Klondex picks up Newmont’s Midax complex

At the end of last year Klondex Mines’ (TSX: KDX; US-OTC: KLNDF) CEO Paul Huet signalled that 2014 was going to be a big year.

His comments came after the company made headlines in December with a deal to acquire Newmont Mining’s (TSX- NMC; NYSE-NEM) Midas mine and mill in northern Nevada.

On Feb. 11 it took the first step towards making 2014 a memorable one by closing the deal for the mine.  

With the acquisition Klondex gets an asset that both Huet and his team have a lot of comfort with. Huet himself spent seven years there as mine manager, and he believes the mine is key in developing Klondex’s flagship Fire Creek project, 177 km south of the Midas mill.

“We were always missing that mill,” Huet said on a conference call connected to the acquisition. “And Midas is a Cadillac mill. This thing is in really good condition, being built in the late 1990s, and everything is still operating and in great condition.”

Klondex estimates that it will cost US$32 a tonne to truck ore from Fire Creek to Midas, and the company already has a good idea of how the ore will behave once it arrives.

That’s because it has been processing samples of Fire Creek ore at Midas over the last year, and has gotten recoveries above 95%. The two projects are also kindred deposits in that both are in northern Nevada and host narrow-vein, high-grade material.

The acquisition cost of the mine comprises US$55 million going to Newmont, plus US$28 million to replace a reclamation bond. It also issued Newmont five million warrants with a $2.15 strike price. The acquisition was financed with $42.6 million in equity, $25 million in debt and a Franco Nevada (TSX: FN) gold loan for US$35 million.

For that money Klondex gets a mine that has been producing gold and silver since 1998, and has turned out over 2.2 million oz. gold and 26 mill oz. silver over that time period. The mill can handle 1,200 tonnes per day, but Klondex expects to start off using just half of that capacity.

It also comes with a well-defined orebody, as Midas has proven and probable reserves of 500,000 tonnes grading 3.25 grams gold and 267.1 grams silver for 50,000 oz. gold and 4.41 million oz. silver.

Speaking on the same conference call, Huet said Klondex will immediately set to work on expanding those numbers, promising exploration dollars and two drill rigs turning underground with the aim of identifying near-term targets.

The acquisition will give Klondex some new toys to play with as well, as it has US$30-million worth of mobile equipment on-site. That is a big plus for a company looking to develop a mine a few hours down the road.  

Huet estimates that half of that gear can be put to work at Fire Creek, where a preliminary economic assessment is due soon.  

But even with all the activity around the acquisition Klondex hasn’t neglected Fire Creek, as it has continued a bulk-sampling program and is carrying out exploration and infill drilling to expand its current resources.

Infill drilling is being done to better understand the Joyce and Vonnie veins and stay ahead of the bulk sampling. Joyce and Vonnie are both open at depth to the north and south.

As is it stands Fire Creek has measured resources of 205,000 tonnes grading 44.7 grams for 295,900 oz. gold and inferred resources of 620,000 tonnes grading 19.2 grams gold for 421,400 oz.

Those high-grade numbers are just what investors are looking for, and the other thing investors are hungry for — positive cash flows from production — should be on the way.

Klondex expects that when the year is over, it will have produced between 70,000 and 100,000 oz. gold.