Kaiser Reef Ltd (ASX:KAU)

Investment Memo:

Kaiser Reef Ltd (ASX:KAU)

- LIVE

Opened: 21-Oct-2024

Shares Held at Open: 4,665,000

What does KAU do?

Kaiser Reef (ASX: KAU) is a high-grade gold producer and explorer located in Victoria, Australia.

What is the macro theme?

Gold is a precious metal that is often used as a hedge against inflation, which remains persistently high, and the gold price is trading at all-time highs at the time of this memo.

Why did we invest in KAU?

The gold price is surging

Gold is up almost 35% against the USD in 2024 making it one of the best performing commodities this year AND it is trading at all time highs against just about every currency in the world.

At the time of writing this, gold is at AUD ~$4,050 per ounce (US ~$2,700), up nearly 100% from 2021 lows (we track the gold price here).

KAU 100% owns the prolific, historical A1 gold mine in Victoria

Discovered in 1861, this mine has produced over 600,000 ounces - that’s ~$2.4 Billion worth of gold at today’s gold price.

The average grade was 25g/t gold which is extremely high grade (considering most mines today operate at ~1-2g/t of gold).

KAU 100% owns an operating gold processing plant

It's a 250,000 tonne per annum capacity plant within trucking distance of KAU’s operating A1 mine AND the Bendigo goldfields.

The plant means KAU is able to produce and sell gold to the market straight away.

It also means KAU holds a “hard to replace” bit of infrastructure that is valuable to pre-production gold companies nearby wanting to turn their projects into gold (and cash).

KAU recently spent ~$5M on plant upgrades which should improve gold recoveries.

KAU is already producing and selling gold

KAU is already producing and selling gold (and has been for the last few years) by mining the “remnant ore” in the A1 mine that was left over by old time miners who extracted the “easy to get to” high grade ore.

KAU is making around $23-30M revenue per year for the last two years, flirting with break even. A rising gold price means rising revenue for KAU by just doing what they are already doing.

High grade gold exploration upside

Drilling about to start at never before reached depths at the A1 mine.

KAU has already spent ~$23.5M in development and upgrade capital to reach, explore and start mining at these virgin, new depths that the old time miners were not able to access.

New higher grade ore discoveries means higher margins when processing.

KAU also 100% owns the Maldon Mine

The Maldon mine started operating in 1854, and has historically produced 2.1Moz ($8.5 Billion of gold at today’s gold price). The Maldon Mine contained Australia's highest grade gold mine (Nuggety Reef) which produced 301k ounces of gold at whopping grades of 187g/t gold. This project has been on care and maintenance since 2018 but we think any exploration success could bring the project back to life.

Processing plant only operating at ~20% capacity

KAU’s plant was originally built in the 1980s to bulk process lower grade ore from a different mine. This means that in the event of a new high grade discovery at the A1 mine and/or restart of the Maldon Mine, KAU can ramp up production immediately. With the extra capacity KAU could even “toll treat” ore from other nearby gold companies to make some extra revenue.

Visited all sites, spent time with management

We had been looking at KAU for over a year now. We visited the KAU’s projects in March and again in October, and spent time with management, board members and the plant and mine operations teams, and were impressed.

Unhedged gold producer

Some gold producers commit to sell future gold production at a fixed gold price - which means they do not benefit from rising gold prices (or suffer from falling prices).

KAU is NOT hedged, meaning the more the gold price goes up the better off KAU will be.

KAU has a $38M market cap which we think is well below the replacement cost of its assets.

We think KAU’s processing plant and its two gold projects (the operating A1 Mine & the Maldon Mine) are worth a lot more than $38M.

Our view is that just the processing plant on its own would cost more than KAU’s current market cap to replace.

Previous investors/owners have done all the heavy lifting for KAU

KAU’s assets have had years of work and tens of millions of dollars spent getting them to where they are today. KAU is now in a position to benefit from all that sunk capital.

What do we expect KAU to deliver?

Objective #1: Make new high grade discoveries at the A1 Mine

We want to see KAU drill out the never tested sections of the A1 mine and make high new grade discoveries

Milestones

not done Drilling commences

not done Drilling results

Objective #2: Increase production from A1 Mine

We want to see KAU mine out the never before touched sections of the A1 gold mine.

Milestones

not done Decline construction progresses

not done Mining of virgin ground commence

not done Increased average gold grade processed

Objective #3: Make new discoveries at the Maldon project

We want to see KAU make new discoveries and add to its JORC resource at Maldon, which currently sits at 1.2Mt @4.4g/t gold for ~186K ounces of gold. KAU has a current exploration target of ~165K and 345K ounces of gold.

Milestones

not done Drilling commences

not done Drilling results

not done Resources justify bringing the project back online

Objective #4: Increase capacity utilisation at its processing plant

KAU’s processing plant is currently operating at 20-30% capacity, we want to see the company increase this either from its own projects or through toll treating deals on other assets.

Milestones

not done Incrementally increase tailings capacity by 200K tonnes and then 1.8M tonnes.

not done Organically increase production

not done Toll treating deals

not done M&A of new ounces

What could go wrong?

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.

Commodity Price Risk

The performance of commodity stocks are often closely linked to the value of the underlying commodities they are seeking to extract. Should the gold price fall, this could hurt the KAU share price.

Exploration risk

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

Funding risk/dilution risk

As a small cap, KAU is reliant on capital markets to advance its projects. If something negative happens at a macro or company level, KAU could struggle to access capital on favourable terms. These capital raises may take place at a discount, and result in the issuance of new shares which incur dilution to existing shareholders.

Market risk

There is always the possibility that broader market sentiment gets worse and shares as a whole trade lower, taking KAU’s share price with it. Alternatively, there could be further sector specific pain ahead where junior explorers suffer a lot more than the broader market.

Development/delay risk

Should any or all of the above risks materialise, KAU could wind up stuck in “development purgatory” where newsflow dries up and the project remains stagnant for a prolonged period of time, hurting the share price. Additionally, if delays occur in terms of material newsflow, the market could turn on KAU.

What is our investment plan?

We are Invested in KAU to see it expand its production and bring the A1 Gold Mine back into production.

Our plan is to hold the majority of our position in KAU for 3 to 5 years which we hope is enough time to see KAU materially increase gold production (see “our long term bet” above).

After 12 months we will apply our standard de-risking strategy.

We may look to sell up to 20% of our holding if the company delivers on one or more of our Investment Memo objectives and/or the share price materially re-rates.

Any sell downs will be in accordance with our trading and hold policy disclosure.

Disclosure: 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 Investment Memo. The Company has been engaged by KAU to share our commentary on the progress of our Investment in KAU over time.