Canadian junior gold miner Klondex has transformed itself into a leader in narrow vein gold mining over the last five years. The company’s specialty is now buying failed mines from creditors, then returning them to profitability using that narrow vein expertise.
This focus has seen the company rise from the bottom of the junior mining heap on the Toronto Stock Exchange to the best performing stock on the S&P/TSX Composite Gold index, gaining 22% in the six months ending 2016.
It wasn’t that long ago that Klondex was teetering on the brink of collapse. By the time a group of shareholders staged an intervention with management in the summer of 2011, the company was literally insolvent. By 2012, when a new Board of Directors was appointed, the company was cash-flow negative, had one asset (the Fire Creek mine in Nevada), $400,000 in the bank, and $7 million in bills.
The new Board of Directors began searching for executives that could bring Klondex’s sole mine to production. For CEO, they targeted Paul Andre Huet, one of the top narrow vein mining experts in the industry. Huet left his job as Chief Operating Officer of Premier Gold Mines, Ltd. to take the helm of the struggling company.
While the move was seen by some as akin to jumping onto a sinking ship, Huet had a secret for turning Klondex around: an intimate knowledge of the Fire Creek mine. He had earlier conducted studies of the mine for two separate traditional gold mining companies, neither of which tendered an offer to Klondex.
With a hand-picked team skilled in the difficult task of exploiting narrow vein gold deposits, Huet totally reworked the failing mine, exposing some of the purest gold veins in North America in the process. These small veins would have been hopelessly diluted with rock, using bulk mining techniques, but were more than economically viable when using the right extraction methods. As recently as this month, Klondex geologists were discovering “outstanding” gold veins at Fire Creek even more pure than the ones currently being worked
Remarking on Huet and his “dream team” of specialists, Barry Allan, senior VP of Mackie Research Capital, said “There’s a very short list of people that would take on these narrow-vein high-grade systems. Not a lot of people are good at mining them.”
Klondex was ready to expand two years into its turnaround from the brink of disaster. Their target was Newmont’s Midas gold mine and mill, 110 miles north of Fire Creek. Newmont was in the process of shutting the mine down when Klondex came knocking. The mine had become unprofitable for Newmont after the large main veins had been mined out using normal bulk mining methods, but Klondex saw untapped opportunity in the remaining high-grade small gold veins at Midas
Much like Fire Creek, the company had detailed information beforehand on deposits and operations at both the mine and the mill at Midas. Klondex CEO Huet had worked at Midas for seven years while employed at Newmont, becoming Mine Manager. Vice President of Operations Brian Morris, a noted geologist specializing in exploiting the types of veins in the Northern Nevada Rift, spent five years at Midas.
CEO Huet recently told Bloomberg, “We managed to sustain the same tonnage every day, from the exact same mine, with half the people,” Huet said. “In 12 months we managed to double the grade from what Newmont was doing.” In addition to knowing exactly where to mine at Midas, there was an additional bonus: Klondex was saving the $30 million a year it was paying Newmont to have the ore from Fire Creek processed at the Midas mill.
The acquisition of the Midas mine and mill marked Klondex’s transformation from a junior exploration company to a gold producer. In two short years, the new management team had saved the company from certain ruin, and more than doubled the company’s assets. December 2014 found the company with $53 million cash on hand after mining 107,861 ozt of gold equivalent.
2015 saw Klondex on home turf in Canada, acquiring their 3rd mine, the second from creditors. The $32 million deal for the True North mine in Manitoba closed in January 2016. The previous owners had not processed the raw tailings at the mine, a task Klondex immediately began. It is forecast that the recovered gold from this and from underground test bores will pay for the rehabilitation and refocusing of the mine for narrow vein operations. Included in the deal was a mill twice the size of the Midas mill in Nevada. The True North mill’s 2,500 tonne/day capacity will allow Klondex to process ore from other mining companies for a fee, providing another income stream.
Returning to Nevada, the team began targeting mines near Fire Creek for acquisition. Only six months after purchasing True North, Klondex added the Hollister Mine to their roster. The owner, Great Basin Gold, went bankrupt in 2012, and the mine was purchased by a holding company.
Once again, the executive team had advanced knowledge of the mine’s potential before making an offer. Klondex Chief Operating Officer Mike Doolin was metallurgist and Mill Manager at Hollister, and CEO Huet was General Manager at Hollister for five years. The $80 million purchase, which was finalized in August 2016 involved a major fundraising effort on Klondex’s part, but netted them two mines (Hollister and Esmeralda) and a third mill.
This gives Klondex three mines (four, if you count Esmeralda separately) sitting on some of the purest narrow vein gold in the world, and two mills in the same general vicinity over the Northern Nevada Rift. Hollister is only 18 miles southeast of Midas, allowing the company to easily shift work crews from one to the other, according to demand.
The company’s unusual skill in turning bankrupt mines into high-yield assets has started catching the attention of industry analysts, and gives Klondex the advantage focusing on low-cost acquisitions which are unattractive to mining majors.