Klondex adds life to Midas with aggressive drilling

When Klondex Mines (TSX: KDX; US-OTC: KLNDF) bought the Midas gold-silver mine in Nevada from Newmont Mining (NYSE: NEM) in early 2014, Newmont had penciled in March 2015 as the date the underground operation would reach the end of its mine life.

But Klondex’s CEO Paul Huet believed there was a heck of a lot more gold to be found. He knew Midas well because he had worked there for Newmont between 2000 and 2007, first as mine superintendant, then chief engineer and later as mine manager.

Since buying the mine, Klondex has added three more years of mine life with the discovery of 132,000 oz.  of reserves (220,000 tonnes at 18.8 grams gold equivalent per tonne) through aggressive, near-mine exploration, and has plans to find a whole lot more.

“It’s a world-class epithermal vein deposit, and we could never get the funding we needed from the corporate level at Newmont,” says Brian Morris, Klondex’s vice-president exploration and geologic services. Morris, who joined Klondex in January, worked at Midas under Newmont’s ownership for five years, and overlapped with Huet between 2002 and 2007.

“We recognized there was a lot of upside at Midas, and I’m happy to say I’ve come back through Klondex and can pursue the targets that we’ve always recognized were there from years past,” Morris says.

Klondex has released assay results from 40 underground drill holes this year, which Morris says could add resources.

Assays from the 505 vein — 31 metres east of the mine’s current development work — are the most encouraging, because they can be incorporated into the 2015 mine plan, Morris says. One hole returned 280.3 grams gold-equivalent per tonne over 1.5 metres, while a second hole intercepted 41.6 grams gold-equivalent per tonne over 2.1 metres.

Farther east, drilling on the 905 vein returned 108.3 grams gold-equivalent per tonne over 1.3 metres in one hole and 136.8 grams gold-equivalent per tonne over 0.4 metre in a second.

Assays from the 705 vein returned 70.9 grams gold-equivalent per tonne and 51.8 grams gold-equivalent per tonne. The 705 vein runs parallel and 60 metres west of the main 101 vein, on the southern end.

The second phase of the 2015 drill program will follow up on the zones, which remain open laterally and vertically, while step-out drilling will attempt to delineate the margins of the mineralization.

“These are the kind of results that I had fully expected and anticipated,” Morris says. “They were mining these veins when I was working at Newmont. These were areas that had gaps in drill data information … we recognized there were gaps in the drilling. There are holes along the modelled resource, gaps in mineralization … so now we’re going back and saying, ‘Look at this gap, we really believe there will be mineralization along the structure, and it’s proving to be quite fruitful for us.”

Not only is it exciting to come back all these years later and “go after this low-hanging fruit,” Morris continues, but development is not that far off. The team at Midas is already driving out to the 505 vein and should be there in a couple of weeks, he says, which means the 505 vein could become part of the mine plan this year.

The 705 vein is also close, and could join the mine plan before year-end. Developing vein 905, however, east of vein 505, will likely have to wait until 2016, Morris says.

Morris says the team is pleased with its success so far.

“We’ve taken something that should have been shut down and added about three years of mine life to it, and with additional drilling, we’ll add even more mine life to the current resources and reserves,” he says.

Klondex is setting up underground drill platforms that allow it to drill 200 metres northwest towards the Midas trend, and is re-examining the Queen vein, which lies 457 metres south of the current workings. The company is driving a drift 335 metres south to set up a drill platform.

“Just like drilling off to the west, this [Queen vein] is in an area that has large gaps in drilling,” Morris says. “There’s a lot we don’t know about these areas, so as we’re drilling off to Queen, we could very well drill into veins that we don’t even know exist.”

“That’s the beauty of drilling underground versus from surface,” he adds. “When you’re drilling underground, you’re testing a lot of ground on your way to the target, because you’re drilling horizontally.”

Morris believes there is more upside, too, because Klondex controls 119 sq. km of ground near the mine, of which only 10% has been explored.

Midas is just one of two producing operations Klondex owns in Nevada. Fire Creek, 160 km south, started production under a bulk-sample permit in the second half of 2013. A 1,090-tonne-per-day mill at Midas processes material from both mines.

Huet, who left his post as chief operating officer at Premier Gold Mines (TSX: PG; US-OTC: PIRGF) to join Klondex in September 2012, expects the two mines will produce 120,000 equivalent oz. gold at a cost of US$550 to US$600 per oz. this year. All-in sustaining costs are forecast at between US$800 and US$850 per equivalent oz. gold.

This year the company plans to spend $33 million on both mines, entirely from cash flow. About $9 million will be spent on development work at both sites, and $6 million will be spent per site on exploration. The remaining $3 million will be spent at Midas on the mill and extending the tailings pond.

Klondex ended 2014 with a $52.8-million cash balance and reported full-year net income of $18.3 million, or 16¢ per share.

Tara Hassan of Haywood Securities has a “buy” rating on Klondex.

“What was a high-grade drill hole story with a fledgling management team as recently as early 2012, has now become a low-cost, multi-asset producer that is positioned to deliver increased production, free cash flow and resources, and reserves over the next two to three years,” she writes.

“Even with the improvements Klondex has made to its management team, and asset portfolio, which include increasing resources, commencing production and obtaining its own processing facilities, the company continues to trade at a discount to its peers. We believe 2015 will be a pivotal year for Klondex that will help eliminate this discount and attract a premium multiple.”

Klondex traded at $2.70 per share at press time, within a 52-week range of $1.68 to $2.80 per share. The company has 292 million shares outstanding.