
the world, and there’s no upside to Barrick in conveying the impression
that the company can’t find good management teams for its assets. It gets
back to working with people who preserve a strong reputation for efficiency
and effectiveness.
I’m impressed with what I’ve seen from K92 management. It’s an efficient,
effective team.
Step 3: Trust Everyone, but Cut the Cards
Looking back five years, to 2012, there’s no way that anyone could have
planned what happened. The current state of K92 is serendipity on
steroids. It’s like the dealer dealing cards, and you picking up your cards to
see a royal flush, dealt on the first hand.
Here we have mining giant Barrick, putting hundreds of millions of dollars
into an asset, coupled with a major crash that utterly wrecks the gold
mining sector, and places Barrick at the front door of the Bankruptcy
Courthouse.
We’re dealing with a fully-built mine, with equipment, buildings, machinery,
permits, exploration potential, etc. And along comes a superb
management team, to buy it all out for $2 million in a true giveaway by
Barrick-in-extremis.
If I were writing pure fiction, I could not make this up.
Step 4: Share Price Action
K92 shares began trading in May 2016. The share price went up through
last August, and has bounced down ever since, mirroring market trends.
Now, in the $.55 range, we’re near a year low.
Looking ahead, Jim and I see rising gold prices, which will benefit the
sector in general, and true gold miners in particular. With a current market
cap of about $85 million, K92 is ridiculously underpriced for a goldproducing,
cash-flowing company that’s beating its production guidance,
and expects to increase overall gold reserves from 2 to 3.5 million ounces,
with exploration upside… and a porphyry play underneath it all.
The current share price for K92 offers a more-than reasonable entry point.
I expect the share price to move up as gold-silver prices recover, and as
this story gains traction within the sector. It’s very poorly covered right
now.
Step 5: Look at Gold Itself
Right now, gold prices are in the $1,220s-range. We’ve been in a gold
roller-coaster, in terms of prices. Gold prices moved up after the Fed’s
December 2016 rate increase. Prices moved up again, after the Fed’s
March rate increase. Jim expects gold prices to move up in June, when he
believes the Fed will raise rates again.
Jim has pointed out that gold prices are moving steadily upwards, despite
whatever happens with interest rates in the rest of the year. Aside from all
its technical and geological merits, K92 is a leveraged bet on eventually
rising gold-silver prices.
Here’s What to Do
K92 offers strong investment leverage to gold production. It’s an up and
coming mine play, working from a Barrick-quality mine in the heart of one
of the great copper-gold provinces of the world, Papua New Guinea. K92 is
in production, and is increasing output as the mine moves more and more
towards optimization. Management is strong, and well-regarded.
We’re still in the early days of a generally rising tide for gold-silver prices,
with more to come in 2017. With K92, we have an early-stage production
play, with more exploration-development upside, atop a possible porphyry
that was “interesting” enough to intrigue Barrick Gold.
You should purchase shares of K92 up to $0.62. As of this writing, shares
are trading around $0.55. Use limit orders and don’t chase the price. It may
take a few days to fill your order, but be patient. I suggest that you weight
your shares at 5% of our model portfolio.
If K92 stock climbs to $1.00 by late 2017 (as I believe it will), you’ll see a
gain of 81%. By this time next year, if the price is over $1.50, you could
realize a gain of 172%.
Action to take:
Buy K92 Mining Inc. (KNTNF: OTCBB) up to $0.62, such
that it constitutes 5% of your speculative portfolio
***Use a limit order up to $0.62. You do not want to chase the price. If
you can’t get in under our limit price, be patient and wait for the price
to come back down.
**** I want to reiterate how important it is that you follow the strict buy-up-to
prices and the position sizing recommendations we make. Jim and I don’t
want you to get hurt. We want you to protect and grow your wealth using
safe and smart risk-management strategies. Don’t bet your mortgage
money, your child’s tuition money or essential retirement funds on these
plays. Only use money that you can afford to lose and that’s set aside for
these speculations. ****
For even more information on K92, you can watch this recent interview of
K92 president Bryan Slusarchuk with friend and gold-scholar Brien Lundin,
on You Tube.
Best wishes,
Byron W. King
Senior geologist, Rickards’ Gold Speculator
