Klondex tallies open-pit gold-silver resource at Fire Creek

Junior gold and silver miner Klondex Mines (TSX: KDX; NYSE-AM: KLDX) has released an initial open-pit resource that could extend the life of its Fire Creek underground mine in northern Nevada. The producing mine has a mine life based on reserves of three years.

The maiden open-pit resource estimates 42.9 million indicated tonnes grading 0.9 gram gold per tonne and 1.2 grams silver per tonne for 1.1 million contained oz. gold and 2.4 million oz. silver. Inferred resources add 31.7 million tonnes grading 1.2 grams gold and 3.1 grams silver for 1.1 million contained oz. gold and 2.9 million oz. silver.

The resource excludes all underground resources at Fire Creek and is open to the north, south and west.

Klondex says it will focus on mining and delineating Fire Creek’s high-grade underground veins, while looking for strategic alternatives to advance and develop the bulk-tonnage open-pit resource.

Management also says there is potential to mine relatively higher-grade underground resources outside the underground mine plan from surface.

A drill rig at Klondex Mines’ Fire Creek property in Nevada. Credit: Klondex Mines.

The estimate uses a gold price of US$1,400 per oz. and a silver price of US$19.83 per oz., and incorporates surface and underground exploration drill programs in 2017 (4,500 metres of 21 surface and 10 underground core drill holes). It also included historic drilling conducted since 2004 (312,000 metres of 1,474 surface and underground drill holes).

“Fire Creek continues to demonstrate it is a world-class property, and we now have data suggesting the underground and open-pit potential is robust, with the possibility for these resources to significantly expand with our continued district exploration programs,” Paul Huet, Klondex’s president and CEO, said in prepared remarks.

The resource estimate drove Klondex shares in Toronto up slightly to $3.15 per share on Dec. 21, the day the resource was announced. Shares closed the year at $3.26.

Brian Quast of BMO Capital Markets said in a research note that he values the open-pit resource on an in-situ basis at $17 million, which represents a 5% increase in the company’s corporate net present value.

“We do not expect Fire Creek to become an open pit any time in the near future, as a new mill would need to be built, and additional permits will need to be secured — processes that require time and capital,” the analyst said in his note to clients. “In the long-term, the addition of open-pit resources has the potential to extend Fire Creek’s mine life, which we currently model at around four years.”

Barry Allan, an analyst at Laurentian Bank Securities, said the new resource “adds little to no value to net asset value.”

“Klondex is encouraged by the resource since it remains open along strike [laterally] and … substantially more mineralization can be added that would extend the mine life,” Allan writes in a research note. “As currently being operated, though, [as a high-grade underground mine], the resource will not have an impact on operations over the shorter-term since the material is: 1) too low-grade to be transported to the Midas mill, and/or 2) open-pit mining would negatively impact the existing underground mine.”

Mining personnel exit Klondex Mines’ Fire Creek gold mine in Nevada. Credit: Klondex Mines.

Klondex will release a reserve and resource update for all of its assets in the first quarter of 2018. The company has 100% interests in four producing properties: the Fire Creek underground mine; the Midas mine and mill; and the Hollister mine — all of which are in Nevada. In addition, it owns the True North mine and mill in Manitoba.

Its other asset is the Aurora mine and mill in Nevada.

The company expects to produce between 213,000 and 230,000 equivalent oz. gold in 2017, at cash costs of US$675 to US$700 per gold-equivalent ounce.

BMO’s Quast has a $3.75-per-share target price on the stock, while Laurentian Bank’s Allan has a $5.80-per-share target price.

Over the last year Klondex has traded in a wide range, between a low of $3.40 per share (November 2017) and a high of $7.73 per share (February 2017).

The junior has 180 million shares outstanding for a $612.5-million market capitalization.