Klondex Gold’s Paul Huet ‘is all in’

With two producing underground mines in Nevada, plans to spend $33 million on exploration and development in 2015, and a goal of growing production to between 150,000 and 200,000 equivalent oz. gold by 2016, one could argue that Klondex Mines (TSX: KDX; US-OTC: KLNDF) is something of an outlier in the current downturn.

Klondex also happens to be a relatively new gold producer in Nevada. Fire Creek started production under a bulk-sample permit in the second half of 2013, while the company only acquired the producing Midas mine — 160 km north of Fire Creek — in early 2014.

This year, the company forecasts the two mines will collectively produce between 120,000 and 125,000 equivalent oz. gold, or 15% more than the 107,860 equivalent oz. gold Klondex produced in 2014.

“All the capital in 2015 that we’re spending — $33 million — that’s all being funded by the mines, and on top of that, we still generate free cash flow,” Klondex’s president and CEO Paul Huet says.

Since joining Klondex in September 2012 and making changes to management and the board, Huet says the company has outperformed many of its peers in a poor market.

“When the whole industry was falling apart, Klondex shares were up 29% in 2013 and 21% in 2014,” he says. “Those are really important statistics for our company, and people realize we are different from the pack.”

Huet attributes Klondex’s success to a number of factors, including “great assets” and “textbook” synergies (Midas and Fire Creek share a mill and other services, such as human resources in purchasing, maintenance, geology and engineering); Nevada’s low-risk jurisdiction; and free cash-flow generation and management that is aligned with shareholders (“we own a lot of stocks, so if the stock fails, we fail, and we’re not about to fail.”)

Company insiders own 7% of Klondex shares and are buying in the open market, he says. “Seventy to eighty percent of what I have is in Klondex — my net cash, my RRSPs my 401Ks,” he says. “Most people won’t put more than 10% of their cash into the company they work for. I’ve cashed it all in and put it in Klondex.”

Born in Sudbury and raised in Timmins, Huet spent the first half of his career, or about 15 years, working at narrow vein gold mines in Canada, including Hoyle Pond, the Dome mine, Renabie, the Campbell mine, Bell Creek and Pamour.

Before joining Klondex, Huet was working as chief operating officer for Premier Gold Mines (TSX: PG; US-OTC: PIRGF), but says he just couldn’t pass up the opportunity Klondex presented.

“I had previously done two due diligences on Fire Creek, the first when I was with Newmont Mining in 2006, and the second when I was general manager at the Hollister mine in 2011, and in both cases I recommended to the companies I was working for at the time that they should buy the asset,” he explains.

Huet was also familiar with the promise of the Midas mine, where he worked under Newmont for seven years (2000–07), first as mine superintendant, then as chief engineer and finally as mine manager. Klondex bought Midas in 2014.

Klondex is the “new kid in Nevada, but stands out from the pack,” analysts Tara Hassan and Danny Ochoa of Haywood Securities noted in a Jan. 22 research report entitled Nevada’s Next Gold Nugget, marking their initiation of coverage of the company.

The analysts forecast Klondex should generate $26 million in free cash flow this year and point to Klondex’s strong balance sheet and low all-in sustaining costs.

“Fire Creek on its own ranks in the top of its peer group on grade and in the bottom 12% on cash cost against producing underground projects globally,” they wrote, noting that consolidated cash costs in the first nine months of 2014 came to just US$676 per equivalent oz. gold. “Considering Haywood’s estimates of Klondex on a consolidated basis, it ranks in the bottom 17% on all-in sustaining cost against producing projects globally.”

Describing Klondex as a “defensive” name, the Haywood analysts also note that the company has a “strong financial position, with more than $40 million in cash, [$25 million] limited debt on the balance sheet and no large bullet repayments in the near-term.”

Klondex’s Nevada mines also offer potential exploration upside. The results of an infill drill program last year at Fire Creek expanded the measured and indicated resource by 47% to 377,400 tons (342,372 tonnes) grading 37.7 grams gold per tonne and 29.5 grams silver per tonne, the company announced on Jan. 29. (Inferred resources stand at 840,000 tons [762,035 tonnes] grading 14.7 grams gold per tonne and 13 grams silver per tonne.)

Meanwhile at Midas, the company increased total contained equivalent oz. gold by 77% in September 2014, to 526,000 equivalent oz. gold in the measured and indicated category, and 287,000 equivalent oz. gold in the inferred category. Midas contains measured and indicated resources of 1.1 million tons (997,903 tonnes) grading 12.9 grams gold and 207.7 grams silver, and inferred resources adding 858,000 tons (778,365 tonnes) grading 9.6 grams gold and 119.3 grams silver.

This year at Fire Creek, Klondex plans to extend the underground infrastructure 305 metres north and at depth to the south by 442 metres lateral, and 91.5 metres vertical. This will provide the drill platforms that the company says will improve its understanding of north–south mineralization, and help drill the vertical extents of several veins to better understand the deposit.

“There really is a lot of upside,” Huet says. “There is a tremendous amount of opportunity within the footprint we have at both mines. We have a huge level of certainty that these mines will be extended beyond what we have today — we just don’t know how far.”

Over the last year Klondex has traded in a range of $1.68 to $2.80 per share. At press time its shares changed hands for $2.64 apiece. The company has 121.5 million shares outstanding. Klondex will be a presenter as part of Red Cloud’s Pre-PDAC Investor Showcase on Feb. 27 in Toronto.