By Lauren Barrett

WHILE the subdued gold price is squeezing margins and causing many sleepless nights for local executives, there are companies in Papua New Guinea ready to press the start button on gold projects once the price is right.

Take for example Kula Gold. The Australian Securities Exchange-listed junior is not letting the weak gold price environment stand in the way of its ability to make concrete progress at its flagship Woodlark Island project in PNG’s Milne Bay Province.

The company has just been granted the environmental permit for the project, and is confident it will be successful in gaining a mining lease shortly which would give it permission to begin construction on the nine year mining operation.

Prior to being granted the environmental permit, Kula Gold chief executive Stuart Pether sat down with PNG Resources to discuss some of the headwinds facing the project, its plans for development and its confidence in the long-term outlook for the gold market.

Mr Pether, formerly the chief operating officer with gold company Catalpa Resources, said the company was focused on adding value in 2014.

Joining Kula at a time when it was forced to cut its workforce from 100 to 40, Mr Pether said the company would focus on gaining mining leases and maintaining its assets in 2014.

It has continued to enjoy support from major shareholder Pacific Road Capital, which recently provided it with a A$3 million working capital facility.

This will ensure the company doesn’t have to go straight to the market to raise funds “a day after receiving the mining lease,” Mr Pether said.

Like most juniors in the gold space, the company’s share price is trading at a serious discount to its initial public offering. Kula’s IPO was A$1.80 when it listed in 2010. At the time of going to press, the company was hovering at around 11c.

“There’s been a lot of downward pressure on the share price over time and certainly the current gold price and market sentiment isn’t helping,” Mr Pether said.

“Clearly the current share price doesn’t represent our underlying value. We’ve got 2.1 million ounces of defined resources and a feasibility study that delineates just under 800,000 ounces of reserves.

“I think our leverage to the gold price and where the fundamental value is with the gaining of a mining lease isn’t being recognised right now.

But Mr Pether can see a ray of light in the middle of the dampened market sentiment, acknowledging there is widespread interest in PNG gold.

A number of investors had wanted to meet with him to better understand the Woodlark Island project since his appointment as chief executive, he said.

At the moment, Mr Pether believes that the challenge for Kula is to be in a position to take advantage of the gold price when it eventually rebounds back to more profitable levels.

“The opportunity is there for Kula that if we have enough of the boxes ticked that when the gold price does get to a range where its enabling for the project that we’ll be able to respond very quickly to that,0 and I think that’s a good opportunity for the company,” Mr Pether said.

Mr Pether admitted the project would be challenging to get up and running at these prices.

“The gold’s profitable even at these gold prices but you are not going to get the returns you want on the capital that needs to get invested and cover the risks that are there at these gold prices,” he said.

Using a US$1,400 an ounce gold price, Mr Pether says the project would have a net present value of $114 million after tax with an internal rate of return of 22 per cent, which will prompt it to look “very seriously” at the project.

“That’s a reasonable return but you probably wouldn’t start building a project unless you believed gold was going to go above $1,400,” he said.

“There’s quite a bit of uncertainty and volatility and where there’s volatility there’s opportunity. The gold price has gone down quite rapidly but I think it can go up just as rapidly.”

While the company had initially believed it would be in a position to make a final investment decision on Woodlark Island once the mining lease was granted, Mr Pether is now hesitant to put a timeframe on the decision for the US$160 million development.

“Certainly with this gold price it is very difficult to make a financial investment decision and know when first production will be. It’s about looking at where the value adding opportunities are so that we are in a strong position to take advantage of when the markets turn,” he said.

“It’s a doable project, it just needs the right gold price environment to enable it to happen.

“We are confident that the gold price will get to a point where an investment decision can happen and the technical fundamentals will hold true.”

With a number of regional and near-mine targets that haven’t been followed up since the company floated, Mr Pether said while building the mine is on the cards this year pending a stronger gold price, there was also an opportunity to grow the resource base.

“If the gold price gets to a point where we can build a project then we will build a project no doubt, but if it doesn’t then I think we have to look at where we can improve value for our shareholders and some of the value can come from improving the bankable feasibility study case…another untapped area is continuing to demonstrate the resource potential,” he said.

“I think we’re right on the cusp of an opportunity for another discovery phase particularly as we gain the mining lease and take that risk out of the investment decision.”