K92 Mining Inc. - Angel Publishing€¦ · KNT trades at a P/NAV multiple of 0.4x, the cheapest in our producer universe. We believe numerous catalysts over the next six to nine months,

Please see Disclosures and Disclaimers at the end of this report.

K92 Mining Inc. (KNT-TSXV: C$1.93) September 9, 2019

BUY Target: C$4.50

Craig Stanley / (416) 365-2550 [email protected]

Carter Smith / (416) 350-3311 [email protected]

Jackson Harding / (647) 484-8591 [email protected]

Compelling Valuation, Production Growth and Resource Expansion Trumps Overblown Political Risks

KNT: Price/Volume Chart

Source: Factset

Company Description

K92 Mining owns and operates the high-grade Kainantu Mine, and is exploring the regional land package for Au + Cu porphyry deposits in Papua New Guinea.

We are initiating coverage of K92 Mining (KNT) with a BUY rating and a price target of $4.50/share, representing 133% upside from the current share price. KNT trades at a P/NAV multiple of 0.4x, the cheapest in our producer universe. We believe numerous catalysts over the next six to nine months, including a resource expansion to ~ 5 M oz and a preliminary economic assessment (PEA) examining a ~ 300 k oz/year mine, will result in the market ascribing a multiple more in-line with its peers, leading to a re-rating of the share price.

Target Price Valuation Methodology: Our price target is based on 0.9x our NAVPS calculated at Eight Capital’s long-term price forecast of $1,400/oz gold. While our target multiple is below the group average of 1.2x to account for single asset / single jurisdiction risk, we envision multiple expansion from the current 0.5x as the company executes on its production growth and resource expansion.

An Attractive Valuation - KNT Trading at a Discount to Peers: KNT trades at a discount on a P/NAV (0.4x vs. 1.2x) and 2020E P/CF (4.4x vs. 6.8x) basis, and in-line on a 2020 FCF yield (12% vs. 11%) basis compared to the average of the precious metal producers covered by Eight Capital.

2019 Production Guidance Increased: As a result of continuing high head grades, management last month increased 2019 production guidance for the Kainantu Mine in Papua New Guinea from 68-75 k to 72-80 k Au eq oz; AISC guidance was lowered 8% to $720-$760/oz. We estimate 2019 production of 76 k Au eq oz at total cash costs (by-prod) of $533/oz and AISC of $706/oz.

Production Growth in 2020-2021: KNT is in the process of doubling throughput to 400 k tpa that we forecast will result in a 56% increase in 2020 production to 119 k Au eq oz, and an additional 26% increase in 2021 production to 150 k Au eq oz.

Q1/20 Resource Update to 5 M oz: Management is guiding an increase from 2.9 to 4.2-5.5 M Au eq oz. Given the lack of historical exploration and prospectivity of other identified targets, we see the long-term potential for 10 M oz.

Stage 3 Expansion to ~300 k oz/year: A PEA is scheduled for Q1/20 that will examine increasing throughput to 800 k – 1.2 M tpa, followed by a feasibility study in Q4/20.

Political Risk Concerns Overblown: KNT’s share price has been under pressure these past few weeks due to press reports the Papua New Guinea government is trying to increase its share from Porgera, the country’s largest gold mine. We believe the sell-off is overdone given KNT’s mining lease is not due for renewal until June 2024, and the Kainantu Mine will be paying much higher taxes on a per ounce basis than Porgera. We note the new government recently announced it will honour a multi-billion dollar liquefied natural gas deal that in part brought down the previous government in May 2019.

RecommendationRating: BUY

Target: C$4.50

Return to Target:

2019 EPS

2020 EPS

Company DataPrice (09/06/19): C$1.93

52-Week Range: C$0.67-2.68

Market Capitalization ($MM): US$292

Enterprise Value ($MM): US$282

Shares Outstanding - Basic (MM):

Shares Outstanding - Diluted (MM):

2019E Dividend Yield:

Avg Daily Volume (3 Mos) (000s):

Cash ($MM): US$9

Debt ($MM): US$0

Working Capital ($MM): US$12

Fiscal Year End December 31

NAV LT Gold Price:Price Deck:

Spot Gold:

EPS 2018 A 2019 E 2020 EQ1 0.02 A 0.03 A 0.04 E

Q2 0.02 A 0.03 A 0.07 E

Q3 -0.01 A 0.01 E 0.08 E

Q4 0.18 A 0.03 E 0.09 E

FY 0.22 A 0.10 E 0.27 E

P/E 6.7x 15.0x 5.4x

CFPS 2018 A 2019 E 2020 EFY 0.13 A 0.18 E 0.33 E

P/CF 11.4x 8.1x 4.4x

All Figures in US$ Unless Otherwise NotedSource: Bloomberg, Company reports, Eight Capital estimates

133%

0.10

0.27

0.36x

0.32x$1,400/oz$1,506/oz

US$/sh4.04

4.62

P/NAV

199.2

214.9

0.0%

1,066

mailto:[email protected]

K92 Mining Inc. September 9, 2019

EIGHT CAPITAL Page | 2

Figure 1: KNT Production and Cost Profile

Source: Company reports and Eight Capital estimates

DOUBLING THROUGHPUT

In January 2019, management announced a preliminary economic assessment (PEA) to double throughput to 400 k tonnes per annum (tpa). This 'Stage 2' expansion is based on a mine plan from the Kora and Kora North deposits totaling 4.9 million tonnes at 9.0 g/t Au + 20 g/t Ag + 1.3% Cu. Over a 13-year mine life, production is expected to average 120 k Au eq oz at total cash costs of $429/oz and AISC of $615/oz. An after-tax net present value (NPV, 5%) of $559 M was calculated at base case prices of $1,300/oz Au, $15/oz Ag and $2.90/lb Cu.

The processing plant expansion is expected to be completed in Q4/19, including a new gravity gold recovery circuit that will increase both recoveries and payabilities. Mine throughput is expected to reach the 400 k tpa level by Q4/20.

2020 guidance is for 115-125 k oz Au eq at cash costs below $500/oz and AISC below $700/oz. We forecast 119 k Au eq oz at $535/oz and $736/oz, rising to 149 k Au eq oz in 2021 at $542/oz and 766/oz.

The initial capital cost for the expansion is estimated at $14 M. We estimate KNT has $28 M in cash following a recent equity financing of $21 M at $1.90/share, a $15 M loan with metals trader Trafigura, and a $12.5 M payment to Barrick (ABX-T, NEUTRAL, $28 TP, covered by R. Profiti) to eliminate future contingent payments on Kainantu.

RESOURCE UPDATE Q1/20: AIMING FOR 5+ M OZ

A resource update for Kainantu is scheduled for Q1/20, with management guiding an increase from the current 2.9 M Au eq oz to 4.2-5.5 M Au eq oz (12-12.5 mt at 8.5-10.5 g/t Au + 1.25-1.35% Cu).

Surface and underground drilling is ongoing on the Kora and Kora North deposits, both of which remain open along strike and at depth.

LONG-TERM POTENTIAL FOR 10 M OZ

The resource update will not include the Judd Target which runs parallel to Kora for a strike length of over 2 km. Barrick intersected Judd in its drilling, including 3 m of 278.2 g/t Au + 0.21% Cu and 9 m of 8.32 g/t Au + 1.11% Cu. Judd could easily be accessed from mining development at Kora given it is only up to 100 m away from a proposed second incline system.

As well, the resource update will not include any of the regional targets, including 1.5 M oz of historical resources calculated by Highlands Pacific and Barrick at Maniape (8 M t of 2.2 g/t Au for 600 k oz), Arakompa (2.8 M t of 9 g/t Au for 800 k oz) and Aifunka (1 M t of 3.3 g/t Au for 100 k oz).

EXPANSION TO ~300 K OZ/YEAR

The updated resource estimate will form the basis of a PEA scheduled for H1/20 examining the potential to increase throughput rate to 800 k - 1.2 M tpa. At the current PEA grade of 9 g/t Au and 94% metallurgical recovery, this equates to ~220-325 k oz/year. A feasibility study for this Stage 3 will follow in Q4/20.

As part of this so-called 'Stage 3' expansion, management is planning development of a new twin incline system in Q4/20. In addition to facilitating greater material movement, the location below the current Kora North resource would allow easier definition and exploration drilling. Waste rock could be used for tailings lifts.

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PORPHYRY POTENTIAL A WILD CARD

The potential for Kainantu to host one or more porphyry Au + Cu deposits is why Barrick acquired the asset from Highlands Pacific for $141.5 M in cash.

Papua New Guinea hosts world-class porphyry deposits, including Ok Tedi and Wafi-Golpu (as well as Grasberg in neighbouring Indonesia), and ten porphyry targets have been identified to date at Kainantu.

In 2018, KNT drilled five holes (1,450 m) at Yompossa, the target with the easiest access. Abundant stockwork veins and anomalous gold, copper and molybdenum were assayed, although no ore grade intercepts were encountered.

KNT is currently drilling the Blue Lake target, located approximately 4 km southwest of Kora. Management has completed three of the six planned deep holes to depths of 400 to 600 metres, as well as three shallow holes to 50 metres depth. This drilling has confirmed a mineralized porphyry system, with the best result from Hole 7 that hit 303 m of 0.22 g/t Au + 0.14% Cu.

We expect KNT to drill test additional targets in 2020, including the A1 target, Barrick’s top porphyry target. Barrick never drilled A1 despite an exploration license, as it was unable to get agreements from locals on land access.

POLITICAL RISK CONCERNS OVERBLOWN

On August 19, KNT’s share price declined 18% following news reports PNG’s federal government wanted a larger share of Porgera, the country’s largest gold mine, in which Barrick and Zijin Mining Group (Not Rated) each own 47.5%, with the remaining 5% interest held by the government.

We believe the sell-off was unwarranted, as the issue is specific to Porgera and the ongoing negotiations over a requested 20-year extension to the mining lease, and not indicative of the government trying to extract larger ownership stakes in Kainantu or other mines in the country.

Kainantu Mining License Good to 2024

K92’s mining lease is not due for renewal until June 2024, and the government has not approached KNT about amendments to the lease.

We note that, whereas Porgera dumps its tailings into a river, KNT has a purpose-built tailings storage facility, one of just two in the country.

Kainantu To Pay Higher Taxes on a Per Ounce Basis than Porgera

The Porgera mining lease expired earlier this year, although the mine can keep operating during renewal negotiations. On August 1, Barrick issued a press release stating the mine has paid $1.3 B in taxes and royalties since commencing operations in 1990, or ~$60/oz based on ~20 M ounces recovered. In contrast, the January 2019 PEA for the Kainantu Mine estimated taxes and royalties of $250 M at the base case prices, or ~$250/oz.

New Government More Vocal Following LNG Issues

We believe the new PNG government under Prime Minister James Marape, a former Minister of Finance, is also more vocal in dealing with large resource projects (much larger than Kainantu) given negative reports on the country’s liquified natural gas (LNG) projects that led to the May 2019 resignation of Peter O’Neill as Prime Minister after eight years in office.

First, in 2018 the government halved its revenue forecast from PNG LNG, a project in operation since 2014 and backed by Exxon and Oil Search Ltd. (both Not Rated), due to unfavourable tax concessions and drop in gas prices.

Second, the PNG Ombudsman concluded Mr. O’Neill acted improperly by securing a A$1.2 B loan to buy shares in Oil Search Ltd., part owner of Papua LNG along with France’s Total (Not Rated) and Exxon, in 2014 without seeking formal parliamentary approval. The government lost ~$300 M when it sold the shares in 2017. Despite this, in early September 2019, the new government announced it would honour the Papua LNG deal led by Total that was signed by Mr. O’Neill’s government.

Little Effect Likely in Proposed New Mining Laws

News reports suggest the government is contemplating changes to the country’s mining laws. Little details are available, although the changes may only apply to new projects and may not take effect until 2025. The only potential change we are aware of is an increase in the government royalty by 0.75 percentage points to 3%.



VALUATION

We calculate an NPV (5%) of $939.1 M for Kainantu. Our model is based on the current PEA (although with much higher sustain capex). Factors in the Stage 3 expansion are based on the following assumptions:

• 1 M tpa,

• Mineable 10 M t @ 9 g/t Au + 10 g/t Ag + 0.65% Cu,

• Capex of $350 M,

• Opex of $110/t, and

• A two-year build with development commencing in Q3/23.

We ascribe no value at this time to the porphyry deposit potential.

Figure 2: KNT Net Asset Value at Eight Capital's Price Forecasts

Source: Company reports, Eight Capital estimates

Precious Metals

K92 Mining Inc. Craig Stanley +1 (416) 365-2550

Net Asset Valuation at Eight Capital Price Deck (US$) Carter Smith +1 (416) 350-3311

Shares (FD, FF, ITM) (MM) 224.6 Jackson Harding +1 (647) 484-8591

Market Capitalization ($MM) $433

Target Setting NAV

Discount ($MM) (/Share) (% NAV)Gold AssetsKainantu (100%), Papua New Guinea 5% $939.1 $4.18 100.0%Total Gold Assets $939.1 $4.18 $1.00

Balance Sheet & ExpensesBasic Working Capital $11.9 $0.05Value of ITM Instruments $9.2 $0.04Estimated Working Capital Additions $118.5 $0.53Long-term Debt $0.0 $0.00Estimated Debt Additions ($115.0) -$0.51General & Administrative Expense 5% ($41.4) -$0.18Exploration Expense 5% ($14.7) -$0.07Net Financial Assets ($31.4) -$0.14

Net Asset Value (US$) $907.7 $4.04Share Price (C$) $1.93NAV Multiple (P/NAV) 0.36x

Net Asset Value Summary



RELATIVE VALUATION

KNT trades at a discount on a P/NAV (0.4x vs. 1.2x) and 2020E P/CF (4.4x vs. 6.8x) basis, and in-line on a 2020 FCF yield (12% vs. 11%) basis compared to the average of the precious metal producers covered by Eight Capital.

Figure 3: P/NAV - Eight Capital Precious Metals Producers Coverage

Source: Eight Capital estimates

Figure 4: 2020E P/CF - Eight Capital Precious Metals Producers Coverage


Figure 5: 2020E FCF Yield - Eight Capital Precious Metals Producers Coverage


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TARGET PRICE VALUATION METHODOLOGY

Our price target is based on 0.9x our NAVPS calculated at Eight Capital’s long-term price forecast of $1,400/oz gold.

INVESTMENT RISKS

Risks that could affect our target price include:

Volatility in metal prices, foreign exchange markets, inflationary conditions and investor interest in mining equities in general could impact financing, capital spending and exploration decisions that may impact the company’s valuation and subject KNT’s shares to price volatility.

Financing risk – medium: We estimate KNT has sufficient liquidity from existing debt facilities and cash flow to complete the expansion to 400 k tpa at Kainantu. However, expanding throughput to ~0.8-1.2 M tpa would require external financing, likely a combination of debt, equity and/or metal streams.

Technical risk - high: Mining is risky and unforeseen issues could materially impact tonnes, grades and recoveries. Our model assumes additional ounces outside of those currently defined as resources.

The current mine plan is based on a PEA, not a feasibility study. However, the PEA was not for the proposed development of a new project, but an expansion of the producing Kainantu Mine. Also, the cost to produce a feasibility study would have been a large percentage of the $14 M initial capex and taken one year to complete, which would have resulted in a lost year of production.

Current resource drill spacing can be large (up to 100 m) and 86% of the resource tonnes are classified as inferred, although the geology is relatively simple and reconciliation to date is positive.

The Kora North resource is based on a 0 g/t cut-off grade. However, according to the tech report, the resource didn’t use a cut-off grade because “Reconciliation with mill production indicates that using the narrow wireframes considerably understated the amount of tonnes sent to the mill and the gold ounces produced by the mill.” Also, the PEA is based on a ~4 g/t Au eq cut-off grade.

The Kora North resource does not utilize a top cut. However, the tech report states high grade samples are controlled “by a combination of geological interpretation, composite length, variography and search parameters. The reconciliation outcomes strongly suggest that gold top cuts are not needed.” For reference, a 200 g/t Au top cut would reduce the gold grade by 10-15%.

No geotechnical or concentrate metallurgical test-work have been performed at Kora North.

Political and regulatory risk – high: KNT's sole mine and project are in Papua New Guinea, a country with a long history of mining. However, changes in governments and/or policies could lead to revised mining laws and taxes.

Employee/Personnel risk - low: If the market becomes more favourable to mining and the demand for skilled personnel materially increases, the company may not be able to retain key employees and contractors.

Liquidity and volatility risk - high: KNT’s shares are relatively illiquid compared to large cap equities and even small changes in precious metal prices would likely result in price volatility.



APPENDIX A: MANAGEMENT AND BOARD OF DIRECTORS

Management

John Lewins, CEO: Mineral Engineer with over 35 years of experience, including managing the development and operations of numerous mining projects in Australia (Tom’s Gully, Tick Hill & Nolan’s, McArthur River), South Africa (Harmony Central, Smokey Hills), Armenia (Ararat/Zod) and Mongolia (Erdmin).

Warren Uyen, Senior VP Operations: Mining Engineer with over 30 years of experience, including the management of both open pit and underground mines. Previously, General Manager Underground Operations with Australian mining contractor MacMahon Holdings Limited and GM of the White Mountain Gold Mine in China.

David Medilek, VP Business Development and Investor Relations, P. Eng., CFA: Over 12 years of mining capital markets, corporate strategy and technical experience, including as a mining engineer with Barrick Gold in Western Australia and both investment banking and equity research analysis.

Justin Blanchet, CA, CPA, CFO: Experience in financial reporting, regulatory compliance, treasury and audit for both Canadian and U.S. publicly listed companies.

Nancy La Couvee, Corporate Secretary: Over 20 years of experience providing governance and compliance services for international publicly listed companies in the resource sector.

Chris Muller, VP Exploration: Geologist with 20 years of experience in open pit and underground mine, near mine, brownfields and greenfields exploration in Asia and Africa, including the discovery of additional porphyry deposits at the Wafi/Golpu project in Papua New Guinea.

Daisy Taylor, Papua New Guinea Government & Community Affairs Advisor, PNG Director: Ms. Taylor was born in the Eastern Highlands area where the project is located and has more than 30 years of business leadership experience in Papua New Guinea. She is currently a Director of two separate real estate companies in Papua New Guinea and previously served as the General Manager of Nokondi Investments, the property development business arm of the Eastern Highlands Provincial Government. Ms. Taylor was also involved in the Electoral Commission Papua New Guinea project and was the Project Manager for The Electoral Reform Project, a European Union funded initiative operated by Transparency International (PNG) which was aimed at promoting democracy and advocacy for electoral reform.

Phillip Samar, VP Government & Community Affairs: 20 years with the Mineral Resources Authority (MRA) of Papua New Guinea, the government body responsible for regulating the exploration and mineral sector.

Board of Directors

Stuart (Tookie) Angus, Chairman: Over 30 years of experience in structuring and financing international exploration, development and mining ventures.

John Lewins, CEO: See above.

Ian Stalker: 40 years of experience in mine development and operations in Europe, Africa and Australia, including raising in excess of $500 M for various exploration and development projects. Previously, the CEO of UraMin Inc. from July 2005 until its $2.5 B acquisition by Areva in August 2007. Served as Vice President of Gold Fields between 2001 and 2005, and as a managing director of Ashanti Goldfields.

Graham Wheelock: Geologist and mining professional with over 30 years of experience, including with Anglo American and De Beers where he was Acting General Manager for De Beers Namaqualand Mines in South Africa in 2000-2003. Mr. Wheelock is Cartesian Capital Group’s appointee to KNT’s Board (Cartesian is entitled to one Board seat if it maintains at least a 5% equity ownership in KNT).

Mark Eaton: Over 20 years of experience in equity capital markets and has served in management and on the Boards of several public mining companies.

Saurabh Handa, CPA, CA: Over ten years of experience in the mining industry and currently serves as the Vice President Finance for Imperial Metals Corp.



APPENDIX B: KAINANTU GOLD MINE

Location and Access

Kainantu is located 180 km northwest of the town of Lae, the second largest city in PNG and home to the country’s largest port. The two-hour drive from Lae is along a sealed highway.

Figure 6: Location of the Kainantu Mine, Papua New Guinea

Source: Company reports

Property

The Kainantu property covers a total area of 405 km2. The mining license (ML 150) was renewed in June 2014 for a 10-year period.

Ownership

KNT currently owns 100% of the Kainantu Mine. Under the 2003 Memorandum of Understanding (MOU) signed by a previous owner, the owner of Kainantu agrees to divest a 5% interest in the current mining license to landowners. Although the MOU has no legal or binding effect, KNT has agreed to honour the agreement. The 5% interest was not previously issued due to uncertainty as to who constitutes a landowner as determined through the Land Title Commission (LTC). KNT management hopes to transfer the 5% stake by the end of the year. To be conservative, we model the 5% as issued for no cost, although the MOU provides that 65% of the dividends from the 5% equity will be used to repay capital costs to the parent company, and 35% will be paid to the landholders until the capital has been fully repaid.

Under the PNG Mining Act, when a mining license is granted, the government has the option to acquire a participating interest of up to 30% by payment of sunk costs, and then contributing to construction capital costs on a pro-rata basis to the project. However, the government waived its right on Mining License 150 that includes the Kainantu Mine and some exploration targets, including Judd, when it was granted and has no back-in rights under the mining license renewal process. The state still retains this option if KNT decides to convert any of the surrounding exploration licenses, including the porphyry targets, into a mining license.

Infrastructure

Grid power is supplied from the nearby Yonki Dam Hydroelectric Plant under a five-year supply agreement signed in late 2016. Backup generators are located at both the 800 portal and the processing plant. The camp was recently expanded to a 600-person capacity.



History

Highlands Pacific, a spin-out from Placer Dome, commenced mining on the Irumafimpa deposit in 2005.

In October 2007, Barrick announced it was acquiring the project for $141.5 M in cash to focus on porphyry exploration (Highlands needed to sell to close an offside hedge book that would have bankrupted the company). A total of 68.6 k oz were produced between 2006 and 2008 before the mine was placed on care and maintenance by Barrick in January 2009 due to grade reconciliation and metallurgical issues at Irumafimpa.

KNT acquired the Kainantu Project from Barrick in March 2015 for an upfront cash payment of $2 M and contingent payments up to a maximum $60 M over a ten-year term. In August 2019, KNT eliminated all contingent payments by paying Barrick $12.5 M.

KNT completed remedial work on the mine and refurbished the plant, with the first batch of underground ore treated in October 2016.

In early 2018, management ceased mining activities at Irumafimpa to focus on developing Kora North (discovered 2017). This decision was driven by the more favourable characteristics of Kora North compared to Irumafimpa, including better continuity and ground conditions, and greater widths.

Commercial production was declared on Kora North in February 2018, four months after treating the first bulk sample from the deposit.

Geology

Gold mineralization occurs in NW–SE, steeply dipping, low-to-intermediate sulphidation veins hosted in the Early Miocene Bena Bena sedimentary formation (phyllite) and intruded by Late Miocene Elandora porphyry dykes, sills and breccias at the northern end of the vein system. Numerous stages of mineralization are present, with copper grades increasing to the southeast.

Figure 7: Kora North Mineralized Core

Source: Eight Capital

The Kora – Kora North – Eutompi system has a known strike length of over 1,000 m and vertical extent of 1,100 m. The Kora veins average 3.1 m true width. The veins at the past producing Irumafimpa deposit averaged 1.2 m.



Figure 8: Kainantu Long Section Looking West


Figure 9: Kainantu Resources by Deposit

The Kora resource utilizes a cut-off grade of 6 g/t Au eq for veins 1.2 m – 3 m thick, and 5 g/t Au eq for veins greater than 3 m thick. The Kora North resource is based on a 0 g/t cut-off grade. For the PEA, the cut-off grades are 4.31 g/t Au eq for long-hole stoping at Kora North, 4.61 g/t Au eq for cut-and-fill at Kora North and 4.52 g/t Ag eq for Kora.


Deposit Dat e Cat egory Tonnes (000) Au g/t Ag g/t Cu % Au oz (000) Ag oz (000) Cu lbs (M)

Irumafimpa March-17 Indicated 560 12.8 9 0.3% 230 160 37Inferred 530 10.9 9 0.3% 190 160 74

Kora/Eutompi March-17 Inferred 4,360 7.3 35 2.2% 1,020 4,900 215

Kora North September-19 M&I 850 12.9 13.1 0.7% 350 350 13Inferred 1,920 10.7 13.3 0.7% 660 820 30Total 2,770 11.4 13.2 0.7% 1,010 1,170 43

PEA mineable resource September-18 4,920 9.0 20.3 1.3% 1,418 3,205 141



Figure 10: Epithermal and Porphyry Exploration Targets


Mining

Stopes are accessed from the 800 portal and a 5 m by 5 m incline. At the 2.5 km mark, the incline branches between Kora and the past producing Irumafimpa deposit.

Mining has progressed from one level in 2018 (1185) to the current three levels (1205 and 1185 on K1, 1170 on K2), and increasing to seven.

The K1 Zone (the source of all current mining) is mined by overhand cut-and-fill and the K2 Zone, and Kora will be mined by long-hole stoping, with the first long-hole scheduled for December 2019.

Waste rock is the primary backfill material, with cemented backfill planned for some areas of Kora.

As part of the expansion to 400 k tpa, additional mining fleet equipment is on site, in transit or on order. Also, incline debottlenecking is over two-thirds complete with the excavation of three passing points, as well as larger ventilation fans being installed.

Processing

The processing plant was built in 2005 and consists of a conventional 2-stage crush, ball mill and flotation circuit. It is located 6 km from the 800 portal.

The original capacity was 180 k tpa, but is being expanded by KNT to 400 k tpa with a new, larger secondary crusher and additional flotation capacity (the ball mill was over-sized when built).

As well, a gravity circuit was installed in July 2019 with commissioning underway and first dore expected in September. Test-work on samples from Kora indicated that up to 65% of the gold could be recovered by gravity concentration. We model 50% of the gold is recovered in dore.

Tailings

Tailings are pumped to a conventional storage facility, one of only two in the country. For comparison, the Porgera and Ok Tedi Mines dispose their tailings into rivers, and the Ramu Mine disposes their tailings into the ocean (Wafi Golpu is also proposing to dispose their tailings into the ocean).



Figure 11: Tailings Storage Facility

Source: Eight Capital

Community Relations

Approximately 21,000 people live in the region surrounding the Kainantu Mine. KNT spends a considerable amount of time and effort on community relations, although conditions can be volatile.

In August 2017, some members of one of the local landholder groups entered the mine and caused $1.4 M damage after alleging they did not receive an adequate share of employment and contractor opportunities.

In January 2019, one group of landowners attacked another group west of Kora and south of Blue Lake, resulting in one death and 60-70 houses burnt. The former government claimed KNT had only engaged the latter group in ongoing community relations, thereby angering the former group. We note disputes have also occurred within communities near the PNG LNG project, with the former Prime Minister blaming the government for not resolving landowner claims and proper identification of landowners.

Countering concerns, we note KNT currently employs over 800 people, of which over 95% are from Papua New Guinea, with the majority being from local communities.

KNT also has instituted numerous social and economic development initiatives, including joint venture agreements with landowner groups and local companies to provide services such as transport, security, catering and camp services; and scholarships to support children of landowners for studies at tertiary institutions, with 11 scholarships provided in 2018 and over 50 provided in 2019.



Source: Company reports, Eight Capital estimates

Precious Metals

K92 Mining Inc.: Forecasts at Eight Capital Price Deck Craig Stanley +1 (416) 365-2550

Rating: Buy BUY Carter Smith +1 (416) 350-3311

Target Price: C$4.50 C$4.50 Jackson Harding +1 (647) 484-8591

INPUT PRICES MARKET INFORMATION2018A 2019E 2020E 2021E 2022E 2023E (C$/sh) (Mln shares) (C$Mln)

Key Commodities Share Price: $1.93 Basic Shares: 199.2 Market Cap: 328.84 Gold (US$/oz) $1,269 $1,382 $1,500 $1,475 $1,400 $1,400 P/NAV: 0.36x Diluted Shares: 224.6 Enterprise Value: 282.47 Silver (US$/oz) $15.71 $15.99 $17.63 $18.00 $18.00 $18.00Copper (US$/lb) $2.95 $2.94 $3.25 $3.25 $3.25 $3.25 GOLD EQUIVALENT PRODUCTION PROFILEOil (US$/bbl) $64.89 $58.66 $65.00 $65.00 $65.00 $65.00Key CurrenciesCAD/USD 0.772 0.769 0.800 0.800 0.800 0.800EUR/USD $1.18 $1.13 $1.12 $1.12 $1.12 $1.12USD/TRY $4.71 $5.74 $5.87 $5.87 $5.87 $5.87USD/MXP $19.22 $19.13 $19.11 $19.11 $19.11 $19.11

INCOME STATEMENTUS$MM, Year-end Dec. 2018A 2019E 2020E 2021E 2022E 2023ETotal Revenue 53.2 93.3 168.3 206.6 195.6 194.6

% Gold 97% 96% 92% 91% 92% 91%% Silver 0% 0% 1% 1% 1% 1%% Copper 3% 3% 7% 8% 7% 8%% Other 0% 0% 0% 0% 0% 0%

Operating Costs 25.7 41.7 58.3 75.4 74.5 70.3G&A 4.3 5.5 6.0 6.0 6.0 6.0Exploration 1.8 5.3 5.0 5.0 5.0 5.0Depreciation 4.1 6.2 12.2 18.5 21.6 17.2Other 0.0 0.0 0.0 0.0 0.0 0.0EBITDA 21.4 40.8 99.0 120.1 110.1 113.4 OPERATING CASH FLOW AND CAPITAL SPENDINGEBIT 17.3 34.6 86.9 101.6 88.6 96.2Net Interest Expense 0.4 0.4 0.3 (1.3) (2.7) 1.6Unusual/Other Items (5.1) (18.0) (0.6) 2.5 5.4 (3.2)EBT 12.6 17.0 86.6 102.8 91.3 94.6Taxes (26.5) 5.6 29.4 35.0 31.0 32.2Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0Other 0.0 0.0 0.0 0.0 0.0 0.0Net Income (Reported) 39.1 11.4 57.1 67.9 60.3 62.4Net Income (Adjusted) 39.1 19.7 57.1 67.9 60.3 62.4

EPS (Reported) ($/sh) 0.22 0.06 0.27 0.32 0.29 0.30EPS (Adjusted) ($/sh) 0.22 0.10 0.27 0.32 0.29 0.30Average shares (MM) 174.3 199.2 199.2 199.2 199.2 199.2

BALANCE SHEETUS$MM, Year-end Dec. 2018A 2019E 2020E 2021E 2022E 2023EAssetsCash $6.21 $14.32 $38.59 $93.40 $143.12 $201.61Other Current Assets $13.06 $18.69 $18.69 $18.69 $18.69 $18.69Current Assets $19.26 $33.01 $57.28 $112.09 $161.80 $220.30Non-current Assets $68.50 $100.63 $125.19 $135.15 $146.84 $251.49 FREE CASH FLOW AND NET DEBT/EBITDATotal Assets $87.77 $133.64 $182.46 $247.23 $308.65 $471.79LiabilitiesCurrent Liabilities $15.27 $24.36 $19.87 $15.58 $15.58 $15.58Long Term Debt $0.00 $4.29 $0.00 $0.00 $0.00 $100.00Other non-current Liabilities $2.69 $2.90 $3.37 $4.55 $5.72 $6.44Total Liabilities $17.96 $31.54 $23.23 $20.14 $21.30 $122.02Total Shareholder Equity $69.81 $102.10 $159.23 $227.09 $287.34 $349.77

CASH FLOW STATEMENTUS$MM, Year-end Dec. 2018A 2019E 2020E 2021E 2022E 2023ENet Income (Reported) $39.06 $11.43 $57.13 $67.87 $60.25 $62.43Depreciation $4.07 $6.17 $12.18 $18.54 $21.55 $17.19Other ($20.39) $18.13 $0.07 $1.19 $1.17 $0.00Operating Cash Flow $22.73 $35.73 $69.38 $87.60 $82.97 $79.62Operating Cash Flow ($/sh) $0.13 $0.18 $0.33 $0.42 $0.39 $0.38Working Capital Changes ($4.60) ($9.23) $0.00 $0.00 $0.00 $0.00Cash from Operations $18.14 $26.50 $69.38 $87.60 $82.97 $79.62Capital Expenditure ($18.18) ($36.26) ($36.34) ($28.50) ($33.25) ($121.13)Net Investments $3.36 ($14.26) $0.00 $0.00 $0.00 $0.00Investing Cash Flow ($14.82) ($50.52) ($36.34) ($28.50) ($33.25) ($121.13)Common Share Dividends $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 CASH AND DEBTDebt Additions $0.00 $15.00 $0.00 $0.00 $0.00 $100.00Debt Repayments $0.00 ($2.34) ($8.77) ($4.29) $0.00 $0.00Equity Financing $8.51 $19.83 $0.00 $0.00 $0.00 $0.00Other Net Financing ($6.76) ($0.35) $0.00 $0.00 $0.00 $0.00Financing Cash Flow $1.75 $32.13 ($8.77) ($4.29) $0.00 $100.00Foreign Exchange ($0.01) $0.00 $0.00 $0.00 $0.00 $0.00Change In Cash $5.05 $8.11 $24.27 $54.81 $49.72 $58.50Cash Balance $6.21 $14.32 $38.59 $93.40 $143.12 $201.61Free Cash Flow $4.55 $12.13 $24.27 $54.81 $49.72 $58.50Adj. Free Cash Flow $4.55 ($0.53) $33.04 $59.10 $49.72 ($41.50)

VALUATION DATA2018A 2019E 2020E 2021E 2022E 2023E

P/E 6.74x 14.97x 5.39x 4.53x 5.11x 4.93xP/CF 11.37x 8.12x 4.43x 3.51x 3.71x 3.86xEV/EBITDA 13.22x 6.93x 2.85x 2.35x 2.56x 2.49xAdj. FCF Yield 1.61% -0.19% 11.70% 20.92% 17.60% -14.69%

OPERATING STATISTICS2018A 2019E 2020E 2021E 2022E 2023E

Equity Gold Production (koz) 44.9 71.8 103.5 126.9 127.9 126.6 Kainantu 44.9 71.8 103.5 126.9 127.9 126.6

Total Cash Costs (Co-Prod) (US$/oz) 610 491 523 542 536 507 Kainantu 610 491 523 542 536 507

Total Cash Costs (By-Prod) (US$/oz) 600 533 442 445 456 421 Kainantu 600 533 442 445 456 421

AISC (US$/oz) 772 706 656 670 679 616 Kainantu 772 706 656 670 679 616

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Gold Copper (AuEq) Silver (AuEq) Cash Cost (Co-Product) AISC (Co-Product)



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Recommendations: BUY: Total returns expected to be materially better than the overall market with higher return expectations needed for more risky securities. NEUTRAL: Total returns expected to be in line with the overall market. SELL: Total returns expected to be materially lower than the overall market. TENDER: The analyst recommends tendering shares to a formal tender offer. UNDER REVIEW: The analyst will place the rating and/or target price Under Review when there is a significant material event with further information pending; and/or when the analyst determines it is necessary to await adequate information that could potentially lead to a re-evaluation of the rating, target price or forecast; and/or when coverage of a particular security is transferred from one analyst to another to give the new analyst time to reconfirm the rating, target price or forecast. SECURITY ABBREVIATIONS: NVS (non-voting shares); RVS (restricted voting shares); RS (restricted shares); SVS (subordinate voting shares). Eight Capital Equity Research Ratings:

As at June 30, 2019 Source: Eight Capital

78%

21%

1%

25%

3% 0%0%

11%

22%

33%

44%

55%

66%

77%

88%

Buy Neutral Sell

% of companies covered by Eight Capital in each ratingcategory

% of companies within each rating category for which EightCapital has provided investment banking services for a feein the past 12 months.

Documents

K92 Mining Inc. - Angel Publishing€¦ · KNT trades at a P/NAV multiple of 0.4x, the cheapest in our producer universe. We believe numerous catalysts over the next six to nine months,