Klondex expands its arsenal

Klondex Mines (TSX: KDX; NYSE-MKT: KLDX) has evolved in the last four years from an exploration firm with one project in Nevada to a gold producer with multiple assets in the U.S. and Canada, with no signs of slowing down.

Led by president and CEO Paul Huet since September 2012, the company operates two high-grade underground gold-silver mines in Nevada — Fire Creek and Midas — and is in the midst of expanding its reach.

It began producing from Fire Creek under a bulk sample permit in late 2013, before buying the Midas assets, some 160 km away, from Newmont Mining (NYSE: NEM) in early 2014. Huet is an expert in narrow-vein gold mining and has worked at numerous operations, including the Midas mine, when he was with Newmont from 2000 to 2007.

Klondex Mines president and CEO Paul Huet. Credit: Klondex Mines.

While Newmont had expected the Midas mine would wind down in early 2015, Huet and his team have kept it going through aggressive drilling, while beating grade and throughput expectations at the Fire Creek mine.

With the two Nevada operations performing well in 2015, Klondex was quick to look for expansion opportunities elsewhere.

It bought the True North gold assets near Bissett, Man., for US$32 million in January 2016. True North was formerly San Gold’s large Rice Lake mine and milling complex, which it sold to a Manitoba numbered company during bankruptcy proceedings. The fully permitted operation came with a large mill and 220 pieces of mobile equipment.

Since acquiring True North, Klondex has worked to bring the asset online as its third underground mine. It poured its first doré bar at the end of July, after it started processing gold in tailings. True North should produce between 8,000 and 12,000 oz. gold in the second half of this year through test stope mining and processing tailings.

Within six months of expanding into Canada, Klondex found another opportunity to grow its base back in Nevada.

In late July, it signed an agreement to buy the Hollister underground gold mine and the Aurora (previously known as Esmeralda) mine and milling complex. From 2007 to 2012, Hollister produced 425,000 equivalent oz. gold at an average 31.25 grams gold. The former mine sits 30.5 km from the Midas mill — as opposed to the Aurora mill, some 446 km away — which provides potential synergies.

Klondex uses the 1,200-ton-per-day (1,089-tonne-per-day) Midas mill to process ore from Fire Creek and Midas, and aims to use it for Hollister, too.

John Seaberg, Klondex’s senior vice-president of investor relations and corporate development, notes that the Hollister mine could come online in 2017.

“Give us six months. We should produce within six months,” he says.

The Hollister deal should end before early October. Upon closing, Klondex will pay US$63 million in cash and US$17 million in a secured promissory note, plus warrants and shares.

To help finance this endeavour, Klondex wrapped up a previously announced bought-deal private placement in August. It offered 25.9 million subscription receipts at $5 apiece for gross proceeds of $129.5 million.

A month later, it reported a positive production decision for True North, as well as resource and reserve updates for both its Canadian and Nevada assets.

Reserves at True North stand at 85,500 oz. from 319,300 tonnes at 8.33 grams gold. Measured and indicated resources are 294,000 oz., with another 460,000 oz. in inferred.

Klondex estimates producing 45,000 to 65,000 oz. a year from True North, at an annual throughput of 600 to 1,000 tons (540 to 900 tonnes) per day. It will include a detailed mine plan in the project’s technical report in October. Annual capital spending should fluctuate between $15 million and $25 million in the early years of the mine life.

Total gold-equivalent reserves at the Fire Creek and Midas deposits have increased 5% from 444,000 to 468,000 contained oz. within 625,000 tonnes, net of depletion. This increase came from the gold-equivalent reserves at Midas jumping 41% from 123,000 oz. to 174,000 equivalent oz. gold.

Despite the gold-equivalent reserves at Fire Creek falling from 321,000 oz. to 294,000 oz. due to depletion, Fire Creek’s measured and indicated resources have increased 7% to 505,000 equivalent oz. gold.

Klondex Mines’ Midas gold mine in Nevada. Credit: Klondex Mines.

To calculate the 2016 Nevada reserves, Klondex assumed metal prices of US$1,200 per oz. gold and US$17 per oz. silver, compared to last year’s US$1,000 oz. gold and US$15.83 oz. silver. It also used higher metal prices and slightly lower cut-off grades for its 2016 resources.

“It’s important to note most of the ounces we added were from the drill bit. They were not due to metal price increases or lower cut-off grades, it was 99% from the drill bit,” Seaberg says, adding the other factors had a minimal impact.

While Klondex is expanding its arsenal, it plans to keep focusing on its Fire Creek and Midas mines.

The Bureau of Land Management approved Fire Creek’s environmental assessment this February. “That gives us more flexibility. It allows us to put in more infrastructure and development, and potentially grow the asset,” Seaberg says.

For 2016, Fire Creek and Midas should deliver between 145,000 and 150,000 equivalent oz. gold. Fire Creek is on track to contribute 100,000 equivalent oz. gold, up from the little over 78,000 oz. it produced in 2015.

For the first half of the year, Fire Creek and Midas delivered a total of 71,592 equivalent oz. gold at cash costs of US$636 per equivalent oz. gold sold, within the 2016 cost target of US$600 to US$650.

Klondex shares closed Sept. 14 at $7.19, up 162% year-to-date. BMO analyst Brian Quast has an $8.25 target price and a “market perform” rating on the stock.