Canaccord Genuity (TSX:CF, LSE:CF) has resumed coverage of Karora Resources Inc with a 'Buy' rating and a C$6.25 target price, noting that the stock offers organic growth, at a good price.
The Canadian broker noted that Karora (KRR) is a Western Australia-based gold producer operating the historic Beta Hunt (BH) gold-nickel mine and the Higginsville Gold Operations (HGO), which consists of a 1.6 million tonnes per annum mill and a conglomerate of open pit and underground mines.
Leveraging a hub-and-spoke strategy centered around the HGO mill, the company currently produces over around 110,000 ounces of gold per year with ambitions to nearly double production by 2024, all while maintaining a strong ESG focus as evidenced by being one of the world’s first carbon-neutral miners in 2021.
In a note to clients, Canaccord's analysts said: "In our view, Karora offers investors a combination of inexpensive organic growth, substantial (and asymmetric) optionality, significant FCF generation, and risk-reducing characteristics that serve to protect investor downside."
READ: Karora announces record annual gold production from Beta Hunt and Higginsville mines in Western Australia
The analysts pointed out that, in their view, Karora's turnaround from a financially faltering junior producing around 21,000 ounces of gold in 2016 to a 100,000 ounces-plus producer generating significant FCF (free cash flow) has been impressive.
In a note to clients, the Canaccord analysts said: "We see production growing to ~185koz in 2024, driven by expansions at the BH mine and HGO mill. With a modest capital budget (CG est. ~C
$150M), we expect KRR will self-finance these relatively low-risk brownfield expansions, while leaving a sizable liquidity buffer (C$91M Q4/21 cash position). As production ramps
up and growth capital falls, we project FCF yields to reach ~30% by 2025, an unwarranted discount to peers given the risk profile, in our view."
They added: "We see KRR's multi-mine operation in the top-tier jurisdiction of Western Australia as highly compelling. On top of this, we like the turnkey nature of HGO's brownfield projects, which could be brought online should challenges arise during the BH expansion. Combining these factors with a peer-leading focus on ESG and an operator-focused management team that has a track record of
execution, we see Karora's risk profile as attractive for a junior gold miner."
The Canaccord analysts noted that KRR achieved carbon neutrality in 2021 by purchasing 80 kilotonnes of carbon offset credits, becoming one of the first mining companies globally to do so. They said they see the push to net-zero as a fundamental shift in the industry, and thus far KRR is a pioneer, leaving other industry participants playing catch up.
The analysts also highlighted Karora's promising exploration upside noting that 1,900 square kilometres of the company's land package remains underexplored and sits within the renowned Kalgoorlie district, home to St Ives - 14 million ounce (Moz) - and the Kalgoorlie Super Pit - 60Moz.
At BH, the analysts noted that the company declared around a 0.5 Moz reserve in 2020 on top of a 1.6Moz global resource (up around 285% since 2016), while BH's historic nickel focus has left significant gold opportunities, including the virtually undrilled Fletcher Zone and Gamma Block, where KRR is now releasing strong drill results.
They also pointed out that KRR's Mt. Henry pits are large, low-grade, brownfield deposits located around 60 kilometres south of the HGO mill.
"We exclude them from our base case financial model as we think they are unlikely to be pursued unless we enter a sustained +$2,000/oz gold price environment, but they could be brought online for a modest capital investment. Although marginal at current gold prices, we estimate an ~4% lift to our operating NAV for every $100/oz increase in gold from Mt. Henry," the analysts added/
The analysts said their target price is based on a 50/50 combination of a 0.9 times multiple applied to their forward curve-derived operating NAV (net asset value) less net debt and other corporate adjustments, and a 6.0x multiple applied to 2022E EBITDA. Karora is currently trading at 0.54 times NAV and 3.9x (2022E) EBITDA versus peers at 0.61 times NAV and 4.5 times EBITDA.
They concluded: "Our target multiples are at the high end of the range we use for junior precious metal producers due to KRR’s FCF-accretive growth plan and favourable risk profile."
Contact the author at jon.hopkins@proactiveinvestors.com