Dennis Karp is the Executive Chairman of a new resources or gold and silver IPO, which is an unusual thing, Manuka Resources. They're IPOing at the moment, raising between $5-7 million. Pretty small IPO for a market cap of $50 million. They've got a gold mine and a silver mine near Cobar in New South Wales. They’ve got a plant at the silver mine. They are currently producing gold, which they're trucking from the gold mine to the silver plant so it’s obviously producing gold. I think it's a very interesting prospect. Well worth listening to this interview or reading it, I can tell you that.
Here’s Dennis Karp, the Executive Chairman of Manuka Resources.
Now you've got an IPO, Manuka Resources, Dennis, but you're only giving up about 10 or 14 per cent of the business for $5-7 million, which seems hardly worthwhile. I just wonder if you're doing that because you just couldn't borrow any more money. Did the banks just turn you down to do any more borrowing?
Look, the borrowing side of it has been a challenge for us because initially we were unlisted and weren't producing and the banks weren't that keen on the offering at that point in time. We went to Hong Kong and borrowed the money out of Hong Kong. The key components to the Hong Kong debt facility is they don't want us to put any money into exploration. They want to lend us the money. They want us to get into production, which we've done and then they want their money repaid back and I think it fits very tightly with the mandate of their specific funds. Now that we're in production…
You borrowed $20 million in Hong Kong, right?
That's right, yeah, out of Hong Kong.
And you've got a couple of other loans as well, so your total debt is $26 million?
Yeah, it's actually 24, it will be 24, we've just repaid a tranche, and look, my company, ResCap Investments is the lion's share lender and has been the financier to date. And just prior to the IPO, we converted $4 million of debt into equity at 20 cents a share. You know, again, I mean, you know, we, we think this is a great project and that was just to demonstrate further the extent of it. That was money put into the project. We've got $24 million, pre-IPO. We're not using any of the proceeds from the IPO to repay any debt, whatsoever, but the proceeds of the IPO are primarily for exploration.
And then we've had some very patient convertible noteholders who all convert. Every one of them is converting into equity. But $1.6 million of the proceeds from the IPO will be used to repay their outstanding convertible note interests.
And is it fair to say none of the IPO money goes to you or the other shareholders?
No one is taking any money off the table and in fact, all the seed investors, all the seed investors who came on board with us in 2016 escrowed. Some for one year and the majority of us are for two years. There’s no one leaving the table. The convertible noteholders will be able to convert the original cash components into equity. Those will not be escrowed, but they're converted at a small discount.
How much of the company do you own?
ResCap, which is my corporate vehicle, will own about 36 per cent of the company at IPO, following our $7 million raising and I’m just short of 50 per cent of that. It’s sort of 18 per cent is what I'm going to end up owning. In answer to your first question that you asked, which is we’re only raising $5-7 million and it barely seems worthwhile. Our biggest concern, to be honest, was how the market was going to take an IPO with all the COVID stuff going on. We actually were looking at doing this IPO in February/March. We met at the ASX prior to that. Bell Potter was going to be the lead broker. Everything was the same and then we were advised to pull it because we’d just started the marketing campaign in early or mid-March for an end of March target date.
We were advised to pull everything, suspend it, and then in discussions with our advisors and we were advised to reduce the size, get it listed, get the initial batch of exploration. Once the results start coming through from the exploration, we'll be able to then look at options going forward. We see this actually, anyhow, as fully funded exploration because the project is profitable, now onwards. We're in production already. We started recovering gold in April. And last week was our seventh consecutive weekly gold pour.
Are you producing both gold and silver, or just gold?
At the moment that we're producing gold ores from the Mt Boppy Project and the makeup of the ore's bar is gold and silver, both payables. Last week we produced just short of 600 ounces of gold, which at current pricing is over $1.5 million at this point in time and that's still in the build-up phase.
mce-anchorGive us a bit of the background. You bought the Wonawinta project in 2016, right, and you bought Mt Boppy last year.
Yeah.
What were the circumstances, did you buy one, Wonawinta from a receiver?
Yeah. Both projects were owned by a company called Black Oak Minerals and in 2015 the Aussie gold price dipped down to 1,450 the gold price broke below 1,100 US and this is the background to why they went into receivership, they had a non-traditional lender at the time, who panicked and called in the receivers.
The reason they panicked was because they had a gold reserve at Mt Boppy of over 5 grams per ounce. They weren't hitting those targets and then they re-did their reserve statement and it out at 3.3 grams per tonne. That was the first thing. The second thing was that the gold price was a lot lower and then-current levels obviously, and had broken lower and Black Oak appeared to be in breach of a number of their covenants. So this group called TrailStone which is a UK based energy fund, decide just to go back to their core activity, which is a fund investing in energy projects. We saw the opportunity. What I liked about the Wonawinta Project was, it was a project there, which had a plant and infrastructure which had originally cost over $120 million to construct. The company used to be called Cobalt Consolidated around 2009, 10, 11.
I'm not sure if you remember them, but at one point they had a market. They were going to be Australia's largest silver producer. This is just the Wonawinta project. They were going to be at one of Australia's largest silver producers and they had a market cap at that stage of over $300 million. There was fantastic infrastructure, they’d only ever had two years of production through it. They’d only ever put 2 million tonnes of ore through this plant. And the plant is substantial. Its capacity is between 850,000 tonne per annum and to a million tonne per annum. It's a really substantial plant and at the same time, there was a 52 million ounce, silver resource. When I put my financial markets hat on and looked at just the option value of silver, a call option, five-year out, we could fund the care and maintenance costs if that was going to be required.
The inherent option value was incredible at that point in time because we had all our mining licences, you know, the plant would need money to restart, but that could be factored in, and those were the initial motivators, which…
And what did you pay for it?
Look at the time we paid $3 mil.
$3 million?
Yeah. But hang on let's just go step by step. There was an environmental suspension at the time that one of the previous employers – this was a public tender. By definition, we paid too much because you pay more than the next bloke. When you put all the, you know, Aussie gold and Aussie silver prices were in the doldrums. There was an environmental suspension on the mine and plants because there were accusations made of dumping of mercury in the tailings dam. That took us two years of working with the EPA. In the end, doing over 200 drill holes in the tailings dam, submitting reports, bringing in environment…
It cost us, we'd allocated $1 million, but it was short of that, but not a lot short. We had that issue to resolve. We spent initially $7 million on the refurbishment. We then had to put a tailings wall lift on which cost another $3 million. We had to keep it on care and maintenance for the four years to keep it going, environmental rehabilitations of $7 million had been lodged with the two projects. It's not just sitting there and saying, great, $3 mil and we’re going to do an IPO today at a pre-money available, whatever, $35 or $38 million before the convertible notes kick in. It's actually a lot more than that has gone into the project to get it to this point in time. Then the opportunity came to buy the Mt Boppy Gold Project.
Was that from the same receiver?
That had been sold from the receiver, we actually owned 20 per cent of it. It was sold by the receiver and we own 20 per cent and a mining contractor in the region bought 80 per cent. When I say ‘we’ that's ResCap Investments, and then they wanted out of the project. We bought the balance and it was a condition of our Hong Kong lender that it had to be put into Manuka Resources holding company and it was for a non-cash transaction. That went in and that, we've finalised in July, 2019, simultaneous to completing the first drawdown of the Hong Kong debt, so that's when you put the two projects together.
Okay. Both of the projects that are now producing, is that right?
No, so what we've done is we’ve refurbished and upgraded the plants at Wonawinta, and we have started production. We started mining and production of the Mt Boppy deposit. And the intention is to process all the gold at Mt Boppy and then we're going to start looking at the silver from July onwards because we want to do some exploration work and upgrade that resource. We expect to upgrade that resource into reserve, not all 52 million ounces, obviously. And then we've got some other targets there that we want to look at doing.
We want to increase our inventory first, we’ve got 12 months of production from Mt Boppy. And if there's no exploration upside, we'll then move on to a minimum of five years of production on the silver only at Wonawinta.
mce-anchorDon't you have a plant at Mt Boppy, do you?
We have one plant, you're correct. We only have one plant. There was historically a plant at Mt Boppy, but that was removed, not by us, years ago. We have a plant at Wonawinta. The mine plan is to spend the next 12 months mining the Mt Boppy ore and processing that through the Wonawinta plant, which is the plant that's on the silver project, so you're correct. We've only got the one.
You're going to do 12 months of gold from Mt Boppy, processed at Wonawinta, how much gold will come out of that? You must know that.
Yeah, we know that. There's an existing reserve, there's a gold reserve of 31,000 ounces, and then we’re ambitious and hopeful of additional exploration success. Now I just want to delve into the history of Mt Boppy. Mt Boppy was actually one of the richest gold mines New South Wales has ever had. Between 1895 and 1925, it produced 500,000 ounces of gold at over 15 grams per tonne, which is a pretty number. The nature of Cobar deposits are that they are very deep systems. Cobar Basin is a very deep system. You know, the CSA Mine, which is owned by Glencore, started in the late 1800s, and they're still producing, they're two kilometres deep now, and they're still producing. The Endeavour Mine started in 1983 and it just went onto care and maintenance in December last year, over a kilometre deep. The Peak Gold Mine, which is just the north of us, is again, is over a kilometre deep. Our Mt Boppy project is only 120 metres deep, and there’s been very little work done at depth in that very little exploration.
Is that an open-pit only or…?
Ours is an open pit. There was a bit of artisanal mining in the 1890s, 1920s, and there were some underground and we do come across a number of old stokes and the like when we’re working it, at the moment, but primarily, it's an open pit. It's an open pit mine down to a hundred metres.
And what's the head grade?
Our head grade is 3.1 grams and that's sufficient because it's pretty much open. There's very little overburden. There's very little plant amortisation, that…
Has any drilling been done at depth?
Very little historical drilling done a depth we have a four square kilometre subsection out of our tenements around Mt Boppy and, you know, there's four different projects there, all of which just show enormous potential. The Canbelego King Project was mined and produced gold at 50 grams per tonne. Birthday Prospect, which has had some drilling in 2004/5. And the drilling done there was over 30 grams per tonne. Again, same story in the early 1900s, it was mined and there's very scant records. It's very hard to actually develop a full picture of what there was there. We've got a grade control drill in the pit at the moment because we drill and blasting, and then we'll have, once we've got proceeds from the IPO, we'll have a second drill in the pit. And we're looking at the South Eastern part of the pit where we think the scene continues also.
But you know you've got 31,000 ounces, is that correct?
Yeah, and we know we’ll be debt-free from those ounces within 12 months.
Well, you'll be more than that debt-free won’t you?
Yeah.
I mean you’ll make your market cap, won’t you?
Well, pretty close. I mean, we see ourselves generating other 1200 Aussie dollars per ounce of gold.
You've got to cart the ore to Wonawinta which is what, 150 kilometres or something?
Correct. $20 per tonne, the cost of haulage $20 per tonne and on basis of 2,500 Aussie gold price, 3.1 grams per tonne, it's a 10th of an ounce. You know, it’s 250. The gold value that we’re trucking in the ore is $250 per tonne of gold value.
Just to be clear about this, you're saying that you will have your market cap in cash from the gold over the next 12 months.
I can't be that specific on it as far as the IPO is concerned. I can only talk to numbers at this stage, what we've got in our prospectus. We had an independent technical report done by a group called Mining Associates. They're independent, our all in sustaining cost of gold is less than 1300 Aussie dollars per ounce and that's the number I'm able to talk about. The current Aussie gold price is over 2,500 per ounce. There's $12-1,300 profit per ounce of gold.
Yes, that's fine, and possibly more gold, but you don't know?
Yeah, we have a lot more in the resource. When I talk about 31,000, that's the reserve. We have more in resource, which we may well find is economically feasible, commercially feasible to extract. But at this stage, we've based our parameters on a conservative framework.
And 12 months of mining it at Boppy if no exploration upside, then we'll move across to mining a million tonnes a year at the Wonawinta site.
mce-anchorHow much silver have you got at Wonawinta?
There's a resource there are 52 million ounces of silver in the high-grade capital. Silver that's going to grade over three ounces per tonne. We've got about 4.5 million tonnes of ore in that category. And so we expect to mine, to produce a minimum of 2 million ounces of silver per year, when we start mining the Wonawinta Project. Again, those pits are all open, they're all open. They were mined down to 60 metres, that's it.
And yeah, when we look at our neighbours, I've really mentioned they’re between one and two kilometres deep.
What's your cost of production per ounce of silver?
It’s just less than 15 Aussie per ounce. The current Aussie silver is around $26 per ounce. Our cost is below 15. We've got a million ounces on our stockpile at the plant, which obviously there's no mining costs. That’s going to be more profitable. There’s 500,000 ounces of silver ore, which will get over two ounces per tonne and that becomes, you know, that should generate $12-13 million of EBITDA, I'm just processing this.
I presume you'll definitely do that. It's not just a question of whether Mt Boppy goes to depth. You'll definitely presumably produce that silver.
Yeah. The question for us is going to be going forward, really, if we have exploration upside at Boppy, it'll either warrant putting on a plant at Boppy itself. It’ll be sufficient to put a plant on. At this stage, we are only trucking 300,000 tonnes of ore, all up we're trucking 300,000 tonnes of ore. The trucking exercise is $6 million, substantial, but not the cost of a plant. If we have exploration upside at Boppy, it would justify putting a plant back on. Now we already have a mine camp there. We've got power water there, tailings facility there, we've got everything and it's fully permitted and we've lodged $1.4 million with the Department at Boppy. It's all ready to go in either direction. If it's modest exploration success, we'll just carry on mining the gold and trucking it. And if it's exciting stuff, then it warrants putting a plant at Boppy, we'll do that.
Otherwise, we've got plenty of space at Wonawinta. We actually own the land. All up we've got 210 square kilometres of exploration licences, and mining licences at Boppy at the gold project. And we've got just sort of 1,000 square kilometres on the silver. And we actually own the land that the mining licence sits on. But the plant is spacious. It's easy to put a second circuit on, so you're right. Where we are going to be going into three years’ time is we'd expect and it's our ambition to be mining both projects simultaneously.
mce-anchorWill the IPO money pay for all of the drilling you need to do at Mt Boppy?
It covers us for the next year. And then if we have any success there, look actually the IPO money won't cover all the drilling requirements going forward for Boppy and Wonawinta, but we're going to be fully funded exploration is the way we see it going forward, unless we really want to ramp something up quickly we're going to have excess proceeds flying in from ongoing operations.
Do you think you'll be raising more money, unless you build a plant? I imagine if you decide to build a plant at Mt Boppy, you'll have to raise capital, but otherwise, would you be raising more capital?
We may need to do some, so that's the juggle, that's a very good question, Alan. That’s the juggle between the repayment cycle with our Hong Kong lender and the urgency we want to attack whatever exploration we come across going forward, you know, the ramp up of further exploration going forward.
So we've mapped out our plan for both sites for the next 12 to 18 months and that's funded from the IPO. If we come across something that warrants a more aggressive program, then if it's within the current debt cycle, sorry, I'm belabouring this a little bit. But if it's within our current debt program with Hong Kong, then we would need to raise some additional funding. If we’re outside that we can fund it ourselves.
They might want to roll the debt over because you're probably paying a decent interest rate?
We are.
What is it?
It's 14 per cent at the moment is all we’re paying. But again, I've got to put that in perspective because people sit there and say, wow, that's a big number.
It is.
It is a big number when you're listed and you're in production and obviously, there’s scope for us to have a very good look at that and we could cut that substantially. That's something that it hasn't passed us by, I can assure you.
I was going to say, I would have thought that paying 14 per cent, the lender would tie you to a chair and not let you go.
Actually, we’re very fortuitous in that regard, there are no hooks in us. A refinancing program is well within our scope and is something that can be looked at. There’s no early repayment penalty. That is the one appeal of the facility. There's no early repayment penalty. So that is something we can address very quickly. But then if you wind back the clock to December 2018, when the markets weren't, you know, the gold and silver prices weren’t at these levels, we weren't in production, we needed substantial money spent on the plant. It's a different landscape at that stage. But since then, we've obviously, we're now employing 55 people in the Cobar basin, there's no fly in, fly out. They all drive in. We've got camps at both sites. We're running seven days a week, 24 hours a day. It actually has been a remarkable turnaround over the last six months. The amount of energy on-site is just fantastic.
Very interesting. Well, good luck. Thanks for talking to us.
Thank you very much.
That was Dennis Karp, the Executive Chairman of Manuka Resources.
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