Klondex buys Rice Lake complex for US$32M

Klondex Mines (TSX: KDX; NYSE-MKT: KLDX) is buying the idled Rice Lake gold mine and mill near Bissett, Man., to complement its flagship operations in Nevada.

The Rice Lake complex was formerly San Gold’s core asset, but declining gold prices, rising costs and unmanageable debt sent the junior producer into creditor protection in December 2014. Six months later, it sold the assets to a Manitoba numbered company as part of its court-supervised bankruptcy.

Under the proposed acquisition, Klondex will pay US$32 million. The purchase price includes US$20 million in cash and a US$12-million deferred debt payment that it will repay in three installments of US$4 million a year, at a 4% annual interest rate. 

“We are happy of the fact that we have no dilution to our shareholders. We are able to pay cash for this asset,” Paul Huet, the company’s president and CEO, said on a conference call.

The fully permitted Rice Lake complex includes a functional 2,500-ton-per-day (2,268-tonne-per-day) mill, valued at US$80 million to US$100 million. It also comes with 220 pieces of mobile equipment valued at up to US$20 million. Klondex intends to use some of this equipment at its underground Fire Creek and Midas gold-silver mines in Nevada.

Since 2007, San Gold spent $375 million on the Rice Lake mine and mill, including underground development. Between 2007 and 2015, the operation produced 390,000 oz. gold, Klondex said in a related presentation.

Rice Lake has a historical reserve estimate of 455,000 oz. gold (2.4 million tonnes grading 5.9 grams gold per tonne), plus measured and indicated resources of 634,000 oz. (2.9 million tonnes grading 6.8 grams gold). Its reserve and resource base is similar in size to Klondex’s combined Nevada operations.

Given the large amount of capital previously invested at Rice Lake, Klondex will not need to spend a lot to get the operation up and running. But Huet notes the company is in no hurry to bring Rice Lake online.

“There is no urgency to turn this thing on immediately,” he says, explaining it made sense to buy the asset in today’s depressed markets, given its attractive price tag.

“When you consider a $32-million price tag … this thing is a no-brainer, in my opinion. It has a lot of upside, a lot of opportunity — we just got to deliver it.”  

Before restarting the operation, Klondex intends to update the resource and reserve, and devise a new mine plan, using more selective mining methods.

Huet points out Rice Lake historically produced the best results through shrinkage mining methods, and that Klondex will apply its narrow-vein underground mining expertise to the operation.

Despite the large capacity at Rice Lake’s mill, Huet envisions the company will start Rice Lake as a smaller 60,000 to 100,000 oz. per year producer, with a plan to feed the mill high-quality tonnes. Klondex aims to restart the mill in the fourth quarter of 2016.

“We’re blessed with a very good asset … we could turn it on sooner if we wanted, but we just want to make sure we do our homework.”

That said, Huet emphasizes Klondex will stay focused on Fire Creek and Midas, explaining Rice Lake will come second to its Nevada operations.

The company’s objective in Nevada is to fill the 1,200-ton-per-day (1,089-tonne-per-day) Midas mill, which processes high-grade feed from both the Fire Creek and Midas operation.

As part of the Rice Lake acquisition, Klondex will receive a 50% interest in the Tully gold project in Timmins, Ont., and a 32% stake in SGX Resources (TSXV: SXR). The transaction, announced on Dec. 17, should close in early 2016.

“We believe the Rice Lake acquisition for US$32 million is a worthwhile undertaking with potential to create value, but it adds execution risk, and could take time to prove it works,” RBC analyst Sam Crittenden writes. He has a $4 target and an “outperform” rating on the stock.

Similarly, Mackie Research analyst Barry Allan notes that Rice Lake is a “difficult asset,” which he believes may take Klondex nine months to restart at a cost of $20 million. “For the next few months, we suspect the market will take a wait-and-see stance. However, if anyone can unlock the value of Rice Lake, it will be Klondex, which has the right attitude to … restart the mine,” Allan writes. He has $3.50 target and a “buy” rating.