Karora Resources keeping up the momentum down under and poised to improve output and costs in 2021

A quality gold producer in Western Australia Robust financial position driven by strong free-cash-flow generation A large and expanding resource base What Karora Resources does: Karora Resources Inc (TSE:KRR) (OTCMKTS:KRRGF) (FRA:5RN1) is now a "top tier" junior gold producer in Western Australia having started its transformation - when known as RNC Minerals - with its purchase in 2019 of the Higginsville Gold Operations (HGO). The group is focused on growing gold production and reducing costs at the integrated Beta Hunt Gold Mine and the Higginsville mine and its associated treatment facility. At Beta Hunt, a robust gold mineral resource and reserve is hosted in multiple gold shears, with gold intersections along a 4 kilometre strike length remaining open in multiple directions. Meanwhile, Higginsville has a substantial historical gold resource and highly prospective land package totaling approximately 1,800 square kilometers (sq km). The Higginsville treatment facility is a low-cost 1.4 million tonnes per annum (Mtpa) processing plant which is fed at capacity from the underground Beta Hunt mine and open-pit Higginsville mine. In August 2020, Karora further expanded its portfolio after completing its acquisition of the Spargos Reward project tenements, which cover 33 square kilometres located in the Eastern Goldfields of Western Australia, 35 minutes by road from the Higginsville gold operation. On top of the existing historical resource, there are a number of historic workings within the project, the most notable of which is the historic Spargos Reward Gold Mine which produced 105,397 tonnes at an average grade of 8.56 grams per ton (g/t) of gold in the 1930s and 1940s, with limited gold extraction since that time. The Spargos gold project contains a historical JORC (2012) Mineral Resource Estimate of 112,000 ounces (785,800 tonnes at 4.4 g/t) indicated resource and 19,000 ounces (151,000 tonnes at 4.0 g/t) inferred resource. How is it doing: In May, 2021 Karora Resources reported net earnings of C$5.6 million for its first quarter to end-March, well up from C$539,000 seen in the first quarter of 2020. Revenue was C$59.2 million, up from C$54.2 million in the same period a year earlier. Cash flow used in operations came in at C$18.6million, up from C$12.2 million a year earlier, while Karora ended the period with C$76.7 million in cash and working capital of C$63.2 million. Karora produced 24,694 ounces of gold - its seventh consecutive quarter of consistent production of around 25,000 gold ounces since its key acquisition of the Higginsville mill in mid-2019. All-in-sustaining costs (AISC) for the latest quarter came in at US$1,049 per ounce of gold sold, an improvement on the US$1,101 per ounce seen in Q1, 2020. The performance placed the company "on a very strong footing" to achieve its full-year 2021 gold production guidance of between 105,000 and 115,000 ounces and AISC of between US$985 and US$1,085 per ounce sold, it said. The miner also highlighted that the Phase I mill expansion at Higginsville was proceeding "well ahead of schedule". The company has already achieved an annualized production rate of 1.5 million tonnes a year. Once completed, the Phase I expansion will increase production capacity at the Higginsville mill in 2021 by approximately 15%, or 550 tonnes per day, to 1.6 million tonnes per annum from the prior capacity of 1.4 million tonnes per annum Highlights of the quarter included drilling at the 2020 Larkin Zone discovery, which hit 19 grams per ton (g/t) gold over 9 metres (m). There was also the second new high-grade nickel discovery at Beta Hunt in the last six months, known as the "Gamma Zone - 50C", where 1.6% nickel over 4.6m, including 18.4% nickel over 2.2m was hit in one hole. At the Spargos Reward gold project, more strong drilling results were reported, including 6.1 g/t over 14m in one hole, which confirmed the interpreted high-grade gold plunging shoot thesis by extending the shoot to over 300m down-plunge, which remains open. In late 2020, the company unveiled a first consolidated reserve and resource estimate for its two main assets - Beta Hunt and Higginsville - which showed an increase to the proven and probable (2P) gold reserve of 334% to 1.33 million ounces. The consolidated measured and indicated (M&I) gold resource, meanwhile, was boosted by 167% to 2.52 million ounces. The estimates did not include the Spargos Reward project, for which it has said a resource and reserve will be completed in the first half of 2021, to include the new high-grade zone. The Mousehollow and Two Boys deposits are expected to contribute to mill feed in the second quarter this year, while Karora is also planning to bring the Aquarius deposit online mid-year. What the broker says: In a note on May 7, 2021, analysts at Stifel GMP described the miner's first quarter as 'successful' and 'in line' with the broker's estimates, with solid production placing the company in a position to achieve production and cost guidance. "The company was prudent in building stockpiles ahead of the mill should the issue of COVID-19 disruptions arise with supply chains," noted the Stifel analysts. "We expect KRR to deliver a number of catalysts over the remainder of 2021, where exploration should showcase an increasing grade profile as the company works to pull additional ounces forward. On the back of the royalty renegotiation in 2020, KRR is using the cash saved to increase exploration drilling dollars," they added. Karora trades at 0.73 times spot P/NAV versus peers at 0.60 times, and remains one of the few juniors under coverage with a clean balance sheet ready to execute on a portfolio 100% located in Western Australia, added the analysts. Stifel GMP repeated a 'Buy' stance on the shares and a C$5.85 target price. Inflection points: Resource and reserve update for Spargos open-pit in second quarter Improvements to Higginsville mill capacity More exploration results What the boss says: In the statement accompanying the company's first-quarter results, Karora CEO Paul Andre Huet said: “Karora delivered a solid financial performance in the first quarter of 2021 with adjusted EBITDA of $21 million or $0.15 per share, operating cash flow of $19 million or $0.13 per share and consolidated AISC1 of US$1,049 per ounce sold.  Net earnings of $5.6 million or $0.04 per share were negatively impacted by an unrealized non-cash foreign exchange loss of $4.5 million or $0.03 per share, primarily related to intercompany loans due to quarter-over-quarter currency fluctuations. "We reiterate that these are unrealized intercompany loans as we do not transfer cash out of the Australian business unit. Adjusted for these fluctuations, earnings were $8.1 million or $0.06 per share. On the cost front, despite planned lower grades during the first quarter, we recorded yet another strong three-month period of disciplined cost control with AISC of US$1,049 per ounce well within our 2021 guidance range." He added: "With Karora's strong cash balance of $76.7 million at the end of the first quarter, and much of the groundwork to bring on higher grade mining areas over the balance of 2021 completed, we are in a very strong position to deliver on our 2021 organic growth commitments. In this regard, I am looking forward to delivering our multi-year growth profile to the market later in the second quarter." Contact the author: giles@proactiveinvestors.com