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viewKarora Resources Inc.

Karora Resources now a "top tier" junior gold producer in Western Australia after completing acquisitions and disposals

Snapshot

The acquisition of the Spargos Reward high-grade gold project was closed on August 7, which the group intends to fast track into its growing production pipeline with the goal of beginning to generate cash flow from the project in 2021

Gold

Quick facts: Karora Resources Inc.

Price: 3.63 CAD

TSX:KRR
Market: TSX
Market Cap: $527.52 m
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  • Made transformational Higginsville acquisition in June 2019
  • Completed Spargos Reward gold project purchase in August
  • Changed name from RNC Minerals in June

What Karora Resources does:

Karora Resources Inc (TSX:KRR) is now a "top tier" junior gold producer in Western Australia having started its transformation - when known as RNC Minerals - with the 2019 purchase of the Higginsville Gold Operations (HGO).

The group is focused on growing gold production and reducing costs at the integrated Beta Hunt Gold Mine and the Higginsville mine and its associated treatment facility.

At Beta Hunt, a robust gold mineral resource and reserve is hosted in multiple gold shears, with gold intersections along a 4 kilometre strike length remaining open in multiple directions.

Higginsville has a substantial historical gold resource and highly prospective land package totaling approximately 1,800 square kilometers.

The Higginsville treatment facility is a low-cost 1.4 million tonnes per annum (Mtpa) processing plant which is fed at capacity from the underground Beta Hunt mine and open-pit Higginsville mine.

In August, 2020, Karora expanded further after completing the acquisition of the Spargos Reward project tenements, which cover 33 square kilometres located in the Eastern Goldfields of Western Australia, 35 minutes by road to from the Higginsville gold operation.

On top of the existing historical resource, there are a number of historic workings within the project, the most notable of which is the historic Spargos Reward Gold Mine which produced 105,397 tonnes at an average grade of 8.56 grams per ton (g/t) of gold in the 1930s and 1940s, with limited gold extraction since that time.

The Spargos Gold Project contains a historical JORC1 (2012) Mineral Resource Estimate of 112,000 oz (785,800 tonnes at 4.4 g/t) indicated resource and 19,000 oz (151,000 tonnes at 4.0 g/t) inferred resource.

How is it doing:

As it focuses its activity on Western Australia, Karora revealed, on July 22, a deal to sell its 28% interest in the Dumont project in Quebec, one of the globe's largest undeveloped nickel assets. Dumont is being sold to two private funds advised by Waterton Global Resource Management for a total consideration of up to C$48 million. Karora will have the right to receive a portion of future proceeds of any future sale of Dumont or other monetization event.

And at the end of July, Karora agreed to sell, directly and through a wholly-owned subsidiary, a holding of 11,251,456 shares of Orford Mining Corp (CVE:ORM) at a price of $0.09 per share for roughly $1,012,631. The group owned 22,502,911 Orford shares and warrants to purchase up to an additional 1,095,505 shares representing an approximate 23.6% interest on an undiluted basis and 24.5% on a partially diluted basis.

After the sale, the company will control 11,251,455 shares and warrants to purchase up to 1,095,505 shares, representing an 11.8% interest in Orford on an undiluted basis and 12.8% on a partially diluted basis. The company said it disposed of the Orford shares for “investment purposes only.”

The group also eliminated the Morgan Stanley net smelter royalty (NSR) on the Higginsville properties and announced an agreement with Maverix Metals to reduce its Beta Hunt gold royalty during the second quarter, essentially unlocking Higginsville and Beta Hunt for "renewed exploration growth.

Karora revealed on June 30 that it had struck a deal with Maverix to reduce its royalty on gold production from the Beta Hunt mine to 4.75% from 7.5% with effect from July 1, 2020. As consideration for the reduction, Karora said it would pay US$5 million in cash and issue 35.1 million shares at C$0.506 each to Maverix. The cash will be paid in two equal installments of US$2.5 million, with the first such payment to be made on closing and the second payment to be made in January 2021.

In another boost, in July, well-known Canadian resource investor and gold bull Eric Sprott agreed to increase his ownership in the company by 26 million shares via a complicated deal. 

The company said it had worked alongside Maverix Metals to effectively place the entire planned share issuance from the royalty deal, announced on June 30, and in lieu of issuing shares to Maverix, Karora said it will use the proceeds from a total of 36.5 million common shares to be issued to Sprott and one other institutional investor to complete the transaction with an all-cash consideration of US$18 million.

The shares of Karora to be issued to Sprott and the institutional investor were issued at the same $0.506 price per share that had been agreed with Maverix.

On September 10, 2020, Karora announced that it has discovered new high-grade zones for both gold and nickel at its Beta Hunt mine in Western Australia. Drill results at the Larkin zone included one wall sample that returned 5 grams per tonne (g/t) gold over 14.4 metres (m), with gold mineralization there thought to contain a strike length of more than 400 metres.

As well, in early November 2020, the company reported that underground development at the Beta Hunt Mine has intersected an estimated 2,000 ounces of coarse gold (with accuracy of +10%/-25%), which was found in the same geological environment as previously-announced coarse gold occurrences and proximal to the 2018 Father's Day Vein discovery.

Also in November, Karora outlined plans to develop a potential economic starter pit at its Aquarius project in Australia as early as mid-2021, following a near-surface drill program that identified 43.5 g/t gold over 3 meters.

And in the same month the company reported initial drill results from the newly-acquired Spargos Project in Western Australia, which included 29.8 g/t gold over 19.0m. The results were part of a 12,000m drill program at Spargos, all within about 100m of surface, which could potentially be included in an expanded open-pit scenario.

Karora expects a new Spargos mineral resource to be included in the company’s upcoming 4Q 2020 mineral resource and reserve update. 

On the financial front, in November, Karora Resources reported 3Q 2020 revenue of US$59.4 million along with a profit of US$34.9 million or $0.24 per share, up from the US$9.8 million it posted in 2Q 2020.

The company added that it produced a total of 24,717 gold ounces from Higginsville and Beta Hunt operations during the period with record low all-in-sustaining costs (AISC) of US$1,044, lower than the firm’s annual guidance of between US$1,050 to US$1,200 an ounce.

Karora ended 3Q with a record cash balance of more than US$67 million.

What the broker says:

In a note to clients in December, Canaccord Genuity analyst Tom Gallo said he believes Karora Resources is "poised to unlock a newly unencumbered district."

"The company recently acquired Higginsville (2019), giving it the ability to process its own material and double production. The company successfully renegotiated gold royalties at both properties, which provides an unencumbered platform from which to explore and grow resources. We believe there is opportunity for the company to increase its production profile with higher grades, optimize and possibly expand its plant, and extend mine life through exploration," Gallo wrote.

He added: "We believe the company's strategic location (and flexible mill), its reduced royalty commitments, and its focus on near-mine exploration give it a huge advantage for growth beyond our base case. We look for Karora to perform strongly in 2021."

Canaccord Genuity initiated coverage on Karora shares with a Buy rating and a $5.75 target price.

Inflection points:

  • Fast-tracking of Spargos Reward gold project
  • Cash-flow from Spargos seen generated in 2021
  • Reserve and resource update expected in 4Q 2020

What the boss says:

Commenting on the company’s 3Q financial results, Karora Resources CEO Paul Andre Huet said in a statement: “We continued to deliver operationally robust gold production and continued our trend of reducing costs, despite challenges associated with COVID-19 and the impact of a stronger Australian dollar during the quarter, which negatively affected our US dollar cost reporting.”

He added: “Our record adjusted EBITDA of over $23 million demonstrates our cash-generating power now that we have full exposure to market gold prices and significantly reduced royalties across our properties in a strong gold price environment. We have established a strong track record over the last five quarters with our consistent production results and declining costs since we acquired the Higginsville mine and mill in 2019.”

Contact Sean at sean@proactiveinvestors.com

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