Klondex blazes ahead, undeterred by low gold prices

Klondex Mines (TSX: KDX; US-OTC: KLNDF) has been a stellar performer despite the current bear market for gold stocks, with its share price steadily on the rise since the end of 2012.

The company — which operates the Fire Creek gold mine and the Midas gold-silver mine and mill in Nevada — saw its share price slide to a multi-year low of 31¢ in October 2008, before peaking at an all-time high of $3.87 in February 2011, and tumbling to $1.25 in 2012.

Since then, Klondex shares have picked up momentum. They  gained 29% in 2013, 21% in 2014 and soared 74% during this year’s first half to end June at $3.40 per share. The stock finished Aug. 12 at $3.49, appreciating 179% since 2012.

At the same time the spot gold price has retreated 32% to US$1,125.50 per oz., from US$1,664.

The force behind the company — led by president and CEO Paul Huet, who joined in late 2012 — has been its two Nevada operations.

Klondex produced from Fire Creek under a bulk-sample permit in the second half of 2013, and bought the Midas assets from Newmont Mining (NYSE: NEM) in early 2014.

Huet knew Midas well, from his days operating the mine for Newmont from 2000 to 2007.

While Newmont expected that Midas’ underground operation would end early this year, Huet and his team have kept the mine chugging along.

They also showed there was more to Fire Creek than the market thought, Mackie Research analyst Barry Allan explains in an email.

“Originally the Fire Creek resource was not viewed favourably by capital markets. There were a substantial number of skeptics who not only discounted the resource as being high-grade, but also felt the ground was too bad to allow for narrow vein mining. With time, KDX proved skeptics were not only wrong, but exceeded all expectations on grade.

“Klondex is now accepted as a high-grade producer,” he says. 

At the Midas mill, the company processes ore from both Midas and Fire Creek, which sit 160 km apart. In 2014, the two assets produced a total of 107,860 equivalent oz. gold containing 86,239 oz. gold and 1.4 million oz. silver. The average processed grades per tonne were 15.9 grams gold and 261 grams silver.

Klondex initially guided 2015 production of 120,000 to 125,000 equivalent oz. gold. However, given the record second-quarter sales, it bumped up its forecast to 125,000 to 135,000 oz., in a 20% increase over last year’s output.

“Our second-quarter performance was one of the best yet,” Huet said on a recent conference call.

While production cost for equivalent ounces of gold rose slightly by $13 to $744, it dropped in U.S. dollars by US$65 to US$605. All-in sustaining costs per sold ounces of gold fell in both reporting currencies, down $103 to $732 and US$171 to US$595, net of silver credits.

Revenue came in at an all-time high of $51 million, up from $36 million a year ago. While income from operations grew $3.8 million to $12.7 million, quarterly earnings stayed relatively flat year-over-year at $4.8 million.

“We had forecast a good operational quarter, and the company delivered,” notes Allan, who has covered Klondex since January 2011. Earnings per share of 4¢ and 13¢-per-share of cash flow before working capital were both in-line with his forecast.

Commenting on the revised production guidance, Klondex’s chief financial officer Barry Dahl said the extra 5,000 equivalent oz. gold this year would come from Midas, which has a higher equivalent-ounce gold cost than Fire Creek. As a result, Klondex has lifted its full-year production cost estimate by US$25 to a range of US$575 to US$625 per equivalent oz. gold.

But it has trimmed its all-in sustaining costs guidance this year by US$50 to a range of US$750 to US$800 per oz. gold.

Given the exploration success at Fire Creek and Midas in the first half, Klondex has added US$10 million to its 2015 capital expenditures, which are now at US$43 million. (The US$10 million was put aside to repay debt.)

“After careful evaluation, we believe investing the dollars in our mines rather than prepaying the debt at this time increases value for our shareholders, while reducing the risks for future years of production,” Huet explained.

The executive points out that both operations have “essential” permits. Fire Creek obtained the water pollution control permit in June, removing its 35,000-ton (32,000-tonne) annual production cap. The firm aims to finish  the environmental assessment later this year to move into full production.

In July Midas received its tailings expansion permit, which means Klondex can build the phase-six raise to the tailings impoundment. This will add 400,000 tons (363,000 tonnes) of tailings capacity, bringing the total capacity to 900,000 tons (816,000 tonnes). Construction should wrap up before year-end.

The company ended June with a $68-million cash balance, up $13 million from March. Its long-term debt obligations are $39.3 million.

Allan estimates that “production will creep higher quarter-over-quarter, as underground capacity at Fire Creek [and to a lesser extent, Midas] is developed … however, this will be a relatively slow development rate going forward, and given the good results to date, the market will not be as ‘unexpectedly’ surprised by future production.”

He has a $4 target and a “buy” recommendation on Klondex.