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Thursday, 8 November 2012
Kirkland Lake Gold: A golden opportunity in Northern Ontario
Kirkland Lake Gold (TSE:KGI, LON:KGI) is a gold producer that isn’t just looking to coast off the robust gold price, but rather is set apart by its experienced management team, lofty targets and a property with a venerable history of production and strong returns on investment.
Indeed, the company is aiming for total capital expenditures of about $250 million on its flagship Kirkland Lake Gold project, as well as over a 50-per-cent return on the capital deployed.
Kirkland Lake’s president and CEO, Brian Hinchcliffe, and chairman Harry Dobson, are mining veterans, having worked together to build two other mining companies - American Pacific Mining - which was sold to Breakwater Resources(TSE:BWR) - and Jordex Resources, from where the nickel asset was sold to Anglo American Corporation (LON:AAL).
Hinchcliffe says that the gold mining industry works in complex cycles and that he and Dobson have developed their investment strategies by being mindful of where the industry is at any given time.
That includes looking at not just the price of gold at the time, but a strategy whereby Kirkland’s management studies commodities cycles and determines when the market considers a metal out of favour. If the supply/demand fundamentals of the metal indicate spot prices have bottomed and are positioned for a rally, this allows the company to purchase assets at a discounted price.
Hinchcliffe says he also considers various methods of mining, as the underground mining industry was not “in favour” in Canada from about 1980 until 2005.
“We tried to combine our knowledge of the cycles and how Canada would become successful again,” Kirkland Lake’s CEO says of the search for an ideal place to start a gold mining business.
“We also looked at camps and areas with a long history of gold production – areas that were historically big producers.
“We were fortunate in acquiring Kirkland Lake for $ 5 million down and $20 million in the form of a capped royalty which we finished paying in October 2011.”
Hinchcliffe says the combination of Canada being an “attractive mining destination”, a belief that the gold price had bottomed in the early 2000s and was positioned for a comeback, as well as the theory that there was some yet-to-be-discovered gold in the camp, made the Kirkland Lake Gold camp the right choice.
Kirkland Lake is located in Ontario’s Southern Abitibi gold belt and the gold mining company is based in the historic Kirkland Lake Gold camp, which has produced 22 million ounces of gold in its 100-year history.
After the properties were aquired by Kirkland Lake Gold in 2001, Hinchcliffe says the company turned its attention to exploration efforts.
The project consists of the Macassa property and operating underground gold mine, four contiguous gold properties known as the Lake Shore, Wright-Hargreaves, Teck-Hughes and Kirkland Minerals properties and their respective, formerly producing, underground gold mines - collectively called the South Mine Complex – as well as a mill and processing facility.
“We figured the [property] could use a good old-fashioned dose of exploration work,” Hinchcliffe says. “We were lucky enough to find a new discovery, and we knew we would be able to use the existing infrastructure on the property to produce gold at low capital cost and in the medium term compared to discoveries in regions that do not have mining history.”
In 2005, the “high-grade” South Mine Complex was discovered and the company got to work developing its project.
The mine’s total reserve and resource base is 2,884,000 tonnes containing 1,473,000 ounces in the proven and probable category grading 17.5 grams per tonne or 0.51 ounces per tonne, 3,433,000 tonnes containing 1,623,000 ounces grading 16.1 grams per tonne or 0.47 ounces per tonne, with an additional 1,970,000 tonnes containing 1,003,000 ounces in the inferred category grading 17.5 grams per tonne or 0.51 ounces per tonne.
This past summer, Kirkland Lake completed an acquisition of Queenston Mining Inc.’s (TSE:QMI) 50-per-cent interest in the seven joint venture properties the two companies owned in the Kirkland Lake camp for just $60 million.
“We think at the end of the day we’ll end up with about 2 million ounces of gold on these properties,” says Hinchcliffe.
“If that’s the case, and only the drilling will tell us that, we will have made an acquisition for a price of approximately $30 an ounce, which is an exciting place to be from an economic point of view.”
Indeed, the acquisition is attractive fiscally, but also puts the company that much closer to its goal of establishing a mineral base of 5 million plus ounces.
“We’re at about the 4.2 million ounce mark or thereabouts, so we’ve made quite a bit of progress in the last several years,” notes Hinchcliffe.
Keeping his practical mining philosophy in mind when discussing the Kirkland Lake property, Hinchcliffe says the company’s goal is long-term – a plan that includes a mine life of over 15 years.
"That requires a big investment and a belief in the geological potential [of the resource],” he says.
“Gold mining is very cyclical industry – generally 7 years. So you need to have a mine life of over 15years in order to make back your capital and generate profits.
“The cyclicality is why we believe you have to target an IRR of at least 15%, maybe more in politically unstable jurisdictions.”
Late last month, that idea was furthered as Kirkland Lake officially broke ground on its mill project – part of the company’s $95 million mill construction and expansion program that kicked off in January, 2009 and has seen Kirkland invest $60 million so far.
The three-phase, development and mine refurbishment program is aimed at increasing production to 250,000 to 300,000 ounces of gold by the start of 2014, and requires relatively low capital expenditures as there is substantial infrastructure already in place.
Kirkland Lake says the ultimate goal is to reduce operating costs to lower than $250 per tonne through increases in quarterly production rates and improved operating efficiencies.
An efficient operation is also dependent on a skilled workforce. As well as competing with other companies for employees, Kirkland Lake – like many others in the mining industry in northern Ontario – faces a potential shortage of workers as the baby boom generation gets closer to retirement.
Fortunately, Kirkland Lake’s management team had the foresight to notice the cycle and created an employment model “about seven years ago” that puts a real emphasis on a “positive safety culture” and also focuses on dedicated skills training.
“We have had really terrific support from our training team,” says Hinchcliffe.
“They help us transfer a wealth of experience to our workforce.”
In order to retain employees, the company has developed mentoring initiatives and external educational providers on site.
The company’s employee retention programs also include a competitive wage and bonus structure, a “seven-day-on, seven-day-off” work schedule, a company family doctor and housing initiatives.
All these programs have led Kirkland to a 2012 retention rate of 94 per cent.
Hinchcliffe says that the “attract, attain and retain” cycle requires a large individual investment for its employees, but says that the company feels that this is a “win-win” situation.
Another key to the success of Kirkland Lake Gold, says Hinchcliffe, is the political safety of mining in Canada.
“And it’s not just the fiscal aspect,” says Hinchcliffe. “It’s the geological and cultural commitment [Canada has] to stay in the mining business.”
He adds that it is becoming increasingly difficult to find safe, economically sound and welcoming places to start a mining business.
“Then, bolted to the side of that, are the tremendous improvements Canada has made in its fiscal appeal.”
While running a mining business in Canada is not cheap by any means, Hinchcliffe says it is advantageous that the country has progressively decreased the federal tax rate from 25 to 15 per cent.
That, combined with an Ontario provincial tax of 12.5 per cent, makes Canada a country with one of the lowest tax rates in first world mining jurisdictions, he adds.
Looking ahead, Hinchcliffe says that the company will improve its production facility, including refurbishing an existing shaft to increase its hoisting capacity and mill upgrading and expansion.
This will allow Kirkland Lake to move from the point of producing 100,000 ounces of gold to producing between 250,000 to 300,000 ounces of gold over the next couple of years.
“It’s a challenging time that we’re in, but the exciting part from our point of view is that the five year plan that we’ve had under development is coming to fruition over the next 15 months,” Hinchcliffe says.
He adds that investors can expect to see more drill results from the company’s recently acquired properties as well as a steady increase in the rate of mining and production.
Hinchcliffe says that all of the company’s milestones so far, from exploration to “top-of-the-line training programs”, to expansion projects – are part of Kirkland Lake’s goal of becoming a mid-cost producer, both on a per tonne and per ounce basis.