K92 Mining Inc. KNT-TSX.V: $0.78
Rating: Speculative Buy
Target: $1.75 (was $1.60)
K92 Mining Inc.
KNT-TSX.V
Strong Q1/18, Exploration Sizzle to Drive
Continued Re-rating
May 22, 2018
Q1/18 showed a strong beat on our estimates driven by lower than
estimated operating costs. This operational outperformance was achieved
only on a partial quarter of commercial production and strengthens our view
of high margin operations at the Kainantu project. We have adjusted our
estimates for 2018 & 2019 based on management’s 2018 guidance that
showed better cost projections than ours. These changes drive our revised
target price of $1.75 per share (was $1.60/share). Drilling continues to show
positive results with the most recent southernmost holes demonstrating the
highest grade and the widest intercepts at K1 and K2 veins, respectively,
while the Cu grades continue to improve as drilling moves south. Overall,
our outlook for the Company continues to be positive with operations
beginning to generate cash that should support unlocking the immense
exploration upside at the Kainantu project which we believe has a multi-
million ounce discovery potential. In our opinion, this positions the Company
on the radar screens of the majors that face a muted growth profile. We
believe the current valuation is at a discount to peers and is not reflective of
the significant exploration upside available, and that the stage is set for a
strong re-rating with continued operational execution and exploration
success. We maintain our SPECULATIVE BUY rating at our revised target
price of $1.75 per share (was $1.60/share).
Q1/18 BEATS ESTIMATES ON BETTER COSTS: CFPS of US$0.03 was ahead
of our estimated US$0.01 as a result of lower operating costs. EPS of
US$0.02 was ahead of our estimated US$0.01 for the same reason.
Production of 9.7k oz AuEq was pre-reported. Cash cost of US$555/oz AuEq
was better than our estimated US$720/oz AuEq and AISC of US$741/oz
AuEq was better than our estimated $850/oz AuEq supported by lower unit
costs.
POSITIVE DRILL RESULTS DEMONSTRATE POTENTIAL FOR MULTI-YEAR
MINE LIFE AT KORA NORTH: Drilling at Kora North Extension from 2 drill
holes continues to provide positive results with significant holes including:
KMDD0086: 4.20 m at 116.43 g/t Au, 6 g/t Ag and 0.36% Cu (117.06 g/t
Au Eq), KMDD0088: 12.64 m at 8.34 g/t Au, 33 g/t Ag and 2.10% Cu (11.97
g/t AuEq). These two holes are the furthest south that have been drilled,
being less than 200m along strike from the known Kora Main resource. The
holes also recorded the highest and the widest intercepts at K1 & K2,
respectively. The results continue to confirm the consistency of both the K1
and K2 lodes within this area while further delineating the KL structure and
confirming its continuity. We continue to expect the Kora North Extension
resource to grow towards an eventual 1.5MM oz with potential for an even
bigger resource with continued high grade intercepts. This should support a
multi-year mine life at Kora North before mining enters Kora Main resource.
Our valuation model only accounts for ~130k oz at 8.4 g/t AuEq for the Kora
North Extension, pointing to the potential upside to our target price with a
conceptual target price of $2.50/share assuming a 1.5MM oz resource.
OPERATING OUTLOOK STRENGTHENING, TO SUPPORT INTERNALLY FUNDED ORGANIC GROWTH:
We are encouraged by the lower operating costs during the quarter that was based only on two
months of commercial production (effective Feb. 1, 2018) and showed ~US$2.3 MM in FCF (b/f WC
changes). We expect higher production and lower costs as the operations are ramped up to a full run-
rate of 200kt/year by mid-2018. Based on the operational execution to date we are confident in
management’s ability to deliver on the 2018 guidance of 42k – 46k oz at an AISC of US$ 720 - $780/oz
AuEq and believe the current level of operational performance to be sustainable. Accordingly, we have
adjusted our model to align our estimates with guidance and now estimate production of 44k oz AuEq
at US$780/oz AuEq AISC (prior 44k oz at US$852/oz AuEq AISC) in 2018, growing to 77k oz at
US$750/oz AuEq AISC in 2019 (prior 77k oz at US$810/oz AuEq AISC). Supported by the high margin
production and majority of the expansion/development capital expected to be spent over the course
of 2018, we estimate a compelling FCF generation of US$24 MM (22% yield) in 2019. This cash
generation should facilitate the unlocking of the exploration potential at the Kainantu project to drive
organic growth.
RECOMMENDATION: Under our currents estimates, KNT trades at 0.42x NAV, at a >15% discount to
peers trading at an average of 0.50x. We note that under our conceptual upside scenario assuming a
~1.5MM oz resource at Kora North, the stock trades at 0.25x NAV or a 50% discount to peers. We
believe continued operational execution over subsequent quarters and exploration success will see the
stock re-rated. We maintain our SPECULATIVE BUY rating at our revised target price of $1.75 per share
(was $1.60/share).
