RSD at Beaver Creek Interview Series: K92 Mining (TSX-V: KNT) CEO John Lewins

September 19, 2019

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Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is the CEO of K92 Mining (TSX-V: KNT)(OTC: KNTNF), Mr. John Lewins. John, how are you?

John Lewins: Good, thanks.

Gerardo Del Real: It's good to have you here at the 2019 Beaver Creek Precious Metals Summit. Beautiful backdrop.

John Lewins: It is indeed. It's a great conference. Lot of buzz around, obviously with the gold price being where it is. So yeah, it's a good conference.

Gerardo Del Real: The last time we spoke here was last year, obviously very different times with $1,500 gold here in the U.S. I want to start off by addressing the share price volatility. There was a recent pullback on some misconceptions in regards to Barrick and their relationship with the local government. It affected K92 momentarily.

It looks like you're kind of over the hump. I know there was an institution that put a $4.50 price target on the stock a couple of days ago. I think that caught a lot of people's eyes. I'm not surprised that the stock has bounced, but I'd love for you to address that and just kind of briefly address where K92 is in regards to its mining licenses.

John Lewins: Okay. In PNG there's been a change of Prime Minister, not a change of government because basically most of the ministers are still the same ministers. But you've had a change of government, which has been looking at where they're sitting in relation to various projects.

Gerardo Del Real: Sure.

John Lewins: Papua LNG project for instance, which they said, "Look, we're going to have a look at what the previous government, the previous Prime Minister has approved." They've done that and signed off and that project's going ahead.

They've had the Wafi-Golpu, which is applying for its special mining lease. And we've got to say the timeframe it takes to get these things is a lot shorter in PNG than it is in somewhere like Canada or the U.S.

Gerardo Del Real: Absolutely.

John Lewins: So they've said, "Look, that's our next focus. And we see that very much as a legacy for this government that we get that project going. And then after that we're going to look into the Barrick and Porgera renewal. So the Porgera renewal, that has been going for 30 years now. So it's a renewal of a mining lease and the government has said, "Yes, okay we want to engage with you in terms of that renewal." The mine was owned by Barrick, they recently a few years back, sold a large interest into another company, Zijin.

So I think in part there's a view from government of, "What do you intend to do going forward? We'd like to be clear on what you're going to do going forward."

Gerardo Del Real: Absolutely.

John Lewins: So that's all part of the engagement I think that's going on. And there's been a lot of talk about that, talk by people who know something, and a lot of talk by people who don't know something.

Gerardo Del Real: Sure, there always is on both sides. That's the way it works.

John Lewins: On both sides. Some of that has had coverage and therefore that spilled over. And as another Canadian company, we've seen some the impact of that. I've got to say that our company share price, we talked 12 months ago-

Gerardo Del Real: We did.

John Lewins: Our share price today is three times what it was when we talked 12 months ago right now.

Gerardo Del Real: It is.

John Lewins: And that's after, as you said, a bit of volatility, a little bit of pullback. So I think in part we've seen a bit of pullback because we had such a phenomenal run, and in part it's in relation to conceptions, if you like, about risk. From our perspective, we have a mining lease. That mining lease was renewed as part of the deal to take it over from Barrick.

Gerardo Del Real: Correct.

John Lewins: No problem at all. It runs through until the end of 2024. We don't anticipate any problems with the renewal at that point in time. And in fact we will be hopefully looking at yet another level of expansion from the current expansion that we've got underway. So I think it'll be a very positive thing, from both the company's point of view and the country's point of view.

Gerardo Del Real: Let's talk about why that share price is three times what it was last year. You've executed brilliantly on both the production front and the exploration front. Just this morning we had more high-grade hits from Kora, a new vein system. Can we speak to that a little bit?

John Lewins: Okay. Yeah look, last year we beat our guidance.

Gerardo Del Real: Yes.

John Lewins: This year we gave guidance of a 68,000 to 76,000 ounces gold equivalent.

Gerardo Del Real: Correct.

John Lewins: First half of the year we were just under 40,000 ounces. So obviously tracking ahead of the guidance that we had given. We've increased our guidance to 72 to 80 [thousand ounces] and we're reasonably confident we'll get towards the top end of that or thereabouts.

And you know, the market likes to see people deliver. So we've delivered. The market has obviously rewarded us for that.

Gerardo Del Real: It's an industry that rarely does.

John Lewins: Yeah. If you work hard enough and things come.

Gerardo Del Real: It makes these interview so much more pleasant.

John Lewins: But so from our perspective, first of all, we've committed to an expansion. So we're doubling the throughput, going from 200,000 tonnes per annum to 400,000 tonnes per annum. Next year we've already given guidance, I think of a 115,000 to 125,000 ounces, where our all-in sustaining costs of less than $700 an ounce. So that also means that we're funding ourselves, we're funding the expansion, the Holy Grail of expansion without dilution.

Gerardo Del Real: Absolutely.

John Lewins: So again, the market has seen that and the market likes that. Then, when you look at our exploration – and I'm not just talking about our mining lease exploration – we now have five rigs working. When we spoke four months ago, we had two rigs on the lease.

Gerardo Del Real: That's correct.

John Lewins: We now have five rigs working on the lease. Two of them we actually own ourselves. Two of them are drilling from surface and then a third one underground. And to date, I think our hit rates from drilling this year on the Kora vein system has been 100%.

Gerardo Del Real: That's spectacular.

John Lewins: So every time we drill, we hit the vein. Now obviously the grades that we get will vary.

Gerardo Del Real: Sure, sure.

John Lewins: But we're showing consistency. One of the holes we put in when we brought in one of the new rigs was the deepest hole ever drilled, 350 meters below where we currently operate, which made it 200 meters deeper than anything else.

Gerardo Del Real: Right.

John Lewins: That hole in my view is the most important hole we drilled this year, because it showed that 350 meters down the vein is still there. We had 8.2 meters at 4.4 [grams per tonne], and another 7.3 meters at 3.5 grams per tonne. So we're showing at 350 meters below where we're sitting right now.

So that is an incredibly important hold as far as we are concerned and so we're getting a really, really good hit rate on Kora. The surface rigs, the way that we're drilling, they also have to go through another vein system, or some of the holes do, called Judd.

Gerardo Del Real: Right.

John Lewins: Now, Judd has a couple of very good intersection that really hasn't been drilled very much so we don't know much about the continuity. But 500 meters from where we are along strike was drilled by Barrick and by Highlands, a few holes. Best hole, 3 meters, 278 grams per tonne. 200 meters below it 9 meters at 8.3. Now 500 meters along from that, we've just drilled our first intersection of Judd, 5 meters at 5 grams per tonne. So from our perspective, really exciting. We've still got to show whether you get the continuity of that grade.

Gerardo Del Real: Sure.

John Lewins: But certainly it's a pretty good first step.

Gerardo Del Real: I couldn't help but notice you've been in a hurry to pay down debt, you're paying it down quickly. You're also paying off gold ounces that have been owed. Can we speak to that? Obviously with $1,500 gold here in the U.S. It's an opportune time if you're looking to increase production. Right?

John Lewins: Yes. Look, as part of the transaction to buy the mine in the first place from Barrick it was a $2 million upfront payment and then there were contingent payments. Those could amount to quite a substantial amount. And obviously with the success that we've been having with our drilling, we were looking at probably having to pay all of that.

So we engaged with Barrick and, quite frankly, they were extremely supportive, extremely supportive, really want to see us do well. They're in PNG with us.

Gerardo Del Real: Right.

John Lewins: And so they also wanted to send a message, I think, to perhaps the government that you know what, they're supportive and here's a junior, we want to do more. We might be an impediment to that because of potential payments.

Gerardo Del Real: Sure.

John Lewins: So let's sort something out. So we paid out $12.5 million, removed all the contingent payments. That really leaves us free to do whatever we want to do to ramp up our exploration, et cetera, et cetera. Financing to get this whole thing going, part of it was a gold loan and we've now paid that out. That's gone. Part of that gold loan was also royalty. Don't like having to pay people for my gold.

So with that's gone as well. So we've taken all of that out and we do have a straight debt, which is a $15 million facility. So we've got $15 million in debt. Currently we've got something in excess of $20 million in cash and we've spent over 75% of the capital that we were going to spend for sustaining capital and also for our expansion capital this year.

So basically we've actually been increasing the amount of cash that we've got. And if you look at all-in sustaining costs have been below $700 an ounce. I think in the first quarter we were about the sixth lowest cost in the world. The last 12 months we've also been the third highest grade mine in the world. So we're now going forward looking at a very healthy margin and obviously an ability to generate some serious cash.

Gerardo Del Real: Math is fun when it's on your side. Right?

John Lewins: Yes, yes. Notice I haven't used statistics because statistics can tell you anything.

Gerardo Del Real: Sure. Just depends on how you present them.

John Lewins: Yes.

Gerardo Del Real: What can shareholders and people that are looking at the stock and considering initiating a position or adding to it and look forward to hear in the next couple of quarters.

John Lewins: Well it's interesting, we mentioned this volatility in share price and one of the things that that actually helped was that quite a few institutions have stepped in and said, "This is a great opportunity to buy into the stock."

So we've actually had some more institutions come in, some existing institutions increase their position. They saw it as a great opportunity. As you mentioned, we've had analysts come out with a $4.50 target. Analysts are always conservative, sure. You have to accept that.

The next 12 months we've got a drilling program underway. The drilling, that we do until the end of the year, will then update the resource. We think it will be a significant increase from where we are at present and we've put out some targets in terms of what that means. So first quarter next year, new resource out, which we think will be significantly increasing from the 2.8 million ounces we've got at Kora right now.

On the back of that increase in resource, we'll be looking at an updated PEA, looking at phase three for the project. In phase three right now we think that the project has the potential to sustain a 300,000 to 400,000 ounce a year production, which makes it a pretty substantial mine. Part of that, we're looking to start a new twin incline first quarter next year. And that is fully justified by the existing operation, but also sets us up to be able to do an expansion.

The biggest lead item for any future expansion is getting that new incline in so that you can access the whole ore body and ramp up your production. By starting it first quarter next year we'll give ourselves about an 18-month lead, if you like, to get that expansion done more quickly. So all of those things will be going on next year. The five rigs that we've got working onsite, they will be continuing to drill and hopefully further expand our resource.

At the same time we're looking to drill to the south.

The Kora vein system we know extends about a kilometer to the south on the surface and so we'll be looking to drill that and see if we can extend outside of the existing mining lease in our exploration area. We've got exploration drilling underway right now at Blue Lake, which is a porphyry target.

Gerardo Del Real: Sure.

John Lewins: And that'll be continuing next year and we've got a couple of other targets that we are looking to start doing some drilling on next year as well. So there'll be a lot of things happening. We think a lot of good results coming out and we're seeing an environment now which is very positive to gold and we think that we should be able to tap into that and that that should be to the benefit of all of our shareholders.

Gerardo Del Real: Everything you just said is why I keep reminding subscribers that K92 has to be a top takeout target.

Last question I want to ask you. You and your team have extensive history in very tough negotiations. Can you speak to that just a bit? And explain to everybody some of the background of yourself and the team involved, because you're going to get offers if you haven't already. There's got to be people circling the wagon there, per se.

John Lewins: Look, I think it's generally known that the industry today, the big tier one deposits that seemed to be quite easy to find 20 years ago are now very, very difficult to find. Certainly Kora is shaping up to be a tier one asset. High grades, low cost, open at depth, open along strike. So it's got a lot going forward. Look, we're a relatively small company. We've got a decent market cap, like every CEO I think...

Gerardo Del Real: Should be higher.

John Lewins: ... share price should be higher of course.

But obviously there have been quite a few transactions happening and those transactions are going to continue to happen I think in the future. For ourselves, we believe that our focus has to be on expanding what we've got and getting into the market, letting the market see the potential of Kora. Because the best way to make sure we get the best value for our shareholders, whatever we do, is to show what the value is of the asset you've got.

And so that's the focus, to show the value of the asset. Use that to leverage perhaps. And we ourselves are looking for other opportunities to leverage what we have. But at the same time one has to recognize that there are other people out there, who are bigger than us, looking for other things and we've got a few guys on the board and whatever else. that have been involved in some multi-billion dollar transactions in the past.

So we think we have the knowledge, the acumen and the people to be able to deal with those sorts of things and make sure that anything that does happen is always in the best interest of our shareholders.

Gerardo Del Real: I'm curious to see if we get to speak next year.

John Lewins: I plan on being here. Thank you.

Gerardo Del Real: Thank you.


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