CASE STUDY: Karora Resources (KRRGF)

October 24, 2021

Although the stock price has moved up from $2.62 to $3.50, our investment in Karora Resources (KRRGF) is still quite undervalued under most scenarios.

I first wrote up the idea of KRRGF in December 2020 here:

At the time, the stock at $2.62 a share was cheap based on our five measures of cheapness:

    • EV/EBITDA = 4.50
    • P/E = 13.04
    • P/NAV = 0.29
    • P/CF = 5.95
    • P/S = 2.12

The mid case scenario for intrinsic value was that KRRGF was probably worth $9.08 based on NAV.

How much is KRRGF worth today?

    • EV/EBITDA = 1.74
    • P/E = 4
    • P/NAV = 0.20
    • P/CF = 2.50
    • P/S = 1.23
  • These figures are based on 2024 production of roughly 200k ounces of gold per year.  The gold price is assumed to be $1,750.  (Note that Karora’s operations are in Western Australia, so there is very little political risk.)

Karora Resources is exceptionally well-managed, led by CEO Paul Andre Huet and head of Australian operations Graeme Sloan.  The Karora team—despite numerous external headwinds—has met or exceeded every target it has set since its acquisition of HGO Mill in mid-2019.

Also, management owns 2% of the shares outstanding, which is worth $10 million (at today’s stock price of $3.50).  That $10 million could become $30 or $40 million (or more) if Karora keeps executing.

Karora Resources has a Piotroski F_Score of 7, which is good.

Net debt is low:  Cash is $82.2 million.  Debt is $30.8 million.  TL/TA is 40%, which is good.

Very importantly, Karora’s growth is internally funded by existing cash and cash flow.  Karora is not relying on debt for growth.

Furthermore, the company is increasing its production steadily each year until it reaches 200k gold ounces per year in 2024.

Finally, Karora has massive exploration potential.

Intrinsic value scenarios:

    • Low case: Gold prices could fall.  Also, there could be a market correction or a recession during which the stock could temporarily fall by 50% or more (from today’s $3.50 to $1.75).
    • Mid case: The P/E = 4 relative to 2024 production, assuming the gold price stays around $1,750 per ounce.  But the P/E should be at least 16 for a mid-tier, multi-asset gold producer in a top tier jurisdiction (Western Australia).  This implies 300% upside from today’s $3.50, or an intrinsic value of $14 per share.  This does not factor in the continued lowering of AISC (which could reach $935/oz or lower).  Keep in mind that the company has met or exceeded all targets thus far and that its growth will be internally funded from existing cash and cash flow, and not debt.  Also, Karora has huge exploration potential.
    • High case: Gold prices could be much higher in an inflationary scenario.  Fair value could easily be $21 per share, 500% above today’s $3.50.



An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.




Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.