Karora Resources: 2022 EPS Estimates Could Rise 50% Over Next 20 Months

Summary

• 2022 consensus analyst EPS numbers could be upgraded by 50% over the next 20 months as mill capacity upgrades, higher gold grade, and added Nickel production come through.
• A potential Australian listing later in 2021 should act as a positive catalyst in getting new investors on board.
• Trading at only 7*2021 PE on current consensus earnings with a net cash balance sheet, the shares are already excellent absolute value.

I would like to start by taking a look at analyst’s consensus estimates for Karora Resources (OTCQX:KRRGF) (KRR.TO). For 2021 estimates are for sales of C$285.25m, EBITDA of C$138.2m and EPS of C$0.588, based on 5 analysts. Somewhat surprisingly the numbers for 2022 are roughly flat on the 2021 numbers as some production growth is modeled but with a little lower gold price is keeping the progress around flat. We think these 2022 numbers could be SIGNIFICANTLY TOO LOW, in fact most likely 2021 numbers are conservative but it’s the 2022 that could be massively beaten.

Simple points first.

1. The existing mill capacity will be upgraded by around 15% and this comes through in second half 2021 with a full year in 2022.
2. Management have been clear grade should improve through 2021, especially as Spargos deposit comes on line starting in Q2 but with stronger affect in 2H, this is embedded in current guidance for 2021.
3. Beta Hunt begins to mine the Nickel late 2021 (our timing estimate) and this really feeds into 2022 production cost credit.

Karora Management on Q4 2020 Results - Earnings Call Transcript references the above 3 points. Note for point 3 is the Larkin zone which contains both Gold and Nickel.

Mill de-bottlenecking

So 15% extra capacity at the mill should come with relatively low extra P&L costing. It’s described as de-bottlenecking and single digit capex needs. Hence one would expect it to be very nicely margin enhancing. It should ramp in 2H2021 so for 2022 we crudely say 15% extra on group EBITDA as it’s a full year but maybe 4Q 2021 it’s already up to speed so like for like in 4Q 2022 is compensated with conservative assumption of no margin rise improvement.

Grade improvements

Grade for 2020 was 2.33% and for 2021 we expect a 10% improvement through year as a whole and management guide that it’s second half weighted. We think grade can continue to improve 10% again in 2022 over 2021 as it annualises an easy 1H and management help the mix from higher grade pits. Grade improvements are inherently very profitable so we think for 2022 this will help EBITDA increase by 15% due to a 10% grade improvement, that could easily be too low.

Nickel by product start-up

Nickel by product has been mentioned by Paul Huet, the CEO, to improve cost of gold per ounce several times, we assume C$150 by product saving per ounce of gold. Assuming that 50% of gold produced is from Beta Hunt (rest is open pit areas so no Nickel), we have taken 115,000 ounces for 2021 (top of guidance) and added 15% to this number for 2022 production estimate 130,000oz and half from Beta hunt is 65,000 ounces with Nickel by product of C$150 per ounce this corresponds to about 150*65,000=C$9.75m as a guesstimate. As a sanity check: Indicated resources in January 2021 Nickel were 561 kt @ 2.9% Nickel giving 16,100t contained Nickel resources from Beta Hunt. At a price of U$16,000 tonne this has a value of U$250m approx. when produced. To get our byproduct saving value of C$9.75m suggested above in 2022 would be around 600 tonnes mined, less than 4% of the current reserve number. Hence not an aggressive assumption at all, it could turn out much better than this.

2022 EBITDA and earnings estimates

2021 EBITDA of C$138.2 (5 analysts' current consensus)*1.3 (two 15% uplifts from point 1 and point 2 above) + C$9.75m from Nickel by product (point 3) = C$190m EBITDA 2022. That looks like a very realistic easy to beat number, and is 38% higher than current consensus estimates for 2022. With P&L leverage I think 50% EPS rise wouldn’t be outrageous in 2022 driving EPS of C$0.88 (0.588*1.5). This means P/E 2022 would be around 4x P/E upgraded 2022 estimates at the current share price.

Q2 multi-year growth plan announcement expected

Management have clearly signaled an upcoming multi-year growth plan to be announced during second quarter 2021, referenced in the call transcript linked above. This most likely will involve a significant mill expansion (above and beyond the 15% de-bottle necking outlined already) and the bringing online of various higher grade deposits to feed the expanded mill. They have the net cash balance sheet and internal cash generation to most likely fund any planned capacity expansions internally. It might be possible to double mill capacity. We think this means 2023 earnings can also grow rapidly assuming new mill build expansion takes place through late 2021 and all of 2022. This means 2023 would be another significant growth year for earnings.

Possible Australian listing upcoming

Karora CEO Paul Huet is in the process of relocating himself and his family to Australia and in the full year results recent conference call it was confirmed they are examining a possible Australian listing in the fall. Clearly this is not guaranteed but we think it’s a very realistic possibility. Our peer group of 10 Australian listed gold producers trades on a P/E of roughly 17*2021 earnings. This could become a very important valuation expansion catalyst.

Karora trades at a very significant valuation discount (PE 7*2021 EPS) to what will be its new peer group if they successfully list in Australia. We would expect a strong demand from new Australian based shareholders to materialise. We think 12x P/E multiple for 2022 is easily justifiable and we think 2022 EPS can be C$0.88 which drives C$10.5 share price target by year end 2022, about 20months away.

Conclusion

Karora is a growth gold producer with significant potential production, EBITDA and EPS expansion ahead of it that so far analysts are well behind the curve on predicting, we think 2022 consensus EPS estimates might need to come up by 50% over the next 18months. The shares are still cheap on existing market estimates (7x P/E 2021) and a potential Australian listing later this year should expose the shares to a new, more highly rated, peer group and generate new potential investors to buy the shares. We think 12x P/E 2022 upgraded EPS of C$0.88 gives C$10.5 as a possible price target by the end of 2022, 20 months away.

Analyst’s Disclosure: I am/we are long KRRGF.