$0.165
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.
Our Big Bet for KAU
“KAU re-rates to a market cap greater than $300M by increasing gold production at its A1 Mine and/or making new discoveries at either of its two gold projects (A1 or Maldon)”
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 a lot of work to be done, many risks involved - just some of which we list in our KAU Investment Memo. Success will require a significant amount of luck. There is no guarantee that our Big Bet will ever come true
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
Drilling commences
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
Decline construction progresses
Mining of virgin ground commence
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
Drilling commences
Drilling results
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
Incrementally increase tailings capacity by 200K tonnes and then 1.8M tonnes.
Organically increase production
Toll treating deals
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.
KAU: Gold drilling commenced at never before mined depths of one of Australia’s highest grade historical gold mines.
Dec 12, 2024
Dec 12, 2024 |
14 min
Today KAU announced drilling has commenced to test if the high grade gold continues deeper than the old time miners were able to reach… And IF KAU finds more high grade gold, they can quickly mine, process and sell this gold using their operating gold processing plant. Which has processing capacity of ~250,000 tonnes of ore per annum. All while the gold price is the near highest it has ever been.
Our New Investment is Kaiser Reef (ASX: KAU)
Oct 21, 2024
Oct 21, 2024 |
21 min
Today, we are announcing our latest 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.
KAU's Exploration Upside With Production Capabilities
Oct 19, 2024
Oct 19, 2024 |
23 min
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).
Reflections on 2024: Markets, Moves, and Milestones
Dec 22, 2024
Dec 22, 2024 |
12 min
Well, that’s pretty much it for the year. Another bearish year for the small end of the ASX. But at least the market managed to string together a few bright patches this year. Most notably during October and November.
What Newsflow is left for this Year?
Dec 7, 2024
Dec 7, 2024 |
19 min
In the business world, the christmas break is often treated as an “artificial deadline” to get deals done and finish projects. Three weeks ago we said we are watching 16 companies that had guided the market to expect material news before christmas… Usually only a handful of companies that guide news actually deliver it on time.
Market Optimism Peaks Ahead of the Holidays
Nov 16, 2024
Nov 16, 2024 |
11 min
The world is still digesting what exactly the US election result will mean for the next four years. The weeks after an election is often a “honeymoon phase”.
Insights from Industry Leaders at IMARC
Nov 2, 2024
Nov 2, 2024 |
17 min
A few of our team was in Sydney this week for the IMARC conference, and to hear from some of our Portfolio Companies. IMARC is the largest mining conference in Australia - so the big mining companies show up, but also well attended by small cap companies and investors. The sentiment “vibe” is definitely improving, something we’ve been observing and pointing out in recent weekend editions.
Why Small Caps Stand to Benefit from Precious Metals Push
Oct 26, 2024
Oct 26, 2024 |
25 min
Can you feel it? The small end of the market is… feeling good again? It’s being led by gold and silver price rises that are (finally) driving serious interest into a few smaller gold and silver stocks. And people are remembering how it feels when small stocks deliver price rises on high volumes.
