As an IR professional and personal investor, I'm always looking for great companies selling at attractive valuations that have to date escaped the attention of the institutional investing public. On occasion this can have a double advantage: not only supporting my investment returns but also sometimes identifying potential clients that could benefit from our firm's professional services.
Klondex Mines is a junior gold miner which looks very exciting for patient investors who seek value investments.
At Klondex’ current trading price (C$2.30), today you can buy a dollar ($C) of gold in the ground for less than ten cents Canadian. An oversimplification, but here’s how I get there and why you should look further:
Diluted shares out 26.4 mm
Recent price C $2.30
52-Week Range C $1.50 - $3.30
Market cap: C $60.7 mm
Cash position C $10.5 mm
Long term debt zero
Enterprise value C $50.2 mm
Gold resource C $627mm*(C$600 gold price per ounce multiplied by # of resource ounces)
On September 5, 2006, Klondex Mines Ltd. announced that its extensive drilling program has “defined an Indicated Mineral Resource… containing 1,045,738 oz of gold in two separate mineral zones.” That was an increase from the May 18, 2005 Inferred Mineral Resource of 400,529 ounces. So the mineral resource increased by over 160%… and the stock is “unched” and actually now down.
Klondex is continuing its drilling program this fall and into December, with three drill rigs working the property in an effort to identify additional deposits. The company anticipates spending about C$4mm for this development program.
If you want to find Gold, look where others have found it and are mining and milling it.
There’s plenty of information at www.klondexmines.com so I’ll keep it short & sweet:
Klondex’s Fire Creek mine is located in Northern Nevada in the midst of several large mines run by leading mining companies including Newmont and Barrick. Fire Creek is located in an area of tremendous gold discovery and production - on the Northern Nevada Rift, south of Newmont’s famously rich Ken Snyder Mine. It is also sandwiched between two other major gold producing regions – the Carlin and Battle Mountain trends.
Fire Creek’s location is excellent for its geology but also for its suitability for mining and processing. Nevada is a very active state for gold mining (good for permits and operating) and Fire Creek’s location provides it great access to a Federal highway and at least two substantial mill facilities. That all equates to lowering the risk of the property and the required investment to produce, while increasing its attractiveness to a number of leading mining companies.
The Company’s CEO, Bill Solloway, puts it aptly: “We are located on the Park Avenue of gold mining…” As mining is a real estate play to some extent, location is crucial.
To date, my experience with management has been very positive and they appear to be very credible, experienced and prudent mining professionals. They aren’t selling their story too hard (on the contrary), and they are focusing their capital on the right things. They really do seem committed to creating value for their shareholders. They back that up with a lean overhead and a tightfisted approach to dilution that would make any existing shareholder happy.
Beyond Bill Solloway, who is an honorable, class act CEO in his late 70s, I was particularly impressed by Bob Sipthorpe, the company’s Technical Director, and Richard Kern, the Company’s external consultant who’s managing the drilling program. Both gentlemen are very solid with substantial experience in the industry and very credible in their conservative approach to talking about the opportunity. Brendan Donahue, Treasurer, has also been with the company for many, many years. Microcap mining (and other) companies can often be overrun by pump & dump promoters, but I found these gentlemen to be genuinely candid, focused on building real value and devoid of promotion.
Klondex is looking to create substantial value for its shareholders by continuing its Exploration and Resource Expansion Drilling Programs, hoping to continue to expand and better demonstrate its Resource. The Company believes this property can be mined with a relatively low capital expenditure and in a shorter time frame to start as no mill operations would need to be permitted or constructed. Klondex believes its ore – and its relatively high gold content - would be welcome for processing at area milling operations.
Ultimately, Klondex management looks to sell this property to a larger gold mining concern, but they are stern guardians of valuation for their shareholders. I believe the have rebuffed one or more lowball offers from major companies already – and their continued recent resource update suggests that decision was very sound.
To strengthen their position in any future sale, Klondex is working hard to make its money go as far as it can in its drilling/development plan. I’m no geologist (though I did work in a gold & silver mine two summers in my youth) but given what they’ve found, and where they are and where they’ve drilled, it seems highly unlikely that they will find nothing more in their development efforts. That just means we could see ongoing growth in the quantity and quality of their gold resource – something that will make them even more attractive to suitors.
Just What Could the Stock be Worth?
Excuse my return to U.S. dollars…but on the back of the envelope, 1mm ounces of gold at $500 per ounce, assuming $200 per ounce to extract (it should be lower), gets you to US$300 per ounce in bullion, or over US$300 million. That divided by 26.4mm shares gets you to US$11.36 per share. Certainly a buyer might not pay you face value for it, but given the potential for further resource discovery, higher gold prices and lower cost to mine, that US$11.36 could prove to be very conservative… and the stock currently sells for about $2.00 US.
Klondex also seems poised to start to expand the visibility of its investment story. My firm is speaking to them about that process and how we might be of assistance in that process. Whether they select us, or someone else, I am confident they will be working to get this simple value story in front of a broader base of investors – and that won’t hurt the valuation either.
This is definitely not for those who must care about their quarterly investment performance, but for those who look for the potential of returns of several times their investment over a few years. I think Klondex offers that in spades and with the gold in the ground, it seems your downside is also protected.
Where does this thing trade?
Here’s the catch, particularly for U.S. investors:
Toronto Venture Exchange [KDX.V]
Disclosure: I am a Klondex shareholder. I do not currently perform IR services for Klondex.