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Wednesday, 8 May 2013
Klondex Mines’ CEO sees one of the simplest tasks of his career ahead in building Fire Creek
With a new management team in place, Klondex Mines (TSE:KDX) (OTCQX:KLNDF) is positioned to do what CEO Paul Huet knows best, that is to take a Nevada mine into production.
Huet, which came on board at Klondex last September, was raised in Timmins - one of Canada's most prolific mining districts, and started his career underground in the mines, drilling and blasting for a decade at Kinross Gold (TSE:K) - where he was among three people selected for an advanced program designed to train the next generation of mining execs.
After moving on to build and manage the operations of both the Midas and Hollister mines in Nevada, the chief executive, who says he was the only one of the three to graduate the Kinross program with a degree in mining, decided it was time for a new direction in his career, in the way of building a company from the ground up.
And though Huet, also the former COO at Premier Gold, sees this as no small feat, he is confident that the company’s Fire Creek project in Nevada, where a core re-logging program was just completed ahead of schedule, is a recipe for success and has the potential to be a “company builder”.
The property is situated at the intersection of the Battle Mountain trend and Northern Nevada Rift, which also hosts the Midas and Hollister narrow-vein epithermal gold deposits. Aside from being surrounded by major producers, it is also nearby power, transportation, infrastructure and a milling facility in the heart of the U.S. state’s gold trend.
“Of the three mines I have operated, the Fire Creek property is probably the simplest. It’s got a ramp in place, significant resources on less than 7 per cent of the land package, and is shallow in nature,” the chief boasts of the property, where bulk sample production is due to begin in the third quarter, with a toll milling agreement to the Jerritt Canyon mill already in place.
“It’s also an underground high grade deposit with little surface disturbance. You can’t get a simpler operation in Nevada.”
Huet says the company is not “doing one thing that is new to the industry”. “We are taking industry best practices and applying them. Of course we’re going to run into obstacles, be it with ground or water challenges, but these are all problems we will overcome, as my team has dealt with it at one point or another in their careers.”
Indeed, the current management team, which is entirely new with exception to the CFO, is supported by 160 years of combined mining experience, Huet affirms, with most of the team having followed the chief executive for the third time, after having worked on both the Midas and Hollister projects together.
Last week, the company said it completed its drill core re-logging program for Fire Creek five weeks ahead of schedule, with an updated resource estimate on track to be released in mid-June. Klondex started the campaign in January, which involved the photographing and re-logging of around 73,000 metres of archived drill core from previous operators at the property.
The new estimate, to be completed by Micon International, will include 36,639 metres of infill core drilling - from surface and underground - as well as more than 600 assays collected from the re-logged core that was originally included in the resource report from May 2011.
“Though we don’t expect any material upward change in resource ounces, we anticipate an upgrade in confidence level and most importantly, we don’t expect the ounces to drop,” says Huet, adding that this was a “big concern for a lot of people”.
The resource report from May 2011 holds 1.6 million ounces in the indicated category, along with another 458,000 ounces in the inferred category.
As mine manager of the Midas mine for Newmont (NYSE:NEM), Huet says he saw due diligence completed on the Fire Creek property in 2006, and again in 2010 while general manager at the Hollister Mine, in both cases having some concerns with the model and surface coordinates of drill hole collars. “It wasn’t consistent work. There was some geotechnical and metallurgical information omitted, and there were no photos of the core.”
“Now, all this will be included in the new estimate. Micon, our independent consultants, even came in midway of our re-logging so they could audit the process and gain insight. They were involved from the start of the program.”
The new resource report - which will also include recent discoveries like a 13 metre intercept grading 15.5 grams per tonne (g/t) gold in the southern area - will be used to develop a new mine plan, on which Klondex plans to base a preliminary economic assessment study that is expected to wrap up by the fourth quarter.
The junior gold company is targeting to deliver about 8,000 ounces of gold equivalent this year, aiming to become self-sustaining using the cash flows derived from the bulk sample output.
“There are no compliance or permitting issues, with most of the permits for full scale production already in hand,” says the CEO, highlighting the remaining Rapid Infiltration Basin (RIB) permit, for which the application was submitted late last month.
He explains that the company has waited to give production guidance for next year until a new comprehensive mine plan is in place, based on the new and “improved” resource.
And the best part for investors, in this challenging fundraising environment for Canadian junior miners, is that Klondex doesn’t expect it will need to raise much money unless it decides to acquire an asset or build a mill. “If the deposit resource goes to 5 million plus ounces – which it has the legs to do with further exploration – it would reduce the operating costs by building our own mill.”
The Vancouver-based company, which also boasts Larry Phillips – one of the four founders of Iamgold (TSE:IMG)(NYSE:IAG) - as chairman, has $9 million in the bank. Enough, it says, for it to get through the bulk sample.
“We’ve already spent the capital to get there and we don’t expect to have to return to the market. The low cost ounces from Fire Creek could add quite a bit to our treasury fairly quickly. This means that even if gold sinks to $850 an ounce, we can still make money.”
Indeed, few gold miners can say this nowadays, with mining costs steadily increasing and gold last month suffering its biggest two-day decline in 30 years.
“We’ve seen gold go as low as $264 an ounce. The drop in gold price doesn’t surprise me, but we are very well prepared,” says Huet, who will put together three separate mining plans using different gold prices - $700, $1,000 and $1,300 an ounce - giving the company the ability to react quickly to the price of the yellow metal.
“We won’t sterilize the ounces – we’re going to change the cut-off grades if necessary and we will have fewer ounces. But we have such high grades and great infrastructure, so we can be very flexible.”
Huet’s confidence gleams in the fact that he holds 1.2 million shares of the company, or a 1.3 per cent stake. “In the 13 plus years I’ve been in Nevada, this is this first time every member of my team has bought equity in the company, which is not common for those that work in the mining industry,” he says.
Aside from Fire Creek, Klondex also has three other assets in Nevada where it will look to undertake some drilling to eventually bring these deposits online, and will look for other synergistic opportunities where the company can put its expertise in narrow-vein mining to work.
“We’ve put everything we got into this company. With permitting and grades on our side, and a strong management team to boot, we couldn’t ask for anything better,” the chief executive concludes.
Klondex, dual-listed on both U.S. and Canadian indexes, has 64.4 million shares issued and outstanding.