K92 Mining Inc.

Thank you, operator, and thanks, everyone, for attending K92 Mining's fourth 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 and Slide 2 of the webcast presentation. 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.

Thanks, David, and welcome, everyone. So the fourth quarter represented another important step forward for K92 with the commissioning of our Stage 2 Expansion, taking the plant capacity from 200,000 tonnes per annum or 550 tonnes per day to 400,000 tonnes per annum or 1,100 tonnes per day.

Importantly, during the quarter, K92 was announced as the recipient of the Thayer Lindsley award 2021 as global discovery for Kora North. Importantly, within PNG, it was seen as very important.

Recognition from government included them taking out a four-page advertisement because they were celebrating not only our success, but they saw it very much as a recognition of the mineral potential of PNG. The award now sits in Mining Haus, which is the MRA head office, and we had a formal ceremony to actually present the trophy to the government.

So that's been viewed in a very, very positive manner. On the safety front, we had one lost time injury in 2020.

So we continue to operate as one of the safest mines in the Australasian region, and it's an area where we continue to have a very, very strong focus and continue to look now for improvement. Production.

We delivered a record quarter, just under 30,000 ounces for the quarter. And that was on the back of record mill throughput, just under 69,000 tonnes processed; and very, very solid head grade, 14.2 grams per tonne gold equivalent.

If we compare that to the fourth quarter of 2019, we see a 26% increase in our production, while throughput increased 127%. And on an annual basis, our production was just under 99,000 ounces gold equivalent, 98,872.

And that was a 20% increase from 2019. Importantly, I think during the quarter, we also continued to see positive gold copper grade reconciliation versus the resource model and a positive reconciliation both for the previous model and for the more recently updated April 2020 model.

Fourth quarter, you can see very much, we continued the ramp-up that's been really happening since 2019 since we announced that we would be going ahead with the Stage 2 Expansion. And in the period from the fourth quarter of 2019, you can see that material movement increased 275%.

Development meters increased almost 400% and mill throughput, a bit over 250%. So on every metric, we are continuing to expand and achieve new records as we go forward.

Certainly, in the – in this quarter, the initial part of this quarter, we've seen that those metrics have continued to be positive. On the mining front, long hole stoping continues to be expanded, both in K1 and K2.

And that obviously provides us with the flexibility, the operational flexibility that we need as we ramp up to our 400,000 tonnes per annum. 2020, our major focus has been to increase the number of levels as we expand the mine throughput.

And during the quarter, we sourced ore from material from 7 levels. And when you look at the mine plan going forward, this looks to increase it to 13 and also to bring in Judd.

So again, we'll see more flexibility as we get into 2021. No review of 2020 and a review of where we are today can be done without addressing COVID.

We operated, I think, very well during 2020 with -- in that COVID environment. But what we have seen more recently in this current quarter, for the first quarter of 2021 is an increase in COVID in PNG.

We've obviously been operating in a COVID environment, and we've had quite some time to prepare and, in fact, operate in what we consider to be a cooperative, safe manner. We've got containment measures.

We operate the mine as a bubble. So we've got quarantine procedures for everybody arriving on-site whether they come from -- an international or whether they come domestically, everyone's quarantined coming to site.

Enhanced hygiene, social distancing, PPE, we increased our on-site medical staff. We do on-site testing, PCR testing.

And at the same time, we've also been looking at potential impacts from areas such as supply chain. So we've increased our inventories on-site.

And importantly, we established a COVID Assistance Fund for PNG, for government and PGK 1.5 million, which was provided to the 2 provinces in which we operate, which is Morobe and Eastern Highlands and also for the central government. Number one priority is obviously going to be the health and safety, not only of our workforce, but also our local community.

Now March 16, the Australian government implemented a two-week travel restriction between Australia and PNG. And that includes our fly-in, fly-out expatriate workforce.

While it's not expected to significantly impact on our production, we've certainly taken the step of reducing our non-production activities. So some of the projects that we've been doing, the expansion projects we've been doing, et cetera, et cetera, we put on hold.

We are working with the PNG government, the Australian government in terms of looking at all of our protocols and ensuring that we can come off this initial suspension as soon as possible. And certainly, response from both governments has been very positive, recognize the importance of the resource industry for PNG and also the importance of being able to move our people around.

Also, I think when we put out that release in relation to COVID, we also noted that stoping operations have been impacted by an incident involving a loader, which prevented backfill operations. And so that actually deferred some of our high-grade because it effectively stopped our stoping.

And so during the latter half of the quarter, we shifted to processing low-grade stockpile material. Subsequent to that, I'm pleased to say that we have restarted our stoping activities, our backfilling and our stoping activities.

And in terms of guidance for 2021, the guidance in 2021 is not expected to be impacted. So our guidance remains as it -- as we put out.

I think it's important perhaps to emphasize the timing of high-grade ounces will certainly mean that the first quarter will be materially below budget. Production in the second quarter expected to benefit from that, however.

Now I'd now like to turn the call over to our Chief Financial Officer, Justin Blanchet, to discuss our financial results for the fourth quarter and for the full year. Over to you, Justin.

Thank you, John, and hello, everyone. Our 2020 revenue increased 56% year-over-year to $159.1 million.

The increase in revenue was attributable to an increase in production and selling at an increased realized gold price of $1,692 per ounce compared to $1,334 per ounce in 2019. In the fourth quarter, we had revenue of $48 million, a 45% increase from 2019.

As of December 31, 2020, there was 5,451 ounces of gold and concentrate inventory that was sold in 2021. Cost of sales for 2020 was $73.4 million compared to $48 million in 2019.

In the fourth quarter, cost of sales was $23.9 million compared to $13.9 million in 2019. The higher costs were primarily due to increased operational activity, as illustrated by the significant increase in ore mined.

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. Cash flow from operating activities before working capital adjustments increased 55% year-over-year to $76.5 million versus $49.7 million in 2019.

In the fourth quarter, cash flow from operating activities before working capital adjustments was $18.9 million compared to $18.1 million in 2019. As at December 31, we had a record $51.5 million in cash and cash equivalents while spending $20 million in expansion capital for the year.

Following the record production reported in the fourth quarter, we took the opportunity to repay the outstanding loan from Trafigura of $4.9 million in early 2021, leaving the company with no debt. As John mentioned, for the year, the Kainantu gold operations produced 95,109 ounces of gold, 1,853,078 pounds of copper, and 36,067 ounces of silver or 98,872 ounces of gold equivalent, a 20% increase from 2019.

For the year, we sold 93,273 ounces of gold, 1,827,368 pounds of copper and 36,655 ounces of silver. We incurred cash costs of $651 per ounce and an all-in sustaining cost of $782 per ounce during the year, which was significantly below our realized gold selling price of $1,692 per ounce.

In the fourth quarter, we produced 28,809 ounces of gold, 493,584 pounds of copper, and 10,395 ounces of silver or 29,820 ounces of gold equivalent, which is a 26% increase from 2019. We sold 28,112 ounces of gold, 512,203 pounds of copper and 10,594 ounces of silver.

We incurred a cash cost of $639 and an all-in sustaining cost of $768 per ounce, which was significantly below our realized gold selling price of $1,792 per ounce. Our 2020 cash cost per ounce increased to $651 from $532 in 2019 due to the additional costs incurred related to the COVID-19 pandemic, higher labor costs associated with the plant expansion and lower head grades.

It is important to note that after commissioning the Stage 2 plant expansion in late Q3, we have seen a significant compression in our total unit cost per tonne produced or processed, approaching $30 a tonne. We continue to see downward pressure on costs via economies of scale as operations ramp up.

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

Thanks for that, Justin. Now moving on to exploration and growth, starting with growth and the twin incline.

So we made considerable progress. Strong development rates have been achieved.

Furthest incline as of late March, 370 meters, drilling incline slightly behind that. I would point out the twin incline activities are expected to slow down during this period of travel restrictions as we focus on production.

However, at this point in time, we don't expect it to materially impact on the advance rates that we achieved for 2021 and completion dates, et cetera, et cetera. On the exploration front, I think it would be fair to say we're very pleased with the results to date, particularly at Kora, Judd and also Blue Lake.

Kora, mid-February, we announced results from 35 holes, which were primarily infill holes focused on increasing our measured and indicated the updated resource as part of the feasibility study but also some step-out holes to the study. We delivered multiple high-grade intersections, including 7.2 meters, 65 grams per tonne gold equivalent and a very high hedge rate at 25 of the 35 holes with over 10 grams per tonne.

The results also featured some high-grade intersections from veins that are not currently in our source, and that included 7.8 meters at 21 grams per tonne from the K2 Hanging Wall and also just over 3 meters at 50 grams per tonne in K3. At Judd, late January, we announced the latest development extension from -- at Judd, the 1235 levels of the development, the 1235 Level, which was 65 meters of the J1 Vein, averaged 3.8 meters at 18.7 gram per tonne gold equivalent.

The last 179 meters that we've developed averaged 3.7 meters at 15.4 grams per tonne. So development has really shown strong continuity.

Thick high-grade faces, 5.5 meters here at 109 grams per tonne. I think this was from my site visit in late 2020.

Importantly, as well, the geology looks very similar to Kora. And certainly, from the geotechnical perspective, characteristics thus far are extremely good.

So very happy with what we're seeing there. Important also, I think, to note that when you look at the limited drilling program that we've completed, included in that was 7.25 meters at 256 and 258 grams per tonne gold equivalent, which was, I think, a top 5 intersection in the world last year.

So at this stage, very limited drilling program. What we've seen, extremely encouraging, to say the least.

We've intersected multiple veins. We've shown the geology is very similar to that which we see at Kora.

It's high grade. We've got over 2, 2.5 kilometers of strike length, which has got almost no drilling in it.

So there is tremendous upside potential. We do expect, post completion of the DFS drilling for Kora, that we will target Judd with significantly more rigs.

We do anticipate having initial resource by the end of Q3, but that will be a very limited resource based on probably just one rig drilling. But as I said, post DFS, we expect at least 50% of our rigs underground to be targeting Judd.

And of course, all those drill caddies that we've been using for Kora, we turn the rigs around 180 degrees and they're drilling Judd. So there is potential to quite rapidly drill out Judd and significantly more interest to our resource.

And then moving on to Blue Lake. We made considerable progress in drilling this topical porphyry.

The drilling that we've been doing in 2020, and we continue to do, is shallow to medium depth by 500 or 600 meters deep, where we're doing -- completing a number of fence holes that we initiated during our first phase. And they are really completing that 3-dimensional picture so that we're able to vector in towards that potential potassic high-grade core.

And we should be providing an update to the market with results in the coming quarter. I think the results from both the vein drilling and also the porphyry drilling are exciting.

The highlights are the near-mine, big system we've got at Kainantu to show the potential that we've got there. We've only drilled 20% of the high-grade vein field that we know of.

And the majority of drilling that we have done, it remains open at depth. It remains, all concerned, along strike to the south.

We will continue with a focus on our exploration. The second half of this year, we anticipate having additional exploration rigs on-site, and we've got a very substantial budget this year for our exploration.

So with that, operator, I'd like to commence the Q&A. Thank you.

Hey, how are you doing? Well, just questions, mate, on ops there.

When you're looking at long hole open stoping for K1, K2, what's the sort of level of dilution that you're getting? And you reported continued positive grade reconciliation.

What sort of level of quantum are you looking at there? Thanks.

Well, thanks, Geordie. We have evening here.

Although it’s a very warm evening, we’re having very, very hot temperatures. In fact, we’re into the fall.

Look, in terms of dilution in K1 and K2, it does -- we are getting some variable dilution. Some of the stopes, we see almost no dilution at all.

Other ones, we can get 30% depending on the geotechnical around the stopes. You may recall that there is some allowance, that some of K1, for instance, would still come out with a cut and fill, which is what we've done in the past, where the geotechnical conditions require that.

Having said that, to date, we haven't done that with anything. Since we switched to long hole, we expect long hole.

In terms of the reconciliation, there was a graph in the presentation, but I believe the overall numbers would be sitting around 15% more gold than we called for in the model. And that tends to be grade rather than tonnage associated.

Okay. Thanks.

And in terms of, I guess, development along Judd, what sort of advance rate are you looking at there?

Look, development along Judd is not a priority. As such, it is -- it's a heading that we developed as a secondary heading, not as a priority development.

It is still actually developed in part as a ventilation system, which is -- what the original justification, if you like, was, to sort of give a piece of recent history. Our guys on-site, the geology exploration guys, have been wanting to really get in and do a detailed drilling program of Judd for the last couple of years.

But everything has been focused on Kora, first of all, to get the resource to be able to fill the mill and then to get a resource to be able to expand to 400,000 tonnes per annum and then to get a resource to look at the next phase of the PEA and, more recently, to focus on expanding our measured and indicated from the 1.1 million in the current resource, yes, up to around 2 million with the DFS. That's been a bit of frustration, I think, for the guys on-site.

Hence, they came up with the proposal to develop along strike and create -- generate all the information on Judd by doing that development. And of course, it generates not only the information and terms of the grades and what have you but also geotechnical and all the rest of it, which I have to say, have been extremely good to date, really, really confident ground, so very good from that perspective.

So I think we're probably doing anywhere between 20 and 40, 50 meters a month, and it really just depends on what other areas we're focused on. We're running in the order of 600 to 700 meters of development a month at this point in time across the mine.

Okay. Well, that's great and sort of answers my next question.

And maybe lastly, just follow-on to other callers. So Blue Lake, sort of the scope of the work that was done there, that would be sort of set to update soon.

What's the sort of number of drill holes that you look to vector in, I guess, on developing an understanding of the system?

Okay. So we've got two rigs currently working.

One is our own rig and one is a contractor rig. They are basically planned to keep running for the rest of the year.

The holes they've been drilling in the current program have generally been sort of 400 to a bit over 500 meters. So we characterize them in the porphyry system as shallow, but I guess the more medium depth rather than shallow depth, I'd say.

We've probably got about another three or four holes to drill. We've drilled -- I think we've completed about four holes so far.

We haven't got results for all of those. We're planning on getting results out in the next quarter.

And at this point in time, we believe we'll start drilling the deeper holes in the third, probably towards the fourth quarter, where we start vectoring in on that deeper potassic core. So overall, that would give us something in excess, I think, of probably around 20 holes that we'll drill before we start really targeting more of that potassic core.

Yes. Hello, everybody.

Just a couple of questions for you. One, on Q1, you noted that you expect production to be materially below your budget.

You're maintaining guidance, which is obviously positive there. But I'm just trying to get an estimate on the quantum.

Is this just a grade impact? Or are you seeing tonnage decline a little bit as well?

So that's kind of first question. And then the second one was, you mentioned that due to the travel restrictions with Australia, you've reduced the scope of non-production activities.

So I wonder if you can just give us a little bit more details on that. Thank you.

Okay. Thanks, Alex.

Look, first off, in terms of tonnage, or tonnage versus grade, it's more about grade rather than tonnage. We were treating lower-grade material, all of it coming from stockpile.

At this point, certainly anticipate that we'd probably have a record quarter in terms of the tonnage treated. And really, that grade is -- impact is really just this quarter, like stope mining, et cetera, as we speak.

In terms of what we sort of cut out, I mean, there's 2 drivers for that. One is in terms of the travel restrictions which are currently being put in place for a 2-week period by Australia between Australia and PNG, which impacts our FIFO workers.

And this is something that we experienced almost 12 months ago and when we had the first cases in PNG that resulted in a state of emergency being declared. We're running with around 15 people on-site -- 15 expats, sorry, not people.

We certainly have a lot more than that, but 15 expats on-site. And so the work that we cut down on tends to be anything that's nonproduction-related.

So we've had a fair bit of capital projects going on, for instance, expansion of the camp, the expansion of the warehouse. So some of those things have been cut back simply to be able to focus on production.

Some drilling has been impacted. Some of our exploration drilling has been impacted, more the underground drilling rather than the surface drilling.

The other area, I guess, that we do have some concern relates to the increase in COVID that we're seeing in the community and PNG altogether. So there is certainly a significant spike that's occurred over the last 4 weeks.

And hence, Australia has taken the step of: a, suspending the FIFO, fly-in fly-out; and b, restricting other flights. They haven't stopped them completely, but they have restricted them.

So that community transmission of COVID, that does give us some concern because, obviously, some of our people can test positive for COVID. We've had people arriving into our quarantine system testing positive.

As I think many people are aware, we, like all the other mines in PNG, we operate a bubble effectively all the mines so that we quarantine everyone coming to the site for at least 7 days, some longer, before they're allowed in. Whether you come from Australia, whether you come from Port Moresby or whether you come from a kilometer up the road, you're required to quarantine and be tested before you're allowed to come in.

[indiscernible] But the increasing community transmission, certainly, the concern is that, that will have some impact. Although at this point in time, we don't believe it will be significant.

But in order to cater for that and ensure that we don't impact production, we give priority to production. The same for the twin incline.

Twin incline is not considered same priority as production. So if we're going to -- if we're going to talk development phase, this will drop them in the twin incline rather than drop them in the main underground.

Okay. That's great.

And just a follow-up here. So obviously, you said you had 15 expats on-site before.

So that's not a whole lot. So I just -- maybe this kind of answers my own question.

But how confident or comfortable are you with your current staffing levels? So I mean if this extension -- travel ban gets extended longer, do you feel that you've got enough -- your people on-site are sufficiently trained?

And you're comfortable that even if you're not -- aren't getting new people in, you can continue to operate according to plan.

Yes. Look, I mean, we have about over 40 expats.

So normally at any given time, we'd have 20, maybe a bit more than 20 on-site. And that number has increased over the last 12 months because we've brought in the twin incline, and that's over 10 people, I think, as the result of bringing that twin incline in.

So if you were looking at 12 months ago and said, well, how many people do we have on-site, how many expats would you have on-site at any given time, it would be around 15. So in that context, and just as life would have it, by the way, Alex, that when we had the last state of emergency, quite a number of our senior guys were on-site for that one and stayed on-site for a couple of months as a result of that last state of emergency.

So we got the same guys, a number of the same guys on-site as well. And they've been trying to assure me it's not their fault.

But look, we operate with 4% expats. We operate with the lowest number of expats of any mining company that I'm aware of in PNG.

So we have a lot of our senior people are PNG nationals, mine managers, geology superintendents, metallurgical superintendents, et cetera, et cetera. And that's been deliberate on our part to obviously target top people in PNG.

Some of those are actually people that have come back to PNG having been working in Australia. So we are -- we're comfortable that as it stands right now, we've got the people that we need to maintain production.

I would also just add to that, that we are, through the Chamber -- and I'm a councilor of the Chamber of Mines in PNG, we're engaged with both the PNG government and the Australian government. In fact, last week, we had a virtual meeting with the Australian High Commissioner.

And I mean the messages that were coming out were, first off, that the Australian and PNG governments are fully cognizant of the importance of keeping the resource industry operating in PNG. And the numbers are actually quite stunning when you think about it.

85% of exports from PNG come from the resource sector, it's either LNG or primarily gold, copper; over 30% of GDP; 20,000 direct employees, 30,000 who then work for contractors who work only in the resource industry. And when you consider that there are less than 300,000 taxpayers in the whole of PNG, 100 -- over 100,000 of those are actually government employees, it sort of gives you an idea of just how important the resource industry is to PNG with the taxes we pay, royalties, et cetera, et cetera.

So I think we're comfortable that PNG government, Australian government fully recognize the importance of the industry and want to work with industry to make sure that we keep it going, that we have in place all the systems and procedures, protocols that we need to ensure that we can safely move people in and out of PNG from the mines back to Australia. And we've been engaged with government on exactly that in Australia and in PNG.

Well, thank you for that, operator, and thanks for everyone for attending this fourth quarter results. Look, I think it would be fair to say that we're happy with the performance in 2020.

We're happy with a record production in that fourth quarter, and a record not just in ounces but in tonnes treated and meters developed. So it's very much driven by the important metrics that we're trying to tick the box on in terms of our expansion.

And we've done that in probably one of the toughest years for many mining companies to operate with COVID and the impact that it's had on our world. We've done it on the back of what I believe is one of the best teams that any company could have, any team in the resource sector could have.

We are very much a PNG company, and it's a PNG team with some Australians and Canadians thrown in there as well. But the team has really delivered.

And I think it's -- from our perspective, we are extremely pleased with the performance and what we achieved. We've set ourselves up well to achieve more in 2021, both in terms of our Stage 2 Expansion and then moving on to that Stage 3 Expansion.

And at the same time, a lot more potential there in the exploration side of things, both in terms of expanding the resource with Kora but, also, we think, pretty importantly with Judd. And that's really exciting, I think, for us over the next 12 to 18 months.

I think that's going to be really exciting for us. And then, of course, Blue Lake, the big porphyry target.

So thank you for your attendance. And hopefully, we can continue to deliver and see the company move forward and go to the next level.

So thank you for your time this morning, this evening or whatever time it is in the day where you are. Thank you.