Papua New Guinea needs explorers to capitalize on gold boom – K92 Mining CEO

➤ Canada is more positive on Papua New Guinea's mining sector compared to Australia.

➤ The Wafi-Golpu gold development has been key to attracting exploration spending in Papua New Guinea, in part due to Newmont Corp.'s involvement.

➤ Canada-based K92 Mining, the largest explorer in Papua New Guinea, would welcome the entrance of more Australian companies in the country.

K92 Mining CEO John Lewins. Source: K92 Mining Inc.

K92 Mining Inc. CEO John Lewins gave the only presentation from a purely Toronto-listed miner at the Australian Securities Exchange-focused Diggers and Dealers Mining Forum in Kalgoorlie, Australia, on Aug. 7. It was the company's first time at the major conference.

The company booked record copper recoveries in the second quarter and the highest gold recoveries since late 2019. K92 Mining is now fully financed for stages three and four of the Kainantu gold-copper operation in Papua New Guinea (PNG), and expects an initial resource estimate for its second project, Arakompa, by the first quarter of 2025.

Papua New Guinea's gold reserves and resources are in the top 10 globally, according to S&P Global Market Intelligence data. However, while gold exploration spending in the country has risen since 2021, the country's percentage of global expenditure has fallen.

S&P Global Commodity Insights and Lewins met after the presentation to discuss concerns about the future of Papua New Guinea's mining sector, in light of current record prices for gold. The following interview has been edited for clarity and space.

S&P Global Commodity Insights: What brought you all the way from Vancouver, British Columbia, to a conference full of Australians?

John Lewins: Diggers tends to focus on the ASX, and rightly so, but we were asked to present. We're in Papua New Guinea, so although we're with the [Toronto Stock Exchange], we've got about 1,700 contractors-employees, 5% of which are expats, and most of those would be out of Australia. A lot of our suppliers, consultants, contractors and the like come to this forum.

We are also here to look at what's happening in the market and the potentials in terms of M&A and business development. But we're not really looking at a dual listing on the ASX. Generally speaking, dual listings don't work terribly well. One market always dominates and the other one becomes just something where you have to comply [with regulations] and all the rest of it.

We get pitched at by quite a number of brokers, and while right now there is certainly more money available in Australia than in Canada — which is unusual — we're already got everything that we need for our project and its growth. We've got a decent cash balance of about US$60 million, a US$150 million debt facility and we'll produce 130,000 ounces this year. So we don't need equity or debt.

However, we get a discount in our share price because we've got PNG assets and we don't have anything outside of PNG. Overall, the TSX is more positive on PNG than the ASX, which is a good rationale for us just staying with the TSX.

Our market capitalization in Australian dollars is close to A$2 billion, which is higher than many of your mid-tiers [Down Under] because of grade and margin and what we're doing in-country.

So what is the future for Papua New Guinea's mining industry?

The construction of Wafi-Golpu is a key for the medium term. It's a massive investment and is a big tick for the investor community due to the involvement of Newmont and to a lesser extent Harmony Gold Mining Co. Ltd. For our expansion, we're putting in US$300 million in capital this year and next, so right now we're the biggest investor in the country in the mining space. But the future does concern me. Yes, we've got Frieda River, which has been around for over 30 years. If it was in Australia it would be in production, but it's going to take time. At this point, it has been the Chinese which have tried to develop it because they need the metal.

We're not having enough exploration. Who's the next mine? I can't tell you, and that's the challenge for PNG, which is why we need to attract exploration dollars.

People don't understand PNG in Australia, which I find stunning given it's the nearest neighbor. The average safety record of a PNG mine is actually better than in Australia. That's a strength of the legislation — inherited from Australia — with a model whereby 0.5% of our sales go to fund the mines department, and as a result, you've got a very strong department unlike developing countries generally.

PNG has incredible geology, yet almost no exploration. I mean we're the largest explorer by spend in PNG by far: We spent US$25 million this year, and that's probably half of what will be spent in exploration in the mining space in the country, which is so little considering its endowment. It's not even a week's worth of exploration in Western Australia. So we're not afraid of competition in PNG. We'd like to see more Australian companies come in.

Outside of a little exploration being done around some of the bigger mines, there are not a lot of juniors which, let's face it, are what drives exploration. We acquired Kainantu from Barrick Gold Corp., which had it for about seven years and they spent US$42 million on exploration, US$14 million of which was just on administration. If that was a junior, you might have spent US$3 million or US$4 million on administration and put most of the money in the ground.

All of our rigs are on a new project called Arakompa where we've reported multiple high-grade gold intersections of plus-20 grams per [metric] ton over meters, only 3 kilometers from our mine and 2 kilometers from the mill. You can't find that sort of thing in Australia much anymore.

Much has been said of gold producers' underwhelming performance compared to the gold price. What is going on in equity markets?

Gold has had a good run, but if you look at the gold equities, including producers, that hasn't been reflected in the valuations. We're significantly underperforming what the gold price is doing, especially when you consider it should be [that] you're improving margins dramatically with the gold price. Specialist gold funds are all there, but some of the generalist funds we talk to say, "Look, gold is running, but historically when we look at gold equities, the gold price goes up and your costs go up and your margins don't change much. So in terms of making a return for investors, you guys are not great." So you're not getting the generalist funds coming in as you would expect to see at this sort of gold price.

The likes of Barrick Gold and Newmont are certainly doing a better job at holding their costs in this higher gold price environment, and therefore improving their margins. That should be good for the industry as a whole as it encourages new funds to come in, which are generalists as opposed to specific mining or precious metal funds. Within the North American or the Canadian context, that is very much the case. You also don't have the superannuation monies in the Canadian market that you have in the Australian market, where there is an ever-increasing number. This certainly appears to be a good source of funds for the Australian miners.

While Canada does have flow-through funding, which has tax benefits, Australian miners have benefited from the low Australian dollar, which has compounded the increase in the US dollar price of gold. So they're looking at even better margins because their costs are in Aussie dollars but the sale price at the end of the day is in US dollars. The Canadian dollar is 10% stronger than the Aussie dollar, so we don't get the same benefits of that increased price with a lower domestic currency. A lot of the Canadian miners are actually in South America and Africa, and their costs are in US dollars anyway.