Karora Resources Inc.
- TSX: KRR
- Shares Outstanding: 608M
- Share price C$0.54 (25.06.2020)
- Market Cap: C$328M
Interview with Oliver Turner, SVP, Corp. Dev of Karora Resources. (TSX: KRR)
Karora Resources is one of the mining turnaround stories in recent years. In just over a year, CEO Paul Huet and his team have overseen a remarkable transformation. RNC Minerals, became the strong, consistent and commercially sensible gold producer, Karora Resources.
Today, it was the turn of Turner the impressive to sit in the Crux hot seat. Having previously interviewed Huet and the President of Karora’s Dumont division, Johnna Muinonen, we have great expectations for Karora representatives. He is a well-spoken, articulate professional.
It has been 12-months of consistently hitting deliverable after deliverable for Karora Resources, and there is a reason the share price of this gold producer has only been heading North. From the transition away from Nickel to gold, to the sale of its 28% stake in Dumont, to the elimination of the Morgan Stanley NSR royalty on HGO operations, to the acquisition of Spargos Reward in Western Australia to add some higher-grade feed into Karora Resources’ mill, there seems to be a rigour and thought to the planning, and management of market expectations.
The most recent corporate actions have been even more encouraging. The 1:4.5 share consolidation was done in the best interests of shareholders and tightens up the registry. Moreover, getting Maverix Metals’ royalty down to 4.5% on Beta Hunt gold production was an excellent game of chess and eventual negotiation, driving millions into the company’s bottom line.
- 1:40 – Oliver’s Background & Experience
- 3:01 – The Turn-Around of Karora Resources
- 6:43 – Selling Dumont; Closed Deal?
- 8:53 – Outcome of the Maverix Deal: Expanding Shareholder Registry
- 11:13 – The Business Plan & Strategy Going Forward
- 13:37 – Higher Grade Discovered @ Beta Hunt: Implications & Plan
- 18:44 – Higginsville: Potential & Plans
- 21:22 – M&A In Other Parts of the World, A Consideration?
- 22:52 – Revised Resource Estimate Expectations
- 25:33 – Shaping Karora Resources: Discussions on Corp. Structure
- 27:45 – Discussions with US Generalist Funds: Thoughts to List on NYSE?
- 28:56 – The Future: End Game & Options
CLICK HERE to watch the full interview.
Matthew Gordon: Why don’t we kick off and tell people who you are and what, what your role is at Karora?
Oliver Turner: I joined Karora just about a year ago around the Denver Gold Show which is round about my anniversary right now and joined as the Head of Corporate Development for Karora Resources and heading up investor relations in tandem with that. And was brought in alongside Paul to help with the corporate turnaround of the Company, cleaning up the capital structure, bringing in new investors which we have been tremendously successful at in terms of changing the shareholder register and, and just executing on the plan that we had laid out for you and for the markets in the third quarter of last year. It’s been quite successful.
And that little bit of my background, I come into the industry from the mining engineering side of things and thereafter ended up over on the sell-side part of the business at an investment bank called JMP Securities where I worked for 7 years in equity research covering names in the junior side of the spectrum all the way up to mid-tier producers and got to know Paul Hewitt, our CEO very well than via covering Klondex mines which were his previous success. And at JMP we had quite a bit of success while I was there in building companies of this size from junior producers into effective higher-margin, mid-tier producers.
Matthew Gordon: Is it a Nickel company? Did you lay out a plan for what you needed to do?
Oliver Turner: Yeah, I think we’ve executed very well on the plan that we had laid out to the market a year ago, you’re right. If you fast forward back towards just prior to the Higginsville transaction, this was a company that had a very exciting asset in Beta Hunt that had produced obviously some high-grade coarse Gold nuggets but had no real stable mine plan and also had the second-largest undeveloped Nickel deposit in the world in Dumont that had been sitting there for quite a while. When Paul came in and, of course, our operator in Graeme Sloan and then myself, we had to focus this company on what we wanted to be and ahead of a strong Gold cycle we knew we wanted to be 100% focused on Gold so we’ve executed that corporate strategy with the divestment of Dumont which we announced earlier this year.
We retained upside for our Nickel investors in the fact that we can get up to $48M on that sale but $11M into the bank right upfront, so that was very, very important. We needed to provide a stable operating base so the acquisition of the Higginsville mine and mill was absolutely critical for providing a stable operating base and allowing us to consistently deliver production every single quarter while improving margins and provide that reliable resource base and delivery of production that has allowed for the next tier or quality of institutional investors to enter this story. If we’d had this conversation a year ago on camera, I would have told you we are around 8 or 9% institutionally owned at that period in time. Today we are well over 55% institutionally owned and we have some of the best mining investors in the business owning our stock, the guys who got in early to very successful stories previously.
On top of that, we also have significant investment by US and UK generalists which are now coming into the sector and seeing Karora Resources with what we’ve done over the last year in providing that stable base of operations, a cleaned-up capital structure and a top-tier board and management team. We provide them with a very, very compelling investment thesis which they’re obviously enjoying the success of right now. I think we’ve executed on that strategy very well. And the last bit I’ll touch on which we did layout to the market, of course, was that focus on costs. We had 4 remaining areas we wanted to focus on, royalties which we’ve obviously been very successful with and just transformed the future of this company. The GNA top 20 vendors and then, of course, personnel.
So, as you’ve seen our best report card, of course, is our quarterly performance and quarterly reports are all-in sustaining costs or continuing to decline, we continue to target that $1,000 US grants mark. We’re very confident we will get there, that’s taken a lot of discipline and a complete overhaul of the prior business in order to arrive at where we are today. It’s very successful.
Matthew Gordon: Do you think that was a fair price for what you off-loaded there, which is a significant Nickel project?
Oliver Turner: It is, and obviously the Nickel prospects and the offshore vehicle world are quite strong but let’s not kid ourselves here. This is not an asset that we were going to build ourselves, that we were willing to dilute our shareholders for, you know, it’s $1Bn plus to build that asset. We are not experienced-based metal producers, that asset belongs in the hand of a much larger company who can afford to put that capital in and doesn’t need to blow up their capital structure which we have very carefully repaired over the course of this year in order to build it.
It is important for us that we did retain some upside on a potential future sale which we made sure that we did with that divestiture into Waterton and if you look at the actual sale price or the potential proceeds for Karora investors, the $48M is actually more than the entire 72 prior per cent had been divested for. So, we believe those are very good, a very good deal for Karora shareholders and that capital being reallocated into our Gold projects will definitely drive strong returns.
Matthew Gordon: You know in the back of your minds, you’re not reliant on that in any way clearly but is there an expectation that something will come through?
Oliver Turner: Yeah, look the partners that now have the 100% ownership of the asset in Waterton are talking to other parties about a potential sale. Much like we were, I mean its Nickel price dependent so when the Nickel price spikes more people come in knocking at your door when the Nickel price rolls over, they go away for a little bit. We’re confident that they will be able to move that project at least into the hands of somebody that will develop it but, more importantly, is that we get the cash upfront right now and any potential future sale we still get to benefit in.
Matthew Gordon: You both walked away with what you wanted but then there was a little kind of chink at the end there where Mr Eric Sprott walks in, I mean, what happened there?
Oliver Turner: Yeah, no we were very excited to have Eric increase his ownership and we’ve been working hard with him to find him a block of stock to increase his ownership. Not only is he excited about the prospects of Beta Hunt but also our Spargos Reward, high-grade additional pit there and then let’s not forget that we have some extremely high grades also at Higginsville. Both were with respect to the open pit, but also our Aquarius deposit so Eric wanted a large block of stock, we were trying to find it for him.
That was sort of a natural fit, Mavericks were … you know they were a good counterparty to negotiate with over the course of this year but ultimately, of course, they are in the business of increasing their royalty portfolio and deploying cash into new royalties, so we were able to find a solution where the $13M was able to be sent to them from Eric Sprott’s purchase of those shares. They get to go out and buy more royalties, they also get to participate in what I’m calling a bigger pie at Beta Hunt. With this royalty now reduced, it’s incentivising us to explore more and also increase the economics for them as the deposit grows. But at the same time, we’ve bought in a fantastic investor in Eric Sprott who now owns more and is excited to see what we uncover there.
Matthew Gordon: Do you expect him to be a long-time holder?
Oliver Turner: Yeah, absolutely, I mean if you listen to any of Eric’s discussions, he has a very bullish view both on Gold and Silver in this space and things further. We’re just at the beginning of a very strong cycle in both those precious metals especially given the monetary debasement that we are seeing in the United States, so, we expect him to be there for at least allowing us to execute on our plan moving forward and we’re happy to have him.
Matthew Gordon: How do you view that cash that you’re producing now?
Oliver Turner: You’re absolutely right, we are producing strong free cash flow at these prices but it’s not just price-driven, it’s also the hard work we’ve put into reducing that cost profile across both assets, margins are improving, obviously, significantly and we want to make sure that while we’re, obviously, very excited about this Bull cycle but that we’re prepared for any downturn of the Gold price. We don’t want these assets to be dependent on a certain Gold price in order to work, we want to be resilient through Bear and Bull markets so we’ve now well-positioned those assets under Graeme’s excellent leadership over there in Western Australia to be very resilient to metal prices moving forward. We will generate free cash irrespective of the Gold price.
How do we look at our capital balance now, I mean, capital allocation is something, where we’re deciding between, do we deploy on organic growth profile projects, do we deploy into exploration, are we out there looking in the market for other opportunities? Again, we’re focused on being prudent stewards of capital, we’re not going to throw away dollars here and we’re not going on a shopping spree just for the sake of going shopping. So, every dollar that we look to spend, we look at the potential return on that dollar and we make our capital decisions accordingly.
We are very excited to announce, obviously last week, that we increased our exploration budget by 50%, $5M, and just for your viewers for some context there, West Gold was spending in the range of hundreds of thousands of dollars per year at Higginsville, due to the fact that that royalty was basically overlaying it for over 10 years so this was the largest exploration budget that both of those assets have seen in a very long time. $50M deployed into both of them and as far as we’re concerned, given the success that we’ve had in the past and, obviously the recent announcement of last week, we think those are dollars very well deployed.
Matthew Gordon: High-grade Nickel, were you expecting to see that? Those sorts of numbers?
Oliver Turner: Historically it’s really interesting looking at Beta Hunt, I mean Beta Hunt actually used to be two separate mines. There was the Beta mine and there’s the Hunt mine. Both of those mines were Nickel operations that were actually in place for over 40 years. One of the massive advantages that we have at Beta Hunt is there’s over 400kms of infrastructure in place already and the announcements that you saw last week are actually a perfect example of us leveraging that infrastructure. If you look at the cross-section in our second release, there on the Larkin Zone, we actually drilled off the Larkin Zone from a drift that’s been in place for over 30 years. Not only do we have excellent drill base for exploration, but we also have these drifts in place for, basically, immediate mining or mining whenever we choose to do so.
It’s been absolutely outstanding to have that infrastructure in place and now being able to take advantage of it. With respect to the Nickel, the Nickel was obviously mined for an extensive period of time and our exploration and geological theory was always that the Nickel basically sat right on top of the Gold where we’re currently mining. That’s been true in A-Zone and Western Flanks where we’re mining to the North of that Alpha Island Fault. We knew, or we at least had the theory, that those Shear Zones that were mining very continuous economic free cashflow generating Shear Zone, irrespective of coarse gold, those Shear Zones would continue South of the Alpha Island Fault and that sitting on top of those Shear Zones would be this Nickel what we call, a Nickel Trough.
Now that Nickel Trough called the 30C, which we announced last week, on top of that Larkin Gold Zone, is the first Nickel discovery at Beta Hunt in over 13 years. So, we’re extremely excited about it. Those will provide some pretty fantastic by-product credits. I mean some of those intercepts were over 7% Nickel, that’s $1,000 a tonne rock, it will be meaningful going forward and we want to make that into part of our stable mine and production plan to further improve the costs that we’re already working on.
Matthew Gordon: Why not go chasing the easy, quick wins?
Oliver Turner: Yeah, absolutely, I mean if they’re easy I guess we’d all be doing it for sure but the big difference here is, is with the acquisition that mill last year and this is, you know, this is Gold price rally and agnostic here, let’s go back to $1,250 to $1,300 US grounds called. The acquisition of that mill in Higginsville took our milling costs which were previously toll milling costs from AUD$45 per tonne down to AUD$29 per tonne and obviously in our last quarter we had a significant improvement on that as well so that has drastically changed the economics and the future of Beta Hunt. Beta Hunt is economic and free cashflow generated at the average grade and what we are doing now is we are long hole stoping those entire Shear Zones which grade somewhere in the range of 2.8 grams per tonne, and we’re taking them out in the proper geotechnical sequence in which they should be mined, in making money, even if we never hit another oz of coarse Gold.
Now, do we think there is more coarse Gold? Absolutely. Do we know where it occurs? We know the setting it occurs in and we know that across those Shear Zones, there is 16kms of where this pyritic sediment crosses those shores on which is the environment in which that Gold drops out. But it’s not a matter of if we’ll get the coarse Gold, it’s a matter of when we will get the coarse Gold and we’re taking things out in a proper mine plan. We extract the entire Shear which includes the coarse Gold and at the front end of our mill, we have a gravity circuit in which we get 100% recovery of that coarse Gold. This is a stable operation which is going to be economic without coarse Gold but all the coarse Gold that we encounter is, for lack of a better term, gravy on top and will go directly to our bottom line. It’s a stable producing operation, it’s something in which institutional investors are very, very interested in. Obviously, we have that very exciting coarse grade Gold kicker but we’re not going to go tunnelling just search for these nuggets.
Matthew Gordon: Higginsville, what’s the plan there? What are you going to be trying to deliver this year?
Oliver Turner: Higginsville has been absolutely outstanding, since we took off that and completely eliminated the Morgan Stanley net smelter return royalty, one of the impacts that COVID did have on Western Australia is that third parties basically weren’t coming to the site. We were not … anybody that wasn’t mining Gold, wasn’t at either site. So that did impact exploration drilling over the course of the North American summer. We’re very happy to announce that we do have drills turning back at both sites, we have 2 drills on the ground at Beta Hunt, we’ll be adding another drill in the fall, we have 2 drills turning at Higginsville and we’ve also sourced another drill there. But what we did do during the course of that drilling hiatus was we conducted a very large gravity survey at Higginsville. 400kms2, we announced this in our first release last week, of our 1,800kms2 land package and the area that we’ve focused on that was the Salt Lake area.
The Salt Lakes are an area that, regionally speaking, some very large deposits have been found by Goldfields. And in fact, our own deposit that we are currently mining, called Baloo, sits on the Salt Lake itself. So this gravity survey actually identified some very large anomalies which could be analogous to some of those deposits, we’re going to do further work here and drill test them, of course, but there are definitely some very, very interesting exploration targets that we will be following up on this year. Not only that but of course inheriting this property from West Gold who was unable to drill most of the property, we have a list of 32 round fields targets at Higginsville. There is no shortage of targets, we have high grade, underground targets in Aquarius, we have high-grade open pits in areas such as Baloo and Fairplay North. We have larger high grade, potentially lower mining costs projects like the Palaeo Channels called Challengers, so, there is certainly lots for us to work on.
And recently we announced that we have already started mining Hidden Secret and Mouse Hollow which previously were actually 2 open pits and deposits which, based on the drilling that we did earlier this year before the COVID pause, actually have joined into one larger open pit and we’re hitting some outstanding grades on that. We announced a hole that was 25g over 4ms, 17ms below the surface so definitely pay dirt and as is the case with most of these open pits in Western Australia, it looks like there will be underground opportunities under several of them as well and we’ll certainly be exploring that in the future.
Matthew Gordon: Do you feel the need to mitigate the country risk? Do you feel the need to look outside of Australia, maybe deploy cash elsewhere or invest in other, outside of Australia?
Oliver Turner: Yeah look so we’re obviously very active on the corporate front as well as working on our own projects here given Paul and my experience in the capital markets where we’re shown a lot of assets and we’ve certainly looked at a lot of different companies and we’re only going to do things that will be per share created for our shareholders and we’re very, very focused on 2 things. When we’re talking about our own projects, it’s margin per tonne of rock, when we’re talking about potential corporate additions it’s per share or creation and that is, the perfect example of that actually was the Spargos acquisition which we acquired for AUD$4M, unbelievably creative per share and we’ve actually already begun some development work there and we’ll be getting a drill turning there shortly with the target, of course, of getting some of that ore into the mill by the second quarter of next year.
But in terms of diversifying away from country risk, I mean, the honest truth here is that Western Australia is the number 1 jurisdiction ranked by the Fraser Institute last year for mining in the world and what we are focused on corporately as a mining team and as a corporate team is not diluting the jurisdictional quality of our assets, so anything that we do look at will only be in top-tier or tier 1 jurisdictions.
Matthew Gordon: What are you hoping for?
Oliver Turner: Well, you know obviously we can’t talk numbers’, but we can certainly talk direction. We expect things to move positively in the right direction. There are definitely several levers that we can pull that will be positive for resource and reserve estimates at both assets. Obviously, we’re in a dramatically different metal price environment right now. That said what we’re seeing a lot of the industry do is remaining conservative on resource and reserve prices. What we don’t want to do is add ounces at the cost of grade or margins, so we are margin focused. One of the big, you know, basically accomplishments this year that will obviously play into our resources and reserves is those royalties. Those royalty renegotiations have dramatically reduced the costs of mining at both assets so that will play into our resource and reserve estimates and then of course with the drill bit, we’ve had tremendous success at Higginsville, pre-COVID, hiatus and precautions, we’re back, the drills are turning again.
We’re getting some good results coming in and then Beta Hunt, we already announced last week some of the initial success we’ve had there. And when you take a look at Beta Hunt and the strike extents that we have drilled off there so first of all with the new Footwall Zone and Western Flanks North, 160ms of Footwall Strike Flank, looks like that can grow. It’s immediately adjacent to infrastructure, once again, in very, very continuous. When you look at the new Larkin Zone, which we discovered South of the Alpha Island Fault, we’ve delineated 400ms of strike extent and we think we can add another 300ms there and if there’s anything that we know about Beta Hunt it’s that the Shear Zones are extremely continuous.
It’s very homogenous material, easy, stable mining so those areas will … if they don’t make it into this resource from reserve estimate, they’ll certainly be building to future resource and reserve estimates and one of the benefits that we have is what we did last year. So, last year, prior to the kind of change in management, there’s a 40,000m drill programme that cost about CAD$7M. It added 1Moz to the resource, so it goes to show how continuous the Shear Zones are, so we expect Beta Hunt to certainly replace depletion and we expect to add oz there as well.
Matthew Gordon: What are the things that you are discussing with regards to the corporate structure that you need to create?
Oliver Turner: Yeah, so we’ve already done a few of those things this year. I mean one of the major accomplishments was, of course, was voted on by our shareholders and was the share consolidation of the 4.5 to one rollback that we executed earlier this year. That has been transformative for our liquidity. So, one of the important things to realise is that when you’re, when you have a tighter share structure and you become investment grade for a whole new slew of institutional funds, not only does it help bring new investors in which is what we’ve seen with US generalists but it also improves your liquidity. Our market makers are more institutional now. We’ve seen liquidity improve in volumes, improve since the day of that consolidation so that was, you know, a tremendous step forward in terms of repairing our capital structure and getting it into investment or institutional investment-grade quality.
Obviously, we have our $32M worth of remaining debt. We’re in discussions for renegotiating that debt and on more favourable terms and making sure that this is a leaner coupon company moving forward just in case metal prices do stress us further. So, those are some of the areas that we’re talking about with respect to corporate structure and making sure that we’re better prepared. In terms of generating market interest going forward, Paul has talked about it in some past interviews and we’ve been out there into the market, talking with the fact that we’re focused on building an organic growth profile.
Obviously, it’s no secret there that we have some tremendous upside of both properties ahead of us and we have a 1.4Mt granite mill that is at a 100% capacity so how do we increase the oz output of that mill? There are several things that we’re looking at internal projects right now. We obviously have some extremely high-grade projects that we can pull from, from the mining perspective so we will be rolling out an organic growth profile to the market and attracting new investment that way down the line as well and that plays, obviously very important, into our capital allocation decisions.
Matthew Gordon: Do you think it would be at all beneficial for you guys to think about listing on the New York Exchange?
Oliver Turner: Well look, I mean, there are certainly arguments for that with respect to increasing trading liquidity, getting more market exposure, there are even arguments for listing on the Australian Stock Exchange. Look we have a lot of Australian investors knocking down our door just begging me to get into the store for us to be Australian listed and you know, historically speaking, over the last 3 to 4 years the Australian market has been much stronger than the North American market. But what we’ve seen over the course of the year, you know on the TSX has been an absolutely incredible Bull market both with respect to capital flowing into the sector but also with respect to foreign investors buying TSX paper so we’re certainly not closing the door on evaluating listing on other exchanges but we’re certainly very happy with how things have performed on the TSX and with the calibre of investors that we’ve attracted to this listing.
Matthew Gordon: Have you got the energy to go another year or if someone came knocking, is it time to think about what they put on the table?
Oliver Turner: Well look, we’re very excited about what we have ahead of us in terms of what we want to execute this year, for sure. We know that this company ultimately is going to be worth a lot more tomorrow than it will be today but obviously any imbalance that we have, we evaluate those for our shareholders and ultimately speaking we want to do what is going to provide the highest per share return for people that own Karora stock. We’re all shareholders in the company ourselves so we’re directly aligned with our existing shareholders and you know, we’d love to execute on what we have ahead of us, ‘cause it’s going to be exciting, we’re excited to put it together and get it out there into the market and then deliver on it operationally as we have in the last year. With respect to energy, I think we’re probably more excited now than ever. We’ve built a very stable investible base in this company from the company that a year ago was, quite frankly, borderline un-investible so for institutional quality investors, so, we’re excited to move forward with that.
Matthew Gordon: Great stuff, a great turnaround story. I appreciate your time Oliver, thank you.
Oliver Turner: Thank you very much Matt.
Company Website: https://www.karoraresources.com/
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