Klondex Mines (NYSEMKT:KLDX, TSE:KDX) was initiated as a Buy and a $4.75 per share price target by broker Rodman & Renshaw on Monday.
Klondex operates two of the highest-grade underground gold mines in the world Midas and Fire Creek, which are both located around Winnemucca, Nevada.
The Midas Mine and Mill was purchased from Newmont Mining (NEM; not rated by Rodman & Renshaw) in 2014 for $83mln, and provided the firm with a 1,200 tpd mill in addition to a mine. By owning the mill outright, Klondex was able to save approximately $32mln in toll milling fees payable to Newmont for the processing of Fire Creek ore, the broker said.
"In essence, the Midas Mine and Mill were purchased primarily for full ownership of the mill with any additional upside at the mine serving as an added bonus. In our view, this strategic purchase created a strong foundation for Klondex to build upon as it embarks on a journey towards mid-tier status," said analysts Heiko F. Ihle and Jake Sekelsky.
Rodman said Fire Creek is the focus but Midas is not done yet.
"With an average reserve grade of 1.3 opt, Fire Creek is one of the highest grade gold mines in the world. Given this, cash costs at Fire Creek are expected to average an impressive $450 per ounce in 2016, making the mine one of the lowest cost gold mines on a cash cost basis we have looked at in recent memory," the broker said.
In total, we forecast 2016 production of 146,607 ounces at an average blended cash cost of $613 per ounce. We anticipate all-in sustaining costs (AISC) of $919 per ounce which should provide Klondex with healthy margins. While Fire Creek deservedly receives the bulk of attention, we believe the Midas Mine has a sufficient mine life in front of it. Although the mine currently has a reserve life of less than three years, recent exploration success has indicated strong potential leading us to believe in upside at Midas.
Improvements at Midas should translate to the newly acquired Rice Lake Mine.
"In our view, the recent $32mln acquisition of the Rice Lake Mine stands to benefit from similar operational improvements already achieved at Midas.
Although Midas was deemed a non-core asset by Newmont, Klondex has been able to make significant operational improvements since acquiring the asset. The firm was able to reduce headcount at the site by approximately 50% while reducing dilution rates and increasing grades from 0.15 opt to 0.33 opt. Further, through the "right sizing" of throughput and evaluation of correct mining methods at Rice Lake, we believe a revitalization similar to that seen at Midas could be in the works and expect a production decision to be made at the mine sometime in 2H16," the analysts said.
The $4.75 per share valuation - nearly a full dollar higher than where it traded on Friday - is based on an equally weighted composite applied to a NAV estimate of $3.14 per share and a 12x multiple applied to our 2016E CFPS of $0.52.
"Our NAV is based on an 8% discount rate, a 1.2x multiple and long-term gold price of $1,200/oz, in addition to Rice Lake at cost of $32.0 million. We expect to revisit our valuation for the newly acquired asset once we receive greater clarity with respect to the overall mine plan and the timeframe in which to expect first production. Together, these valuations comprise our price target of $4.75 per share," Rodman said.