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K92 Mining Is a Buy

The VanEck Vectors Gold Miners (GDX) exchange-traded fund has fallen 0.7% over the last five days on renewed optimism regarding a potential resolution to the trade war between the U.S. and China.

This indicates publicly traded gold producers moved lower as the exchange-traded fund is used as a benchmark for the mining industry.

Market participants are, however, convinced that additional disputes between the U.S. and China will occur, creating further uncertainty and higher volatility. This environment is typically good for gold mining companies as share prices trade higher as investors increase their holdings to protect their portfolios from increased volatility.

K92 Mining Inc. (KNTNF) (TSXV:KNT) represents an interesting opportunity as it should benefit from the gold bull market.

In the second quarter, K92 produced 18,980 ounces of gold, corresponding to 19,652 ounces of gold equivalent as the company also mines copper and silver from its Kainantu mine in Papua New Guinea.

The Canadian miner also produced 261,800 pounds of copper and 6,894 ounces of silver.

The company produces the metal at one of the lowest costs in the industry as the cash cost per ounce was $551 and the all-in sustaining cost was $681.

The competitive cost allows K92 Mining to beat most of its peers in terms of higher earnings before interest, taxes, deprectiation and amortization margin as the yellow metal is trading between $1,220 and $1,225 per ounce. At this realized price level, the Ebitda margin was 35.3%, approximately 850 basis points above the industry median of 26.8% for the trailing 12 months through June 30.

Over the same period, the bullion averaged 3.3% higher to $1,263.72 per troy ounce on the London market. Thus, K92 Mining can afford the luxury of lower bargaining power than the average competitor when determining the selling price per ounce.

The miner posted earnings of 3 cents per share for the second quarter, meeting estimates, on revenue of $23.68 million, up 72.5% year over year as a result of the sale of 18,824 ounces of gold equivalent at an average realized price per ounce of $1,258.

For full-year 2019, the Canadian miner guided for production between 72,000 and 80,000 ounces of gold equivalent, up from the previous guidance of 68,000 to 75,000 ounces, at a cash cost of $560 to $600 per ounce. This is down from the previous range of $580 to $620. The AISC is anticipated to be $720 to $760 per ounce, down from the previous guidance of $780 to $820.

The company will finance mining, development and exploration activities with a solid balance sheet. GuruFocus assigned a high financial strength rating of 8.6 out of 10.

Year to date, the stock has thrashed the VanEck Vectors Gold Miners ETF by 113% to 128% and the VanEck Vectors Junior Gold Miners (GDXJ) ETF by 113% to 123%.

The stock has a buy recommendation rating on Wall Street and an average target price of $3.63, reflecting nearly 130% upside from Wednesday's closing price.

The stock is not trading at its cheapest. The closing price on Wednesday was significantly above the 200- and 100-day simple moving average lines and only slightly below the 50-day line.

The price-book ratio of 3.88 more than doubles the industry median of 1.44 and the enterprise value-Ebitda ratio of 12.13 is nearly one and a half times the industry median of 8.11.

In addition, Wednesday's closing price was 22% off the midpoint of the 52-week range of 51 cents to $2.08.

The market capitalization was $321.95 million.

K92 Mining's shares closed at 2.10 Canadian dollars ($1.58) on the TSX Venture Exchange on Wednesday with a market capitalization of CA$428.82 million. The price was above the 200- and 100-day simple moving average lines, but still slightly below the 50-day line.

The 52-week range is 67 cents to CA$2.67.

Disclosure: I have no positions in any securities mentioned.

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This article first appeared on GuruFocus.