Across conferences, interviews, presentations, and casual conversations around the mining space, it seems one observation has set the overarching theme of the year: “It’s a tough market for juniors.”
And this has certainly seemed to be the case; with rising geopolitical tensions, politically driven export curbs, soaring costs of living, rising costs of capital, and the threat of recession still on the horizon, it seems mum and dad investors and institutions alike have been loath to part with their money on the hope of a win in the exploration segment of the market.
Seasoned juniors in the mining space might know the cyclical nature of the sector, but they haven’t had the same access to cash that they’ve had in years gone by, meaning a prudent strategy and savvy financial management have become more important than ever.
When Mining.com.au spoke to Sam Spring, President and CEO of ASX-listed copper specialist Kincora Copper (ASX:KCC), back in June, the name of the game for the junior explorer was adaptive planning: a willingness and readiness to mould strategy to respond to market movements.
Now, Kincora has set the foundations to reap the rewards of its shrewd adaptability through three major shifts in corporate strategy.
Access to capital and share price dilution risk are typically key factors that drive share prices, and these are front-of-mind for Kincora.
The first step taken by the company was the strategic review process for its Mongolian assets that culminated in a ‘confidential and incomplete’ acquisition offer. This offer includes a non-refundable deposit to enable the completion of definitive legal agreements.
The binding offer marks a part cash, part scrip divestment of Kincora’s Mongolian assets — meaning not only does Kincora get a boost to its balance sheet, but shareholders retain exposure to exploration success from planned 2024 drilling by the new investor through the scrip arrangement.
Further, the move follows a $2 million capital raise from Kincora first announced back in July as the company looked to consolidate its assets in New South Wales — the second step of its corporate strategy.
Importantly, and the third recent update to Kincora’s action plan, the consolidation of the NSW portfolio provides for a potential pivot in funding strategy, and it’s a catalyst for discussions and negotiations as Kincora seeks out asset-level partnerships or other corporate transaction structures.
Out with the old Mongolia, in with the New South Wales
Kincora’s decision to move away from its assets in Mongolia’s Southern Gobi belt was neither opportunistic nor spontaneous: it came after a careful 6-month strategic review of the company’s assets.
Spring says the company was trying to find the best way to extract value from two ‘district-scale’ porphyry project portfolios in two ‘world-class’ geological terrains that had very different perceived jurisdictional risk profiles.
While Spring remained confident in the prospectivity of Kincora’s Mongolian assets and the prospectivity of Mongolia as a whole, he felt that the company was battling headwinds in the country during a difficult market cycle that limited the amount of capital that could be invested into the projects.
For context, in 2010-2012, it almost seemed mandatory for all major copper groups to try to establish a foothold in Mongolia, which Spring describes as ‘one of the last frontiers for copper on the doorstep of the world’s largest consumer’. This consumer, of course, is China.
However, in 2013, a government corruption case in the country saw more than a hundred licences cancelled. While Kincora and other impacted investors managed to gain their cancelled licences back over the next several years, some major projects were still in dispute — chief among them being Rio Tinto’s (ASX:RIO) Oyu Tolgoi (OT) asset.
This, naturally, marked Mongolia as a riskier investment space than other jurisdictions.
“In 2019 and 2020, Oyu Tolgoi was in dispute, which made investor sentiment very difficult towards the country,” Spring explains.
“Exploration tenure had reduced from over 40% of Mongolia to less than 4%. And to be an active explorer looking to make big discoveries, you’ve got to have access to capital and access to land.
Mongolia was challenging at that time.”
“to be an active explorer looking to make big discoveries, you’ve got to have access to capital and access to land”
This prompted the company to cast its gaze upon New South Wales — a much more stable mining jurisdiction and an area in which Kincora had a competitive advantage thanks to its technical director, John Holliday.
As Spring put it, Holliday is a ‘foremost’ figure in the district, having led the origination, management, and discovery phases of Newcrest’s (ASX:NCM) Cadia mine; a tier-one gold-rich copper project and one of the world’s most profitable hard rock mines.
As it turns out, however, the uncertainty around Mongolia and the subsequently muted market sentiment for the country did not last long.
As 2023 comes to a close, Rio Tinto has invested over US$10 billion into the country, and its Oyu Tolgoi project is on track to be the world’s fourth-largest copper mine. Further, BHP (ASX:BHP) has re-entered Mongolia alongside copper giant Zijin Mining (SHA:601899).
The majors are leading the way in changing investor sentiment, and the country harbours the ambition to become the third-largest copper producer in the world.
In light of this, market analyst CRU Group forecasts copper production from Mongolia to more than double over the next 4 years, with 2 new greenfield projects entering production in the Southern Gobi copper belt — Tsagaan Suvarga and Kharmagtai — as Oyu Tolgoi continues to ramp up and remain on track for full production from the underground mine in 2030.
Alas, despite Kincora’s proven Mongolian copper tenure, Spring says its New South Wales pivot meant it just didn’t have the focus of management or capital to do its Mongolian assets justice.
“These assets have large-scale potential, but we were advancing them in a capital-constrained manner, and juniors generally only get value recognised from their flagship project.
We needed to either find a way that we could fund them more meaningfully or bring in a third-party investor.
And that’s what this divestment is expected to achieve — that our Mongolia assets go into a larger group that has deeper pockets and a dedicated and focused management team.
The deal structure and valuations proposed are a real win for Kincora and for the new investor.”
“The deal structure and valuations proposed are a real win for Kincora and for the new investor”
He explains that while Kincora battled through a difficult period in Mongolia, this new group has entered the space at an ‘opportune time’ to be an early entrant into the Southern Gobi region.
“Bronze Fox is the largest underexplored porphyry system in the country and the most likely to get advanced following in the footsteps of OT, Tsagaan Suvarga, and Kharmagtai.”
Locking in on core assets
Back in late July when Kincora first announced its agreement to buy out RareX’s (ASX:REE) 35% interest in its New South Wales assets and secure full ownership of the projects, Kincora also raised $2 million through an oversubscribed share placement to support its drilling and exploration efforts in the area.
The company has now completed this consolidation, having issued 40 million shares to RareX as part of the deal.
This achieves multiple things for Kincora.
Firstly, it increases the strategic value of the New South Wales portfolio.
Spring says RareX was initially content with its asset-level interest in Kincora, but things changed when Kincora shifted its business strategy to hone in on New South Wales.
“RareX were very happy sitting in at the asset level. They had 35% and were carried into a scoping study.
They saw the conversations we were having from mid-tier and majors showing interest in investing in the projects, they saw the scale of the targets and the drill programmes, and they saw the logic in moving from that carried position to now the listed company-level position.
RareX is now our largest shareholder and faces dilution like all shareholders. So there is strong alignment to see the share price re-rate.”
“RareX is now our largest shareholder and faces dilution like all shareholders. So there is strong alignment to see the share price re-rate”
Secondly, the capital raise completed in tandem with the RareX deal — plus the further cash from the Mongolian asset divestment — puts Kincora in a ‘relatively favourable’ funding position, according to Spring.
And thirdly, the consolidation supports discussions with project-level partnerships regarding funding and other corporate transactions.
Ultimately, Kincora says the Mongolian divestment and New South Wales transaction are expected to be catalysts for ongoing asset-level partnership discussions at a time of ‘increasing and very significant corporate activities’ in the region.
A beacon for potential partners
Kincora has proven that it has the expertise and the technical team to make major discoveries in New South Wales, with over 30,000m of drilling completed in the 3 years since it entered the space.
“That’s during COVID; that’s during major flooding in the district; that’s during mouse plagues,” Spring says.
“We’ve been able to find a way to keep going, without the significant impact of seasonality and having established good relationships with the communities and the landowners.”
Now, to bring the most value out of its landholding, the company is in talks with potential partners to help support exploration and development work.
But of course, as with everything Kincora does, this too is a careful response to market conditions and sentiment, with New South Wales currently a hotspot for corporate activity and partnership deals.
“You just have a look at what’s been going on in the New South Wales landscape,” Spring says.
“You’ve had multiple billion dollars worth of M&A take place, and I don’t think many have really recognised that.”
“You’ve had multiple billion dollars worth of M&A take place, and I don’t think many have really recognised that”
Metals Acquisition Corp (NYSE:MTAL) approved a US$1.1 billion buyout of Glencore’s (LON:GBX) CSA copper mine in June.
The world’s biggest gold miner, Newmont (NYSE:NEM), completed its US$16.8 billion buyout of Newcrest in October. Newcrest’s flagship project — its ‘cash cow’, as Spring puts it — is the Cadia mine in New South Wales.
And just this month, Evolution Mining (ASX:EVN) struck a US$475 million deal to buy the Northparks Mine.
But it’s not just the giants making trades in the district — juniors and small-caps are equally viable takeover or partnership targets.
Take, for example, a farm-in deal finalised between Canadian listed junior explorer Inflection Resources (CSE:AUCU) and gold behemoth AngloGold Ashanti (NYSE:AU) back in June.
Under the arrangement, AngloGold has agreed to spend up to $145 million in staged exploration to earn a 65% interest in Inflection’s New South Wales copper-gold assets.
“That’s a seriously big commitment and deal,” Spring says.
However, he believes this is a ‘very comparable’ transaction structure that Kincora could achieve with the right partner.
“Inflection’s C$18-$20 million market cap is reflective of what we think is just one of our 4 major projects in New South Wales.”
He says this kind of earn-in arrangement is what Kincora is seeking in a New South Wales partnership — where a mid-tier or major miner can help fund exploration work as the partners work collaboratively to find the highest-value deposits in the region.
“We’d like to have more of an earn-in or earn-out type model, similar to what you’ve got with Inflection and AngloGold Ashanti.
The great thing about the AngloGold deal with Inflection is they’re out there drilling 35,000m straight away for a directly comparable project to our Northern Junee-Narromine Belt portfolio.”
“We’d like to have more of an earn-in or earn-out type model, similar to what you’ve got with Inflection and AngloGold Ashanti”
For Kincora, it’s all about securing funding and minimising risks for the development of its core assets.
This is a short- to medium-term strategy rather than a pipe dream, with the company looking to lock in partnerships and announce a pipeline of deals in 2024.
Given the difficult market conditions of 2023, Kincora’s focus over the year has been on laying the corporate groundwork from which to launch exploration and development work in the years to come.
The brains behind the business
If it wasn’t obvious, Spring’s expertise lies in fundraising and dealmaking — two particularly important skills given the current junior exploration climate.
He is a CFA Charterholder and Chartered Accountant (ICAA) and worked at Goldman Sachs in London before moving into the junior exploration space, where he has spent more than a decade. In Mongolia, he has sat as a Vice Chair of the Business Council of Mongolia Resources Working Group.
Alongside Spring, the Kincora board is supported by Chairman Cameron McRae, who spent nearly 3 decades with Rio Tinto leading businesses and mega-project development. In the past decade, he has held senior board and leadership roles in 3 ASX and TSX-listed explorers and developers.
John Holliday and Peter Leaman support Spring as part of Kincora’s Technical Committee and drive the company’s exploration and project generation strategy.
“It’s hard to find a more successful pair of industry veterans within a junior who have secured copper-gold projects and made big discoveries,” Spring says.
Ray Nadarajah, Luke Murray, and Jeremy Robinson also serve as non-executive directors, with the latter two representing over 30% of Kincora’s share register.
So, what’s next?
While Spring and the Kincora team are working to lay the foundations for exploration success, the company also has some important near-term exploration in the works.
In the immediate term, the bulk of the work will come from Kincora’s exploration partner, EarthAI, with which the company has set up yet another savvy funding arrangement.
EarthAI has already completed some important groundwork and generated a string of targets at the Cundumbul project and will now move on to drilling in key areas.
This exploration work will be fully funded by EarthAI under the caveat that if the artificial intelligence specialist makes a discovery, Kincora will grant it a net smelter royalty. Under the exploration deal, EarthAI will drill at least 3 holes up to 600m in the project area.
For Kincora, it’s cost-free exploration work that ensures the company retains a 100% interest in Cundumbul.
Further, it lines up neatly with Kincora’s corporate-level work that ensures it can get its own exploration team out on the ground in the new year, with funds from the divestment of the Mongolian portfolio expected to provide the necessary cash for high-priority follow-up drilling at the Condobolin project.
New episode is out! The Roadtrip. https://t.co/mu9OXVvEbG— romanteslyuk 🇺🇦 (@romanteslyuk) December 14, 2023
In this episode, we are heading on a 1000km 2-day road trip to visit 2 of the alliance projects:
1) Fontenoy (@LegacyMinerals)
2) Cundumbul (@KincoraCopper)#criticalmetals #exploration #geology #mineralexploration
At the end of the day, Sam Spring says Kincora Copper has the three core ingredients that any explorer needs: “Location, team, and targets.”
The Kincora team has proven that it knows how to navigate difficult market conditions. It’s built up a sturdy portfolio of prospective copper assets. It’s maintained exposure to its non-core assets while bolstering its balance sheet.
Now, it seems there’s just one more ingredient investors need to digest to see if Kincora’s assets will bear fruit: time.
Write to Joshua Smith at Mining.com.au
Images: Kincora Copper