KAU's Exploration Upside With Production Capabilities

• Commentary: Our new Portfolio addition preview, KAU. Why is there growing interest in gold and silver? US dollar currency debasement moving gold and silver prices? Our precious metals stocks SS1, MTH, BPM, TTM and... physical?
• Quick Takes: LYN, TTM, SLM, KNI, CND, SS1, GUE
• This week in our Portfolios: SLM, MTH

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 4,665,000 KAU shares and the Company’s staff own 35,000 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.

How’s that gold price last week... it just keeps on going up.

...and silver - wow, up an entire 6.4% overnight to new 12 year highs.

Precious metals (gold and silver) are starting to capture broader market attention.

We are announcing a new Portfolio addition.

...and it’s in gold.

This one is a bit different to the majority of the usual early stage gold stocks we have looked at on the ASX over the last year.

Which is why we like it.

So far our 2024 precious metals Investments SS1 and MTH are both up ~500%.

(the past performance of SS1 and MTH is not an indicator of future performance)

Our new Portfolio addition is Kaiser Reef (ASX:KAU).

A ~$35M market cap gold explorer... and current gold producer - in Victoria, Australia.

We will be sharing our KAU Investment Memo on Monday morning, including our full Investment thesis and associated risks.

But here is a quick preview and simplified summary of the KAU story:

We have been talking a lot about silver and gold prices running for many months now.

AND how the larger cap gold producers are getting the most attention from the market during gold’s price rise...

The question we asked ourselves - which kind of small cap gold stock can perform the best when the gold price is running?

We think it's one that has material exploration upside AND an ability to produce and sell gold NOW while the gold price is at all time highs and continuing to rise.

KAU owns and is exploring for new high grade gold in some of Victoria’s most prolific historically producing gold mines...

In 2021 KAU acquired the A1 gold mine in Victoria, which has produced over 600,000oz of gold since its discovery in 1861, at an average grade of ~26g/t.

(600,000oz is ~$2.4 billion of gold at todays gold price)

For the last 30 years, mining at this project was “remnant mining” from areas that had already been mined out by the old time miners, who had extracted the “easiest to get to” high grade ore.

(KAU still manages to make $23-$30M revenue per year by mining these “leftovers” for gold, flirting with break even and profitability)

But for the first time in decades, KAU has reached deep parts of the project that have never been mined, where new, untouched high grade mineralisation could be found.

And they are just about to start mining there, and drilling a few new exploration holes imminently:

In KAU’s words from their Friday announcement “The best ore is now in-situ and not historically exploited”.

KAU also owns a fully permitted and operating gold processing plant, experienced operations team and all required mining equipment.

... a complete gold processing plant in Victoria, which if built today, would cost 10’s of millions of dollars and take years to permit.

And at KAU’s high gold grades, it’s trucking distance from the mine:

So KAU can now produce from the never before mined parts of its project AND IF it makes a new high grade discovery, it can very quickly start mining, processing and selling the gold.

So no waiting for a mine license or permits.

No waiting for a JORC resource.

No waiting for a Scoping Study, PFS, DFS, BFS, or ‘Final Investment Decision’.

No waiting to secure project financing to build a mine and processing plant.

Fast to production is ideal at a time when the gold price is at all time highs and looking like it just wants to keep on moving upwards:

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.

A rising gold price is great news (and increased cash flow) for a gold producer like KAU.

We like KAU’s exploration upside, with the ability to almost INSTANTLY monetise any new gold discoveries during a period of rising gold prices.

KAU’s processing plant capacity is 250,000 tonnes of ore per year - it is currently operating at only 20% to 30% capacity and processing lower grade remnant ore.

Millions of $ have already been spent optimising this processing plant.

At the mine, after years of work and 10’s of millions of dollars of investment, KAU has finally completed a tunnel (in mining this is called a “decline”) to the depth where the old time miners couldn’t reach.

(this includes about 40 years of work by previous mine owners to get to this point)

This new depth is where we hope the historic high grades of gold will continue.

Which is where the risk/reward sits with KAU - we are betting that they hit a brand new high grade gold reef and can quickly mine and sell the gold.

The risk is that the mining into the deeper levels disappoints with average or low grades compared to what has been historically mined there.

So with:

• The gold macro theme currently going in KAU’s favour - gold price at all time highs
• The significant investment to get the processing plant humming paid for by previous investors
• Access to the un-mined, deeper part of the mine paid for by previous investors
• KAU share price not reflecting last few years of progress
• And, drilling the unmined deeper parts of the historical mine “imminent”

We are adding KAU to our Portfolio.

What we are betting on in the medium term is new high grade exploration drill hits, quick mining of any new discoveries and selling the gold while gold is at all time highs.

Leading to a gradual ramp up in production volumes AND material increases in revenue and profitability from processing new higher grade ore.

(and for the gold price to keep moving up, which nobody can control)

Also keeping in mind the various risks like exploration risk, production risk, possible plant down time, cost overruns and commodity price risk (which we will cover in detail in our Investment Memo).

We will be releasing our full KAU investment memo on Monday morning.

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 4,665,000 KAU shares and the Company’s staff own 35,000 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.

A big session for gold and silver last night

Last night gold comprehensively broke through AUD $4,000 oz.

That’s over $2,700 USD per oz.

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.

Gold has popped up about 5% for the month and continues to build on its upward trajectory that started accelerating about a year ago.

(Source)

But it was silver that stole the show last night, up ~6.4% just in last night's session

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.

Silver smashed through the previous 12 year highs it has set during 2024

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.

So the precious metals run we have been hoping for looks like it is getting some steam.

Here are our current precious metals stocks:

Sun Silver (ASX:SS1) - our 2024 Small Cap Pick of the Year SS1 has a 423M oz silver equivalent JORC resource in Nevada, USA

A silver price run is one of the factors out of anyone’s control that we need to go our way for SS1 be able to deliver the VUL success formula.

Two weeks ago we wrote about how SS1 is highly leveraged to the silver price - we are looking forward to seeing what SS1 does on Monday after last night's 6.4% surge in the silver price.

Mithril Silver and Gold (ASX:MTH) - MTH has 11 million oz silver and 373,000 oz gold or 529,000 ounces of gold equivalent JORC resource, over one of its targets (where it is currently drilling).

Its goal is to double this resource by next year.

And on Friday (yesterday) they delivered another high grade silver and gold drill hit - read our commentary here

BPM Minerals (ASX:BPM) - BPM hit high-grade gold at its greenfields exploration project directly next door to $2.2BN Capricorn Metals.

The drillhole returned 30m @ 1.84g/t gold from 25m, inc. 5m @ 7.12g/t gold from 35m.

A classic ‘discovery hole’ - and at the perfect time - with the gold price at all time highs.

BPM has drilled two more aircore holes either side of the discovery hole to test if they are really onto something big...

These assay results “are expected in mid October” -

which means any day now... read our commentary here

Titan Minerals (ASX:TTM) - already has a 3.1 million oz gold and 22 million oz silver JORC resource at its Dynasty project in Ecuador.

...and more drilling is scheduled to start in the coming weeks to grow it - our latest commentary here

Kaiser Reef (ASX:KAU)- New Portfolio addition, Investment Memo coming Monday.

Physical gold and silver - while our wheelhouse is small cap ASX stocks, we have also been buying physical gold and silver on a regular basis since we were first bitten by the precious metals bug during the "almost silver squeeze" back in 2020.

Known as “stacking”, it is the process of acquiring gold or silver bars, coins, or other numismatic items over time for your portfolio.

Here are a couple we have picked up since we started:

Physical gold and silver make up a smaller portion of our overall precious metals Portfolio compared to precious metals equities.

...but you never know when the world might descend into a dystopian hellscape where government backed fiat currency is worthless and marauding hordes of bandits in Mad Max style crotchless leather chaps only accept physical gold and silver in return for essential goods and services.

Speaking of which...

Why is there such growing interest in gold and silver?

People will seek gold and silver in times of global uncertainty, war or concern with the financial system.

Especially if fear of “currency debasement” (eroding the purchasing power of fiat currency) starts to take hold.

Precious metals like gold and silver cycle like any other commodity.

Gold and silver are unique as “stores of wealth”, and have been for thousands of years.

Gold and silver are rare, take effort to extract from the ground, there is a limited supply and they are chemically the most stable elements on the periodic table so they don’t degrade over time.

Ancient civilisations used gold and silver coins to replace cumbersome barter and trading.

As economies advanced and daily economic activity increased, it became apparent that physical gold and silver coins had some challenges.

So gold and silver eventually evolved into gold or silver backed “paper notes”.

(paper notes were just easier to carry around than silver and gold coins, and were more convenient for large or fractional transactions)

Each note represented an amount of physical gold or silver that was safely stored somewhere, and could be redeemed by the noteholder at any time.

These notes were circulated through the economy as they were traded for goods and services by people.

So instead of swapping physical gold or silver, people swapped paper notes representing that gold or silver.

Eventually most countries moved to the gold backed notes standard.

Until the US terminated the gold standard in 1971.

The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the late 1920s to 1932 as well as from 1944 until 1971 when the United States unilaterally terminated convertibility of the US dollar to gold, effectively ending the Bretton Woods system. (Source: Wikipedia)

Paper money that is NOT backed by gold or silver is called fiat currency.

Fiat money is a type of currency that is not backed by a precious metal, such as gold or silver, or backed by any other tangible asset or commodity.

Fiat currency is typically designated by the issuing government to be legal tender, and is authorized by government regulation. Since the end of the Bretton Woods system in 1971, the major currencies in the world are fiat money. (Wikipedia)

The paper notes still remained, but instead of being backed by gold they were backed by the government that issued it.

And this is where the money we know today originated from - gold backed notes.

By no longer being required to hold enough physical gold to back up each paper note circulating in the economy, governments were able to print more money to stimulate the economy when needed.

Or to pay back giant government debts, or to fund large, urgent expenses like wars.

The issue with this is that when more new fiat notes are printed into an economy, the purchasing power of each note is decreased due to the dilution from new notes.

(sort of like the dilution in a small cap capital raise when a bunch of new shares are suddenly issued - its annoying)

This is called “currency debasement”.

And it puts inflationary pressure on the economy.

Now this is not a new concept.

In ancient times, when gold and silver coins were the primary currency and the government needed to fund a war or something else, they couldn’t just magically “print” more gold/silver.

Instead they would clip off and keep a small bit of each coin in circulation

The face value of the coin stayed the same, but it contained slightly less silver or gold than it did before.

In later times when governments were responsible for minting the gold and silver coins used in the economy, they would use less gold/silver by mixing in other base metals, which debased the currency.

Fiat currency (not backed by gold or silver) is the easiest form or currency to debase when the government urgently needs money.

There is usually a flight to gold and silver during times of global uncertainty (war or threat of war).

OR when people start to lose faith in the value and stability of their governments fiat currency.

The USD, EUR and AUD are all fiat currencies and have been for many years...

And an Aussie $50 note sure doesn’t buy what it used to...

In 1932, Australia departed from the gold standard, which fixed the value of the nation's currency to that of gold. As a result, the Bank was not required to retain gold reserves, and the Commonwealth Bank Act of 1932 made its banknotes no longer convertible into gold. (Wikipedia)

The US dollar is currently the world’s reserve currency.

In 1944 The U.S. dollar was officially crowned the world’s reserve currency and backed by the world’s largest gold reserves thanks to the Bretton Woods Agreement. Instead of gold reserves, other countries accumulated reserves of U.S. dollars. (source)

In 1971 the US terminated the gold standard... so suddenly the world’s reserve currency was no longer backed by gold.

Fast forward 50 years and US govt debt is now at $35 trillion, and it’s growing every year.

~50% of all personal income taxes are spent on just servicing the interest of that debt.

And the world is on edge with potential expensive wars looking like they may break out.

Yesterday the US announced a high annual deficit, adding to its debt:

(source)

The US government is likely going to need to “print its way out of this situation" as neither democrats or republicans would likely risk unpopular spending cuts with a 4 year election cycle.

So the recent increase in the gold (and silver) price could be governments, banks, fund managers or everyday investors shifting some of their wealth into gold and silver as insurance, in anticipation of possible debasement in the global reserve currency.

Currency debasement affects everyone in an economy, so it would be interesting to see what would happen if currency debasement occurred to a broadly unacceptable level and caused a run on silver and gold from the wider population and investors.

Nobody likes getting their hard earned coins clipped...

How are precious metals used as a hedge against inflation and currency “debasement”?

Precious metals, especially gold, are used as an inflation hedge.

When inflation (or currency debasement) erodes the purchasing power of paper currency, the value of gold and silver often rises as they are seen as stable stores of value.

For example:

In the 1930s the price of gold was US$23.67 per ounce, while the cost to buy a tailored suit was around US$25.

Today, the price of gold is around US$2,700 per ounce, and the price of a high quality tailored suit... around US$2,700.

In the year 31 BCE, if you wanted to buy a fine toga in Rome it would cost... you guessed it, 1 ounce of gold.

And you will probably be able to buy a pretty sweet space suit for your trip to Mars in 2085 for... 1 ounce of gold.

So whether it is 31 BCE, 1930, 1980, 2024, 2085 or even the year 3000 - the purchasing power of gold remains the same.

But the purchasing power of the dollar is not.

Today, that $25 from the1930s would barely be enough to cover lunch, let alone a nice tailored suit.

This is the story of inflation over time, that the purchasing power of currency decreases while the purchasing power of precious metals - like gold - stays the same.

This makes gold and silver the perfect “hedge” against inflation.

But how high could gold and silver prices go?

There are some scenarios to consider, which relate to a very precious commodity in these uncertain times - trust.

What is the Silver & Gold “Mega Bubble”?

“I own gold because I am afraid, not hopeful, that it is going to go to $8,000 an ounce” (Rick Rule, 2024).

The silver and gold mega bubble is a phenomenon when the price of gold and silver reach astronomical levels due to severe inflation and currency debasement.

This happens when the faith or value of a fiat currency is shaken, due to excess money printing by governments.

This can be hard to imagine for western countries where currency and inflation are relatively stable.

But in other countries like Argentina or Lebanon, they can lose 78% or ~90% of their value respectively against the USD, like they did in 2023.

Interesting fact, in 2008, inflation in Zimbabwe was so bad that the government printed a hundred trillion dollar note, which was worth around US$10:

For governments that try to print their way out of trouble they can find themselves devaluing their currency further and further.

Precious metals, like gold and silver, provide a counterweight to this.

Take the Silver / Argentine Peso trade for example.

Over the last five years, inflation in Argentina was so bad that the price of silver compared to the currency went up ~2,915%:

(Source)

Had a local decided to take all their pesos and buy silver in 2021 they would be exponentially better off than having held the domestic currency.

In the West, we don't consider a world where currencies like the USD or Euro depreciate at that kind of rate.

But IF the confidence in USD, Euro or AUD is shaken, even a bit, a rapid appreciation in precious metals price against that currency can be expected.

Currency debasement events happen when a government racks up more debt than it can afford to fund with GDP output, eventually leading to money being printed to repay that debt.

Usually, the money printing starts when the debt has reached a “point of no return”, which means the country has to print significant amounts of cash to repay those debts.

Printing money leads to currency depreciation, which leads to a loss of confidence, which leads to further money printing and finally a negative feedback loop that can spiral into what we saw in Argentina.

This is what the Argentine peso relative to the US Dollar recently (we’ve superimposed how much gold these currencies get you on the image):

Our view is that the silver and gold mega bubble could happen if/when confidence is shaken in the global reserve currency, the USD.

Will the USD be overtaken as the global reserve currency?

The US has $35 trillion in public debt and spends ~50% of all personal income taxes on just servicing the interest of that debt.

Our view is that as global debt levels increase, the price of safe havens like gold and silver as “insurance” for a money printing doom loop scenario.

(Source - World Economic Forum)

US government debt has been increasing sharply over the last 10 years.

During the COVID-19 pandemic, the US government printed money in order to sustain the economy as the world went into lockdown.

Now, the US government continues to print money building their military might in order to fund wars and global hegemony expansion.

This includes wars in the middle east (Israel-Palestine) and in Europe (Russia-Ukraine).

Continuing to fund these wars will lead to further inflation and devaluing of the USD.

Recently, we have seen moves by governments to reduce the reliance on the USD as the global reserve currency.

In particular China.

The BRICS alliance of countries is now settling trade contracts between each other in gold and other currencies to reduce reliance on the USD.

This isn’t great for holders of the USD, as a fissure in the value of the USD and continued increase in the debt levels could lead to spiralling inflation.

Precious metals, like gold and silver provide insurance against this situation and central banks have been buying gold at record levels:

Many will be speculating on why gold and silver prices ran so hard this week, and nobody knows the real reason.

Is it a few early movers who are predicting a material debasement in global currencies as described above?

Or is it just pre US election jitters and all will return to average in 2025?

Our theory is that it will be the former and have positioned our precious metals Portfolio accordingly.

What we wrote about this week 🧬 🦉 🏹

Solis Minerals (ASX: SLM)

The copper price has been climbing over the last 12 months.

And we’re bullish on copper as it will form the backbone of the world’s electrification and decarbonisation efforts.

Quality copper projects are notoriously difficult to come by.

One of our Portfolio Companies now has FOUR exploration stage, copper assets.

Drilling will start in Q1 2025, which is just a few months away...

And the targets are shaping up very nicely.

Our $7M capped exploration Investment Solis Minerals (ASX:SLM) is consolidating one of the largest copper exploration tenement packages in Peru.

Read: ⛏️ SLM: Four “shots on goal” at a new copper discovery in Peru

Mithril Silver and Gold (ASX: MTH)

Gold just hit US $2,700/oz...

After hitting yet another new all time high this week.

Silver keeps creeping up and pushing beyond decade highs.

Perfect timing for our precious metals exploration Investment Mithril Silver and Gold (ASX:MTH) to deliver another ultra high grade silver and gold drill hit.

Read: ⛏️ MTH: Another high grade gold and silver hit

Quick Takes 🗣️

LYN set to begin drilling soon

TTM reports high grade gold, new targets

LYN Awards Drill Contract

SLM completes geophysics, copper drilling to come in 2025

KNI defining massive sulphide targets for the EU

CND provides update on Piedra Redonda gas project in Peru

SS1 hits another high grade silver intersection

GUE sells gold asset

Macro News - What we are reading & listening to 📰

Gold:

BRICS Making Good Progress On Their Golden Path (Forbes)

• BRICS shift to gold for international exchange, replacing USD and EUR.
• Russia and Iran develop gold-based financial tools after being excluded from the dollar system.

Lithium:

How Rio Tinto is rewriting the rules on lithium (The Australian)

• Rio Tinto’s $10 billion acquisition of Arcadium marks its entry into the lithium market, aiming to become a key player in the EV battery supply chain despite falling lithium prices.
• Betting on long-term demand for EV batteries, Rio expects strong market growth through 2040, but faces risks from oversupply, project complexity, and market recovery uncertainty.

RIO ASX: WA lithium miners get a Rio reality check, with a silver lining (AFR)

• Rio Tinto's $9.9B Arcadium deal prioritises low-cost Argentine lithium brines over Australian hard rock mines.
• The acquisition boosts confidence in lithium, signalling a potential market recovery.

RIO ASX: One more M&A deal would ‘light up’ lithium stocks, E&P says (AFR)

• Rio Tinto’s $9.9B Arcadium acquisition could trigger a surge in institutional investment in Australian lithium stocks, with Pilbara Minerals and Liontown Resources named as potential takeover targets.
• E&P Financial sees further consolidation driving lithium stock gains, despite current low prices and short-term risks in the sector.

General Motors to Contribute Combined $625 Million in Cash and Letters of Credit to New Joint Venture with Lithium Americas (Lithium Americas)

• GM invests $625M into Lithium Americas' Thacker Pass lithium project, securing a 38% stake and extending their offtake agreement to 20 years.
• The JV unlocks a $2.3B U.S. DOE loan, advancing Phase 1 of Thacker Pass to produce 40,000 tpa of battery-grade lithium carbonate.

Direct lithium extraction: A new paradigm for lithium production and resource utilization (Science Direct)

• Growing lithium demand drives interest in Direct Lithium Extraction (DLE) for more efficient and eco-friendly production.
• This study evaluates DLE technologies' strengths and challenges to enhance lithium recovery from various sources.
  

Silver:

US election 2024: Donald Trump and Kamala Harris don’t want to talk about America’s national debt (AFR)

• Despite rising national debt and a significant fiscal imbalance, presidential candidates Kamala Harris and Donald Trump largely avoid discussing these issues in their campaigns.
• The growing debt poses risks to the economy, undermining investment, productivity, and future prosperity while necessitating urgent policy discussions on Social Security and Medicare.

Uranium:

Google to buy power for AI needs from small modular nuclear reactor company Kairos (Reuters)

• Google has partnered with Kairos Power to buy 500 megawatts from small modular reactors, aiming for the first one by 2030 to meet AI-related energy demands.
• This reflects a trend among tech firms pursuing nuclear power, despite concerns about costs and waste management.

Amazon buys stake in nuclear energy developer in push to power data centres (Financial Times)

• Amazon invests $500 million in nuclear developer X-energy to support small modular reactors (SMRs) for data centres.
• The project aims to generate over 5 gigawatts of power by 2039, enough for 4 million homes.

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