With a soaring share price, production upgrades and strong cash flows, K92 Mining is proving to be one of Papua New Guinea’s resource success stories. Chief Executive Officer John Lewins outlines the company’s aggressive expansion plans to Business Advantage PNG.

John Lewins says the Kainantu Gold Mine, located in the Eastern Highlands Province, has had seven straight quarters of profit and is producing an annual free cash flow yield of US$68 million (K232 million). Listed on the Toronto Stock Exchange (TSX), K92 Mining is valued at about C$450 million (K1.3 billion). ‘All of our cash has gone back into expanding the project; it is all effectively reinvested,’ he says.

The company has paid down almost all its debt. For the initial start up it raised money through a gold loan (raised capital that is then paid back in physical gold) with Cartesian Royalty Holdings (CRH). Lewins said this meant the company was required to deliver 25 per cent of its production to CRH up to a maximum of 1000 ounces a month. He says that at the beginning of 2019 the company still owed 12,000 ounces. ‘That has all gone; the US$16 million has been paid out.’

The company’s share price has more than doubled this year to C$2.15. The share register is broad, and includes institutional investors. The strong corporate performance has Lewins considering expansion into other jurisdictions.

‘If you have cash, which we have, and a strong share price then there are opportunities for TSX companies that are outperforming the market. We are certainly looking for opportunities, primarily in the Americas.’

‘We are not worried about our ability to bring a project into production. We are already in production.’

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Lewins says the aim is to acquire assets in countries that are perceived as being more low risk than PNG. While he believes that ‘PNG is a good country to be in,’ he says the market perception continues to be that it is a high-risk jurisdiction.

Expansion plans

K92’s John Lewins. Credit: K92

K92 Mining has US$20 million in cash, and only US$15 million in debt, according to Lewins. But that conservative capital structure will change as the company undertakes an ambitious expansion plan.

The next step is to expand the resource by 300-400,000 ounces, says Lewins. ‘It is going to cost us US$300 million, so we will be looking at a Preliminary Economic Assessment (PEA) in the first quarter of next year then we will take that to a full-blown feasibility study by the first quarter of 2021. Then we are looking at mid-2021 to making a formal decision to go ahead.’

The next phase of expansion requires a twin incline system, each three kilometres long and costing US$30 million. It is this part of the operation that has the longest lead time, so work will commence in the first quarter of next year.

‘We will have been going 18 months before making the formal decision on the expansion. Instead of three to three and a half years [from the decision to go ahead], we are looking at it taking 18 months to two years.’

Target

The success of K92 Mining may make it more of a target for acquirers. Lewins believes that Australian mining stocks are more ‘fully valued’ than Canadian stocks, and they are using their highly valued paper to acquire.

‘You have to work really hard to bring value to the table as the market sees it, so you don’t get taken out by somebody who can see the value before the market recognises it.

‘At the end of the day, the management is there to maximise value for the shareholders. But we are not worried about our ability to bring a project into production. We are already in production.’

K92 has 500 staff and about 30 expats working on the ground in PNG. Lewins says other opportunities exist in the country but the company is looking to diversify its risk by looking elsewhere.

He says he has rejected offers of other PNG projects. ‘None of them is as good as Kainantu. We are not going to get as good a project in terms of the geology and potential.’