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Klondex Mines set to bring Hollister and True North mines into production

The Hollister acquisition puts Klondex's three assets in Nevada in close proximity and offers great synergies.
Klondex Mines set to bring Hollister and True North mines into production
A gold pour

Gold producer Klondex Mines Ltd (TSE:KDX, NYSE:KLDX) is set for a busy time ahead as it drives its plan to get its Hollister and True North projects into production.

The group's guidance for full year 2017 output for around 200,000 ounces is a far cry from its 2016 figure of around 150,000 ounces, the firm noted in a recent interview.

This underlines its aggressive growth strategy.

Proximity of Nevada assets a big boon...

Paul Huet, Klondex, chief executive, has explained that the Hollister acquisition in 2016 puts its three assets in Nevada in close proximity and offered fantastic synergies.

These three mines will all feed its mill facility at Midas. Under a previous operator,  Hollister ore had to be shipped 277 miles away to be milled, but now can be transported just 19 miles to the Midas mine, meaning a huge reduction in costs.

Meanwhile, he explained how the True North mine and mill in Manitoba was a great opportunity to scale up the group's production, buying it as it did from bankruptcy for just $32mln. It has already had $500mln spent on it. Klondex reckons it can produce 60-80,000 ounces a year, at its 2500 tpd (tpd) mill.

The area also has upside exploration potential to extend the life of mine there. 

WATCH - An 'aggressive' 2017 for Klondex Mines as they take two of their projects into production

What assets does Klondex have?

It owns 100% of the Fire Creek mine and the Midas mine and ore milling facility, both of which are in Nevada, USA. It also owns all of the True North gold mine and mill in Manitoba, Canada.

It has also acquired 100% of the Hollister mine and the Aurora mine and ore milling facility - both in Nevada.

Well positioned to meet guidance after second quarter...

When it posted second quarter results last month, the group said it was "well positioned" to meet its annual companywide production guidance of between 210,000 and 225,000 gold equivalent ounces.

Klondex sold 69,511 GEOs, comprised of 65,293 ounces of gold and 307,899 ounces of silver. Average realized selling prices for gold and silver respectively were US$1,249 and $17.10 per ounce.

Revenue hit a quarterly record of US$86.79mln, up 74% from US$49.99mln a year earlier. That fed through to net income of US$4.5mln, or 4 cents a share, versus a net loss the year before of US$4.5mln, or a loss of 3 cents a share.

True Gold drill assays point to expanding the resource...

Recent assays came from 104 underground holes totalling 19,576 metres, targeting the updip extension of the 710 zone from the 6,350 level and the downdip extension of the 710 and 710 footwall lens at the 32 level.

The firm already in May this year had upgraded the resource at True North. The total proved plus probable (2P) mineral reserve at the gold mine was put at 147,900 ounces of gold -  a 25% increase on the previous estimate

Meanwhile, the probable tailings mineral reserve was put at 43,200 gold ounces at a grade of 0.75 g/t, contained within 1.95mln tons - an increase of about 33% from the previous estimate.

Maiden Hollister resource..

That was also recently put at an initial proven and probable (P&P) reserve at 199,500 tonnes at a grade of 19.9 g/t gold equivalent for a total of 116,100 gold equivalent ounces.

What the broker says...

H C Wainright recently repeated a 'buy' on the shares. Its valuation for Klondex (C$6.25 a share) was based on an equally weighted composite of 14 times' the broker's estimates for 2017 CFPS (cash flow per share) and a DCF (discounted cash flow) of operations at Fire Creek, Midas, and True North.

"We utilize discount rates of 8% for the firm’s Nevada assets and 10% at True North, which we expect to revisit once a full year of production is achieved at the Canadian project.

"Overall, we expect the Nevada operations to continue to outperform, which should help to maintain profitability in 2H17," said analyst Heiko F. Ihle.

The broker has recently been on a site visit to the Nevada operations, where it noted that the firm had stressed their assets in the state were essentially run as a single mine.

"This allows the firm meaningful flexibility in pushing a mine while there are temporary slowdowns at another asset. Given that Klondex only has a single mill, it is somewhat irrelevant which mine provides the ore. In fact, Paul Huet, CEO, stated that the company is thinking of expanding capacity at the mill to future-proof the mining complex for the years to come," it added.

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