K92 Mining Inc.

Thank you, operator and thanks everyone for attending K92 Mining Second Quarter 2020 Conference Call. We hope you and your families are doing well.

In addition to myself, we have on the line John Lewins, Chief Executive Officer and Director; and Justin Blanchet, Chief Financial Officer. I would also like to remind everyone that after the remarks from management, the call will be followed by a Q&A session.

As we will be making forward-looking statements during the call, please refer to the cautionary notes and risk disclosure in our MD&A. Also please bear in mind that all dollar amounts mentioned in the conference call are in United States dollars unless otherwise noted.

Now, I'll turn it over to John to provide you with an overview.

Okay. Thanks, David.

And welcome everyone to our second quarter presentation. So, the second quarter clearly represented an important step forward for K92.

We believe we certainly delivered in most of our operational objectives, which are really towards expanding our production capabilities and of course, furthering our growth through exploration at Kainantu. And I think importantly, when we were looking at the quarter, it was what we've achieved, we've achieved at the height of the uncertainty of the COVID-19 pandemic and then I think is important in showing the operational resilience in showing the commitment to our commitment of our workforce, quality of the team of people that we have on the project at all levels, the quality of the resource at Kora, which I don't think anyone with question, and really importantly the strong support that we've had from all levels of government in PNG.

If we start with safety which is - how we normally start our day, we've had no lost-time injuries during the quarter. And when you actually look at our operation, we've had one lost-time injury since start of operations in 2017, it's almost four years since we had - in four years, we just have had one lost-time injury.

So we have one of the best safety records in the Australasian Region and that really is a very strong focus for us, and I guess we are, we believe, justifiably proud of our record there. If we look at the production front, Kainantu delivered record production, 26,847 ounces gold equivalent, and a record mill throughput at over 49,300 tonnes, if we compare that to second quarter 2019 gold equivalent, production was up by 37%, mill throughput, up by 30%.

Head grade in that second quarter 17.6 gram per tonne gold, 0.54% copper. Gold head grades were above budget and importantly continue to deliver a positive grade reconciliation against resource and this continued when we look at the months of May and June against the new Kora Resource model, which we released in May.

Going forward, production growth as we've been stating quite clearly, will be driven by tonnage and not by grade. And hence the whole expansion that we're busy with is designed to double our throughput and in double throughput take us up to the capacity of up to 145 ounces a year.

That increase in tonnage requires us to be mining both K1 and K2 and so it will be a balance of K1 and K2 and overall that gives us a lower grade than the grades that we've - that we've been processing for the last two years. This quarter production from long hole stoping has increased as expected and we anticipate we'll continue with that transition to our target, which is to get to about 80% of our stopes in long hole utilizing the modified AVOCA method and it will take us until mid 2021 to get to that 80%.

So, we're still quite a bit of our stopes are also cut and filled. Stoping over the last quarter was conducted, long hole stoping on both K1 and K2 veins, and pretty much performed to design.

So we are happy with what we're seeing in terms of the long hole stoping. And that long hole stoping brings us an enhancement in our operational flexibility and obviously associated with that is our throughput capability.

In terms of near-term production, third quarter, we are now focused on the commissioning of our expansion. The commissioning originally was supposed to have commenced at the end of the first quarter and run through the second quarter, due to the COVID-19 State of Emergency, that has been delayed.

And so we are now in - right now, today, we're in the process of carrying out commissioning of the plant expansion. We've already commissioned the crusher.

We've almost completed commissioning of our new process control system and we're busy commissioning the expansion to the float and recovery system. While we're doing that one of the things that we are doing is deliberately putting lower grade material through squabble commissioning with the hiccups one expects to getting commissioning.

We don't want to be throwing away high-grade material, so we will be treating low-grade material during this period. And so certainly this quarter, we would expect production will be a little lower than it was in the last quarter.

And then in the fourth quarter of the year, we obviously anticipate with a complete new plant commissioned that our tonnage will significantly increase in the fourth quarter as well our overall production. And I'd make the point I think that currently, we're sitting with about 24,000 tonnes in stockpile on surface and when you consider that, we treated 49,000 tonnes in this last quarter, that's a significant amount of material that we've got - sitting ahead of us, that allows us to ramp up our production overall.

So with that I will turn over to our Chief Financial Officer, Justin Blanchet to discuss the financial results for the quarter. Thanks, Justin.

Thank you, John, and hello everyone. Our Q2 2020 revenue increased by 105% to $47.9 million compared to $23.3 million in Q2 2019.

The increase in revenue was attributable to an increase in the realized selling gold price of $16.31 per ounce as compared to $12.58 per ounce in the prior year, as well as increased production. As of June 30, 2020, there are 3,439 ounces of gold in concentrate inventory that was sold in July 2020.

Cost of sales was $18.4 million for the quarter, an increase of 47% compared to the second quarter of 2019. This was primarily due to a 30% increase in tonnage processed.

The increase in cost of sales was in line with expectations when accounting for improved efficiencies and economies of scale. In addition, the Company incurred costs related to the COVID-19 pandemic, including additional pay for employees, completing longer rosters at site, additional costs related to the movement of personnel and supplies, and additional safety and medical-related costs.

In comparison to Q2 2019, exploration and evaluation expenditures decreased to $844,000 from $1.37 million, primarily due to the restriction in activity caused by the COVID-19 pandemic. Cash flow from operating activities for Q2 2020 increased by 137% to $23.2 million.

As of June 30th, we had nearly $35 million in cash and cash equivalents, while still paying $4.2 million year-to-date in principal loan payments to Trafigura having a remaining balance of $9.1 million at June 30th, and spending $10.8 million year-to-date in expansion capital. As John mentioned, in Q2 2020, Kainantu Gold operations produced 25,762 ounces of gold, 531,406 pounds of copper and 10,867 ounces of silver.

During the same period, prior year - sorry, during the same period, we sold 27,149 ounces of gold, 566,084 pounds of copper and 11,729 ounces of silver. We incurred a cash cost of $596 per ounce and then all-in sustaining cost of $678 per ounce, which is significantly below our realized gold selling price of $1,631 per ounce for the quarter.

In comparison, 18,980 ounces of gold, 261,800 pounds of copper and 6,894 ounces of silver were produced and 18,824 ounces of gold, 265,640 pounds of copper and 7,138 ounces of silver were sold in Q2 2019. A cash cost of $572 and in all-in sustaining cost of $703 per ounce were also well below the Q2 2019 realized selling price of $1,258 per gold ounce.

Our 2020 cash cost per ounce increased relative to the prior year due to a greater focus on mining the K2 vein with gold grades in line with budget, as well as additional costs incurred related to the COVID-19 pandemic. We see downward pressure on cost, the economies of scale once the Stage 2 mill Expansion commissioning is completed and long hole stoping activities are expanded.

I will now turn the call back to John, to continue with the rest of the presentation.

Thanks Justin. Okay.

Let's move on. Looking at exploration, we're obviously very pleased with the progress that we've seen today.

In May, we announced a very significant increase in our resource at Kora. Measured and Indicated increasing to 1.1 million ounces at 10.5 grams per tonne gold equivalent and inferred up to 3.7 million ounces at 9 gram per tonne gold equivalent.

So very significant increase of 180% on the M&I and 50% on the inferred from the October 2018 resource. Drilling has really continued to deliver strong results during the quarter, and that's really highlighting the continuity in the growth potential.

I'd make the point that the updated resource was included drilling through until the beginning of April. So anything from April onwards basically additional to what that was.

Drilling highlights have included 8.8 meters at 34-gram per tonne gold equivalent K1, 10.4 meters at 25.4-gram per tonne gold equivalent K2 and 2.8 meters at 25-gram per tonne gold equivalent in K3. K3 vein is actually quite interesting.

It's got limited drilling to date and it's not, certainly not included in our resource and certainly something that we will be targeting as we move further to the south, where it seems to become more prevalent. Also important to note that the resource that we've defined very much remains open at depth, although we put in, have shown the continuity of the system and we have not been able to show any of those holes depth where it can't just having.

Likewise, along strike to the south, holes that we've drilled continue to show it going to the South. That step out drilling to the South is going to be a major focus for the balance of 2020 and into 2021.

And in addition to that, major focus will be in increasing our Measured and Indicated for our Stage 3 Expansion for the definitive feasibility study. We did announce that most southerly drill cutting was completed in July and currently one of our rigs underground is drilling from there and we will shortly be reporting our most southerly holes that we've drilled to date.

So already with the drilling that we've been doing, we've been doing outside of our current resource. So we are already showing that the resource expands to the South.

In addition, exploration, we're also testing a number of near-mined targets at Karempe and Judd, and certainly Karempe, currently, we have two surface rigs drilling, and we would expect to have our first results out from there, probably by the end of this month. In addition to that, we've got drilling at Blue Lake planned to commence in the fourth quarter with the arrival of two new rigs on site.

These are our own rigs that we've ordered and had manufactured in Canada, and they're in transit and they will be operational in the fourth quarter. So if you look at today, we've currently got seven rigs operating.

We've got three rigs on the surface to Karempe, one at a regional target called Papua, hole rigs drilling underground, underground rigs currently are focused on Kora but we'll be doing some drilling on Judd from underground, certainly in the coming quarter. Two new rigs, for the surface, coming in takes us up to nine and potentially looking at another rig for underground as well.

So potentially 10 rigs by the end of the year, operating five on the surface, five underground and certainly if I let my VP loose - VP Exploration loose, it will be a few more than five by early next year. And in July, we made significant progress in terms of the review of our Memorandum of Agreement.

The Memorandum of Agreement is an agreement that every mine in PNG needs to have, which is between the mine, the community, local level government, provincial government, central government and administered by the MRA, the Mineral Resources Authority or the mines department as many people would recognize for that. And this has been delayed for some time and a source of I guess frustration for ourselves and for our community.

And part of that support that we're seeing from government is that the Minister, the Honorable Johnson Tuke made it a priority to get our MOA review going again, even though we were in, effectively in State of Emergency. We made arrangements for the next meeting to occur and as soon as the State of Emergency was lifted, we've actually held a week-long meeting where the Minister made himself available for the entire week, the Governor of the Eastern Highlands Province, the Honorable Peter Numu was also there for the entirely week, as well as the Head of the Mineral Resources Department, the MD of the MRA.

So we had exceptional support from government, both central level, provincial level and from our own community. And at the end of a week, we had an extremely good week and at the end of that week, we reached an agreement in principle, covering plans for local landowners and additional funding commitments, community infrastructure, multiple business initiatives, commitments from government in terms of the support that they would be providing and also looking at honoring a regional agreement from when we took over the operation, which was to provide an opportunity for local landowners in the Eastern Highlands Provincial Government to acquire a 5% interest in ML150, Mining Lease 150.

So we were extremely happy with the outcome that we've seen from that. That is not going into a phase of finalization.

And certainly our expectation is, will be a formal signing of the new MLA in the coming quarter and that has been something which has been about two years in the pipeline. So we're extremely happy to see that.

In terms of the operations and the COVID-19 pandemic, to date, we have had no confirmed cases amongst our employees. As I mentioned, the State of Emergency was lifted in June.

But there remains a series of restrictions in place as in every country and we have seen an increase in the number of cases of COVID-19 in PNG. It's currently sitting a little bit under 300 but that is a significant increase from where it's been.

In our case, we have continued to modify our protocols to deal with COVID-19 and our response plans. On site, we have trained doctors, nurses.

We have one of the Rapid PCR testing systems, in fact we have two testing - two PCR testing systems. We have quarantine protocols in place for all personnel arriving on site, no matter where they come from.

We don't have local community people that walk in and walk out of site, everything is effectively locked down with everyone coming in and staying in our camp. The camp itself, we have over the last 12 months to 18 months, we've basically doubled its capacity to now something over 800.

We're also pleased to say that we are supporting both the community, and government through a $1.5 million K92 COVID-19 Assistance Fund and some of those moneys have already been drawn down by the provincial governments and I think that just about a decent drawdowns for the central government. So that has been from our view, it's an important initiative and it's certainly been very well received in country.

Lastly, but certainly not by any means leastly, we've obviously been very excited about a near-term growth Project to - a K92. In July we announced the Stage 3 Expansion PEA outlining what we would call a potential Tier 1 asset with an average 318,000 ounces gold equivalent production per annum at our run rate and a life of mine average all in sustaining cost of $362 per gold ounce net of byproduct credits.

And that expansion will be fully funded at a gold price of $1,500 an ounce. The CapEx that we were looking at there $125 million of upfront capital when we bring in the sustaining capital over the three-year development period, a total of $240 million CapEx spent in 2021, '22 and '23.

All of that would be funded from cash flow from our existing operation. Existing operation, as I mentioned, the Stage 2 Expansion, the commissioning is underway.

We've already commissioned the upgraded Crusher circuit, and it is operating very well. We're certainly getting the throughputs that we anticipated.

We've commissioned the upgraded scatter process control system, and we're busy with the commissioning of the floatation system right now. Tonnage wise, we've seen a significant increase in tonnes and certainly over the last three days, I think we've averaged in excess of 900 tonnes per day for the last three days and to put that into context, our capacity prior to the expansion is 500 tonnes to 550 tonnes, we are still very much in the early stage of the next expansion and we're already up to 900 tonnes to 1000 tonnes.

So we're very happy with how things are going in terms of the expansion. It is clearly more challenging to be commissioning in this environment.

There are no OEM suppliers, representatives or whatever on site, it's all being done by our own people. So commissioning does take a bit longer because you got to go through - you got to do it by the numbers but to-date that's going very well.

And then perhaps worth mentioning the twin incline development, which is also underway with again put on hold with the State of Emergency. That is not very much underway.

And we've got all of the mobile plant and equipment that was specifically purchased for that is all on site. We've been bringing and starting to bring in additional expense, as we - we actually be developing that ourselves, so that's also going ahead.

Exploration, as I've mentioned, ramping up and we certainly expect to see additional results coming from Kora, coming from Judd, coming from other vein targets, in the fourth quarter, we got Kora, we got Kora South, we got Karempe, Blue Lake, Judd, so there is a fair amount happening on the exploration front and a pretty exciting time, I think coming up in this quarter and then leading into the fourth quarter. I think we're very happy to report the results of this second quarter and I think it sets us very - up very well for the balance of 2020 and beyond.

And with that, operator, perhaps we could commence the Q&A session.

Congratulations on the good quarterly performance. A couple of questions on the Stage 2 commissioning.

To start with, could you, John, elaborate on the work that needs to be done to complete decommissioning and is that expected to have an impact on the mill availability and throughput in Q3?

Okay. So commissioning of Stage 2, as I mentioned, the front-end, the Crusher and everything else has been done.

The process control system done. The gravity done and we're now on the float.

We would expect from a tonnage perspective that we will probably - we will see a higher tonnage than we saw in Q2. But I would expect the grades will be significantly lower, because as I mentioned, we have been deliberately running lower grade material through the plant, while we've been doing this commissioning.

Plant availability has actually been lower and that's because we've had it stopped on occasion to do tie-ins to the new sections. But even with the stoppages, we actually expect that the tonnage throughput will actually be higher than in the second quarter.

And just one more question. Basically, what are you expecting on the throughput and unit costs at the end of Q3 after your exiting decommissioning phase and then by year-end?

And the life-of-mine operating costs as per the PEA, they are expected around $94 per tonne range, so do you expect to be around that level by year-end?

Well, first off, I think in terms of operating costs, we would certainly not expect to be in the sort of life-of-mine operating costs that we've put out for the PEA, and obviously, it's based on 1 million tonnes per annum. So certainly, from that perspective, we don't expect to see that sort of cost.

I think overall, costs currently would be probably around the $200 per tonne and we would expect to see that coming down to - by the end of the year as we get into our full $400,000 bearing in mind that last quarter, we basically, I mean, annualized rate of $200,000. Overall, we'd expect to see that coming down to I think a round about $150 mark.

Cost to date would certainly be higher than we would normally expect to see, because we've been opening up underground from an underground perspective, significant expansion of underground and in fact, when you look at the tonnage that we've moved, we've moved significantly more waste and we have ore right now, that will obviously switch as we get into a more balanced production scenario. And then of course, which again because we're actually going to an expansion again.

But in the short term, you would see more of a balance, so the longer term, when you look at it, I think our mining cost should be over $40 processing, $25 G&A, a bit under $30 that you would only see as you get to your 1 million tonnes per annum and that is, you obviously getting quite a lot of economies of scale in that - in those levels. Having said that, some of the initiatives that we're busy with on the mining side, for instance, we are transitioning from bolt and meshing and basically every single cut we do anywhere we bolt and mesh, we don't leave it to a initiative of underground supervisor to determine if it's bolt-and-mesh, everything is bolt-and-mesh and that's part of our safety.

We're switching. We are transitioning to shock crating.

Shock crating provides better, more rapid support and also provides us with some cost benefits as well. The other area that you get a lot of benefit with this expansion, of course, is putting in the twin incline and having a high speed tramming system with the six by six incline as opposed to the one in a 100, current incline is five by five, one in seven, so it is a haulage wise, far slow haulage, et cetera, et cetera.

So there are quite a number of benefits that you get from the expansion that we are looking at.

Thanks, John and David and Justin for answering the call and well done on a solid quarter. Just a question, maybe for David or Justin, I was wondering if you could comment on the application to get listed on the big board, when should we expect that to occur and I'm also assuming that once that happens, you'll be eligible for GDX inclusion, so do you have a handle on timing and what the demand might look like for that as well?

Yes, I can answer that. David.

We will be applying for graduation in mid September and looking for graduation near the end of Q4.

Yes, I can jump in, just on the GDX. So there has been a number of reports from investment banks that have Fly K92 for inclusion for the GDX demand estimates that we've seen from those banks range between 11 million to 13 million shares with the measurement date being September 11th and the closing date for that being September 18th.

So it's certainly something to monitor. There is no guarantee, but it is a sign that a lot of people are looking at now for us.

A lots of questions already answered. John, maybe if you could just give us a little bit of insight as to what we should expect for this ramp up of advance rates on the new, I guess, added or inclined, whatever you want to call it, that you're in a bit of a preparatory phase that the first portion of all of these kinds of ramps and added, though it seems to take a while before the crews settle into a more consistent advanced space.

So what should we expect over to say the balance of this year and where would that get to next year?

Okay. Well, in terms of twin incline advance rates, we've budgeted on 100 meters for each of the two inclines.

We think that's pretty conservative and so it will take us the rest of this quarter, really to set up total areas and everything else, so that we can really start focusing just on taking the cuts. So end of this year, the expectation would be that we'd be sitting right 300 meters to 400 meters in the two inclines.

Going forward next year, we'd be looking for 200 meters to 300 meters per month from incline development on the twin incline and then, obviously, we're doing a lot of other areas as well. I think our development is currently running without the twin inclines at around 600 meters per month of lateral development.

So overall, we'd be looking at 800 meters, 900 meters of lateral development in a month.

And just to make sure I heard that right, so initially starting at something resembling 100 meters per month, per heading and exiting this calendar year, something approaching 400 meters on each?

Yes.

Thanks for mentioning it John, because it's actually going to be my first question. I was just curious about that, the 5% purchase right after the MCI, is there an expected consideration that will be coming your way for that or is that going to be essentially a carry?

There is a consideration that has not been specified at this point in time. We're structuring it as a interest in ML150, it's not an interest in the project, it's not an interest in the plant or anything else, it's actually in the ML, and we've been very specific on that because it provides a far simpler, straightforward system.

PNG, one of your issues are, who are your communities and how do you deal with them and how do they get involved in your project. Now, in our particular case, the focus right now is the communities that are immediately involved in the mine as it stands.

But of course, if we start looking at the expansions, if we start looking at Maniape, Arakompa, Karempe, these other projects, they are quite separate to ML150 and to Kora. And we want to make sure that we keep things compartmentalized, if you like.

The added point is the way we've set it up, is that all of the capital equipment will belong to K92, we're not selling a 5% interest and capital equipment and that will remain to be K92, so that K92 will effectively - effectively ML will be a joint venture between K92 and the community with their 5% community and Eastern Highlands Province. The operation will be run by K92 as effectively the manager of the operation and the provider of all of the capital equipment and we'll recover from the joint venture partners, all of their operating costs, and their capital costs and obviously some sort of management fees.

And then, so is there a potential maybe to rather than sort of receiving initial consideration effectively extended those alone, but to get repaid to the...

Absolutely. It can't do any other way, you have to do it.

Yes. Okay.

Great. That helps a lot there and just because I think it's, as you mentioned, if that's applied directly to ML150, I know you guys are obviously chasing the system to the south, but that will be leaving sort of the mining lease.

Is there, given the timing of the, I guess the current life of the mining lease, till June 24, what would the thought process be potentially on bringing some more of that ground into a mining lease, would it be sort of as part of the anticipated renewal of the existing lease as an extension or would it be its own separate week's package?

Okay. Well, first off, in terms of the existing mining lease, it's our intent to apply for the new next year.

As part of this whole expansion process and that's actually been the recommendation of the MRA, the Mineral Resources Authority as to how they - their recommendation was applied forward as part of their expansion, and there is a logic to that. That is exactly what was done with St Barbara for Simberi, looking at the sulphide expansion and that's actually what's been done by Hidden Valley, where they're looking at the major cutback on their open pits and a brand new tailing stand.

So there's a major capital commitment they put in an application for renewal of their mining license last month and they actually have ML151, so their mining lease is actually up for renewal, early 2025 but they put in an application now on the basis that they are looking at a significant capital expenditure to extend the life. So we would, we would go with that same logic and as I say, that's what the MRA told us, it should be doing as well.

In terms of looking to the South under the current mining act, there is no capacity to expand a mining license. So we would have to apply for a new mining license for any new area.

Under the proposed new mining act, there is an ability to expand the mining license, however, the timing to bring that new mining act in is still unknown. I mean it's been in process for over 10 years now.

We'd like to see in sooner rather than later, but it is a process and of course, seems like COVID have certainly added to the complication of getting legislation done.

Just a quick question on exploration, you mentioned the potential to maybe ramp up to 12 rigs, why not sooner, I guess, and if we're thinking about those extra two rigs, where are you looking at, in particular on those plants?

Okay. First off, in terms of the additional rigs, the two additional rigs, they are both in transit right now.

We're actually supposed to be here earlier but COVID-19 also impacted Canada and they finished them later and shipped them later. So we were a bit disappointed with that quite frankly.

In terms of where they go, as it is, as I mentioned, one of them is earmarked for Blue Lake and the other one will go to either Maniape, Arakompa, Mati or Kora Sout. There are a number of options we're looking at for the second rig.

There's also some drilling at Mati, which is probably the first thing that both of them will do and simply because it's right next to the ML and so it's an easy point to be doing the commissioning of the two rigs. Why not go to 12 or more?

A couple of things. One, we're very cognizant of COVID right now and we don't want to be expanding where we're operating and increase the potential of having complications from COVID, so part of overlooking at is how we manage our exploration in the light of the COVID pandemic.

Right now, the exploration people are remote from the site. They are not allowed to come and go into the camp, so that they are kept separately.

We have separate camps covering the exploration areas, lead to the exploration areas. So there is a camp for Karempe, there is a camp at Blue Lake, there is a camp at Papua and so the exploration people stay in those areas.

So it really comes down to A, being confident and comfortable in terms of where COVID is and secondly, it's a pretty significant step to go from three to five on surface and then to go from five to seven is a further step and so there is a whole process of getting resources setting up to be able to do that, helicoptered support for a lot of it, et cetera, et cetera, so it's like going through process. We had planned for instance to have a detailed aeromike program completed this dry season right now and that was obviously part of our regional work and target generation and that's been put on hold as clearly we can't bring in the equipment to be doing that in country right now and so probably that will only be done next year.

It's a dry season thing you've got to do, we're not going to do it in the wet season. Did that answer your question, Geordie?

Yes. Thanks, mate.

So obviously, not a target issue, a more of the logistics and sort of risk, I guess management corrects all. Okay, thanks.

Yes.

Okay. Well, from my perspective, on behalf of K92, I really like to thank you all for making the time to listen to us today, I was going to say this evening, but it's only me this evening but everyone else is going into the day, I'm finishing mine.

We'll certainly see Q2 as - second quarter as being another transformational quarter, it seems to be worth of belief for a lot of things but given the challenges that are right there, not just for us but for just about every mining company right now, we're very pleased with the results that we got for the second quarter and certainly, just like to put on record that from our perspective, the work that was done by our team on site has been quite outstanding in this last quarter and in this quarter. And the support from government to keep operational has been quite outstanding.

So that's it from me. Thank you very much for your time.