July 23, 2023

Karora Resources (KRRGF) is a gold miner in Western Australia.  I wrote up the idea of Karora Resources on November 21, 2021:

Since then, the company has increased its gold production, having just achieved a record 40,823 ounces in Q2 2023.

The market cap is $645.5 million, while enterprise value (EV) is $632.0 million.

Some time between 2024 and 2025, Karora will produce over 200,000 ounces of gold on an annual basis.  Karora will also produce over 800 tons of nickel.

Revenue based on 200k ounces of gold and a gold price of $2,250 per ounce is $450 million.  All-in sustaining cost (AISC) can be assumed to be $1,200 per ounce.  So EBITDA for gold production would be approximately $210 million.

Revenue based on 800 tons of nickel production and a price per ton of nickel of $21,970 is $17.6 million.  EBITDA for nickel production would be about $7 million.

Total revenue would be approximately $467.6 million.  Total EBITDA would be $217 million.  (Cash flow would be close to EBITDA.)  And assuming the normalized profit margin is 17.4 percent, earnings would be about $81.4 million.

Here are the multiples based on these assumptions:

    • EV/EBITDA = 2.91
    • P/E = 7.93
    • P/NAV = 0.20
    • P/CF = 2.97
    • P/S = 1.38
  • Karora Resources is exceptionally well-managed, led by CEO Paul Andre Huet and managing director of Australia Leigh Junk.  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 about $13 million.  That $13 million could become $26 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 $68.9 million.  Debt is $51.2 million.  TL/TA is 37.2%, 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, 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).  This would be a major buying opportunity.
    • Mid case: The P/E = 7.9 relative to 2024 production, assuming the gold price is  around $2,250 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  over 100% upside from today’s $3.50, or an intrinsic value of $7.09 per share.  This does not factor in the company’s huge exploration potential.
    • High case: Gold prices could be much higher in an inflationary scenario.  If gold prices reach $2,750, then with a net profit margin of 25%, earnings would reach $141.9 million.  With a P/E of 16, KRRGF would be worth at least $12.98 per share.  That is over 270% higher than today’s $3.50.

Note that Karora’s operations are in Western Australia, so there is very little political risk.



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.

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