KAU: Gold exploration drilling has begun. Gold’s next leg up also begun…

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 4,291,000 KAU Shares and the Company’s staff own 71,000 KAU shares at the time of publishing this article. The Company has been engaged by KAU to share our commentary on the progress of our Investment in KAU over time. This information is general in nature about a speculative investment and does not constitute personal advice. It does not consider your objectives, financial situation, or needs.

We called it...

The gold price has just broken out and is trading at new all time highs.

Hopefully this is the start of gold’s next leg up.

$127M capped Kaiser Reef (ASX:KAU) looks on track to produce ~30k ounces of gold this financial year.

At today’s gold price that’s ~$160M in revenues per annum.

(We still don’t think the broader market has caught onto this)

Gold prices have been trading at all time highs for the last 5 months and hit NEW all time highs in the last 72 hours...

And it looks like KAU has now made enough free cash to start some new “blue sky” gold exploration drilling...

At its historic Maldon gold mine in Victoria.

KAU just commenced drilling at a mine that historically produced ~1.74M ounce of gold at average grades of ~28g/t.

The “reef” that KAU is targeting with this round of exploration drilling was responsible for ~491,000 ounces of that production...

We’ve recently seen what a big exploration drill hit in Victoria can do.

ASX explorer Falcon Metals share price is up ~10x after hitting a 2.4m at 8.4g/t gold discovery hole in early July.

So over to you KAU, in a few weeks we should see if KAU can deliver its own new gold discovery in Victoria.

(Noting past performance of Falcon is not an indication of the future performance of KAU)

There’s a lot of eyes on Victorian gold exploration right now.

A great time for KAU to make a new discovery on a historic mine, especially with a mining license already in place...

and just 4.1km from KAU’s permitted and operating gold processing plant:

KAU just started sticking some drill holes into Maldon to find out.

KAU is the first company to drill a hole inside the old Union Hill pit since surface mining stopped in 1992...

As we noted above, the market appears to be loving high grade gold hits in Victoria, Australia - Falcon Metals, one of KAU’s peers, is up 10x in two months (more on that later).

Which is not surprising given the gold price has been trading at all time highs for the last 5 months - and has broken out to new all time highs over the last 72 hours.

Noting the past performance of commodity prices is not an indicator of future performance.

Now let's see what KAU’s drilling might uncover.

With the gold price looking like it has started another upward move, it's a great time to make a new gold discovery.

(and also a good time for KAU to be producing 30,000 ounces of gold per year...)

What could near term exploration success here mean for KAU?

Normally exploration success means years and years of economic studies, permitting and construction before any gold is produced...

Not for KAU.

KAU already has a mining license in place at its Maldon project.

(new mining licenses are hard to get in Victoria)...

AND KAU’s fully permitted, operating (under capacity) gold processing plant is just ~4.1km away

(permitting and building a new processing plant in Victoria is excruciating).

So KAU can relatively quickly move from any gold discovery here to production - and selling the gold into an all time high gold price.

But first we need a successful exploration drill result, and given KAU has started drilling already, we should find out in the coming weeks...

KAU’s Maldon project also includes Australia's highest grade gold mine (Nuggety Reef) which produced 301,000 ounces of gold at grades of 187g/t of gold.

We have been to the Maldon project - here our photo looking into the pit where KAU will be drilling down from:

As we said above, KAU’s exploration drilling program is well timed.

It has begun just as the ASX market is re-rating exploration success in Victorian gold stocks - one of KAU’s peers - Falcon Metals - is up 10x in two months...

The past performance is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

And just raised $20M from investors - including the likes of Jupiter Asset Management...

(Source)

We are familiar with Jupiter Asset Management from its investment into our Mexican silver developer Mithril Silver and Gold (ASX: MTH) - they know their way around the precious metal market.

Seeing heavy hitters like Jupiter invest in Victorian exploration companies is a positive sign for KAU - especially now that KAU is drilling too.

KAU is the only company in our Portfolio that gives us exposure to gold both as a producer AND an explorer.

KAU has producing gold assets in Victoria and Tasmania with forecast production of >30k ounces per annum.

30,000 ounces of gold at today’s prices is ~A$160M in gold every year...

(of course that’s not revenue guidance, just a back of napkin multiplication to give a rough order of magnitude of potential revenue)

Now with drilling started as of yesterday, inside the next few months, exploration upside is also in play for KAU.

KAU’s drilling will be testing for extensions to the old “Eaglehawk Reef” which was responsible for ~491k ounces of Maldon’s total ~1.74M ounce production history.

Here is a photo of the old timers mining that EagleHawk Reef:

(We found this in the State Library Victoria archives, yes we actually physically went to the State Library to find photos)

KAU will be following up a drillhole that previously returned a 7.6m intercept with gold grades averaging 4.88g/t.

We like that KAU is drilling at its Maldon project for three reasons:

1. Maldon sits ~4.1km away from KAU’s operating Victorian processing facility which is currently operating well below its capacity - meaning any new discovery could be put into production very close by (versus trying to build something from scratch)...
   
   
2. The EagleHawk reef, which KAU is targeting now, is close to the existing decline (tunnel that goes underground at Maldon) - meaning any extensions to the reef should also be easier to access.
   
   
3. And finally... the market is very interested in Victorian gold exploration, with another ASX explorer, Falcon Metals re-rating more than 10x off very narrow, high grade hits from ~544m to ~600m depths (Source, Source).
   
   

We think that any repeat of the previous 7.6m intercept with gold grades averaging 4.88g/t at KAU’s project could bring with it some market attention to KAU.

Especially with how close KAU’s project is to its existing operating mill...

Being so close to a processing plant means any discovery can be commercialised a lot easier/quicker than something that is isolated far from any processing infrastructure.

Falcon, for example, has no mine infrastructure or operating mill and is very early into the delineation phase of its new discovery.

The market obviously likes what it has found - Falcon just raised $20M a few weeks ago and is now capped at >$210M.

We think the market has set a precedent for how KAU’s valuation could re-rate if there is any exploration success on its Victorian ground.

KAU is currently capped at $127M, about half the valuation of Falcon, despite having producing, cash generating assets in Victoria and Tasmania...

Why exploration success near a mill could be big for KAU

A great example of a company-making discovery, next door to existing processing infrastructure is ASX listed Spartan Resources (formerly Gascoyne Resources).

Spartan’s project in WA was also placed into care and maintenance (and even went into administration) - similar to KAU’s Maldon project which is also in care and maintenance (not admin)...

In 2022 Spartan Resources drilled ~50m away from its existing JORC resource (which had been producing gold for years) and made a seriously high grade discovery...

That discovery took the Spartan share price from ~10c to a share price north of $2 per share...

Past performance is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

Spartan Resources was purchased by Ramelius Resources for $2.4B within 18 months of the gold discovery:

(Source)

A key reason for the acquisition was the “processing capacity and production profile” of Spartan:

(Source)

C’mon KAU....

KAU’s valuation is de-risked by its gold producing project

We think that KAU’s current valuation is largely supported by the company’s Tasmanian project (the Henty mine).

KAU acquired the Henty mine from $2BN Catalyst Metals on the 15th of May, right in the middle of the April to June quarter reporting period.

(Catalyst took a 19.9% stake in KAU as part of the deal)

In the first 46 days of ownership of the project, KAU produced ~4,069 ounces of gold.

KAU told the market the Henty mine is expected to produce 25,000 oz per year - which works out to be around 3,150 oz every 46 days.

And then delivered a 4,069 ounce production number when it reported its June quarterly.

The Henty asset was a big part of KAU’s ~$10M positive operating cashflow in the recent quarterly cashflow report:

(Source)

We note net cashflows were a lot lower than that operating cashflow number as KAU had to complete the acquisition of Henty and had development costs at its Vic assets.

We will probably see a cleaner quarterly number from Henty in the upcoming September quarterly - which we hope adds a bunch of cash to KAU’s balance sheet (no guarantees of course, negative surprises can and do happen. KAU also has $7.5M debt as of 31 July on its balance sheet).

Henty also has >$100M in project infrastructure (at replacement value) which is why we think it more than backstops KAU’s current market cap at $127M.

(Source)

Ultimately, we want to see KAU increase production and use cashflows from production to fund an exploration win OR more M&A...

All of this forms the basis for our KAU Big Bet which is as follows:

Our KAU Big Bet:

“KAU can grow production at both of its projects in Tasmania and Victoria to >50k ounces per annum. Using that cashflow KAU can fund exploration OR M&A that leads to a re-rate in the company’s market cap to above $1BN”

NOTE: our “Big Bet” is what we HOPE the ultimate success scenario looks like for this particular Investment over the long term (3+ years). There is no guarantee that our Big Bet will ever come true. There is a lot of work to be done, many risks involved, including development risk, country risk and regulatory risk - just some of which we list in our KAU Investment Memo.

Success will require a significant amount of luck and good management. Past performance is not an indicator of future performance.

What’s next for KAU?

Cost optimisation and exploration at Tasmanian project (Henty) 🔄

The main thing we want to see at Henty is for KAU to increase production rates and optimise costs.

BUT at the same time we are looking forward to exploration drill results from the project.

KAU is currently drilling at Henty and has already hit a “108m intersection of strong alteration, indicating that the Henty style alteration extends 600m from the current known mineralisation”.

The main target for the drilling is to find extensions to the “Darwin Zone” which is where Henty has produced over 655k ounces of gold at average gold grades of 8.4g/t.

If we get big extensions to the south of that area and show that those numbers could be repeated into the future we think that will be a big win for KAU.

Here is a visual of where KAU is drilling (note those chequered sections “Darwin Target Zone” and “Darwin South”:

(Source)

Exploration program at Maldon 🔄

With KAU now exploration drilling at Maldon, we want to see the results from drilling.

Because KAU is drilling with a diamond rig, we could see early visuals with visible gold in drillcores (which is usually a good sign the company is hitting the right rocks).

The reason we think exploration success at Maldon could be material for KAU is because of how close it is to KAU’s operating processing plant AND because Maldon was previously home to Australia’s highest grade gold mine - Nuggety Reef - which produced ~301k ounces of gold at ~187g/t gold grades.

Although not guaranteed, a major discovery at Maldon (even 1/10th of the grades Nuggety produced at) could be a game changer for KAU primarily because of the proximity to a mill which is currently operating at 20% of its capacity:

Update on strategic review of A1 Mine 🔄

On Friday last week KAU announced a strategic review of its A1 Mine.

(a strategic review generally means that the company will look to potentially sell the asset and allocate valuable resources to higher potential assets on their books)

A1 is where KAU was producing most of its gold in Victoria, and at the time of our initial Investment we had high hopes for the project.

Last quarter A1 produced 756 ounces of gold, mostly from remnant ore (meaning it was from parts of the mine that had been accessed by previous owners of the project).

KAU has spent the last ~12-18 months drilling deeper and spending on development CAPEX to try and access parts of A1 that have never been mined in the past.

Then on Friday, KAU said “mineralisation identified in the recently reached mid to northern region of the Nova Zone is showing reduced alteration and less consistent and lower grade gold than in the levels immediately above it, resulting in lower mined grades”.

This prompted KAU to start a strategic review of the asset to “assess a range of options to maximise shareholder value from the A1 operation”.

KAU did explicitly mention that no decision had been made on the asset yet...

But after the drilling campaign on the A1 mine earlier in the year KAU may want to allocate resources to the newly acquired Henty mine in Tasmania and exploration at the promising Maldon project in Victoria.

What are the risks?

The three key risks to our KAU Investment Thesis in the short term are - “Production Risk”, “Commodity Price Risk” and “Exploration Risk”.

Production risk because KAU now has producing assets, which carry significant costs.

If production rates fall materially, it could mean significant negative cashflows to KAU which would hurt the company’s share price.

We also note, KAU has $7.5M in drawn debt and a series of put options outstanding (source) which means KAU has short term liabilities it needs to meet.

Any production issues could make it difficult to service that debt and deliver gold into those options which could hurt KAU’s share price.

Production Risk

The ability of the KAU to achieve production targets or meet operating and capital expenditure estimates on a timely basis cannot be assured. As a producer, KAU is subject to risks such as but not limited to, labour costs and availability, energy prices as well as KAU’s internal ability to forecast costs like these and budget effectively.

Source: “What could go wrong” - KAU Investment Memo 26 May 2025

Commodity prices (in this case, gold) are also a risk to our KAU Investment.

KAU is a completely unhedged gold producer; any fall in the gold price would impact revenues directly.

If gold prices fell enough, we would expect it to impact the KAU share price negatively.

Commodity Price Risk

KAU is an unhedged gold producer, meaning all of its production is sold at, or close to, the spot price for gold at any given time. Any material fall in the gold price could hurt KAU’s share price significantly.

Source: “What could go wrong” - KAU Investment Memo 26 May 2025

KAU also has an element of exploration risk because of the drill programs being run across both its Tasmanian project and the newly started drill program at Maldon.

Poor exploration results from either asset could negatively impact the markets perception of the exploration upside on KAU’s projects.

Exploration risk

There is no guarantee that KAU’s drill programs are successful, and KAU may fail to find economic gold deposits.

Source: “What could go wrong” - KAU Investment Memo 26 May 2025

For the full set of risks we have identified and accepted in making our Investment in KAU, see our KAU Investment Memo below.

Other Risks

The company’s financial risk is also material, as it needs to generate sufficient internal cash flow to fund its production growth and exploration programs without resorting to dilutionary capital raisings.

Ambitious plans to grow to 50,000 oz. of annual production carry development risk, particularly at the A1 mine, which is still transitioning to new ore zones.

Additionally, KAU’s operations depend on attracting and retaining skilled labour, exposing it to personnel and operational capability risk, while evolving state regulations create regulatory and permitting risk, especially in tightly controlled jurisdictions like Victoria.

Finally, as a sub-$150M market cap company, KAU remains exposed to market perception and liquidity risk, where weak sentiment or negative news could disproportionately affect the share price due to limited institutional support.

Our KAU Investment Memo

You can read our KAU Investment Memo in the link below. We use this memo to track the progress of all our Investments over time.

Our KAU Investment Memo covers:

• What does KAU do?
• The macro theme for KAU
• Our KAU Big Bet
• What we want to see KAU achieve
• Why we are Invested in KAU
• The key risks to our Investment Thesis
• Our Investment Plan