Klondex Mines' (KLNDF) CEO Paul Huet on Q2 2014 Results - Earnings Call Transcript

Aug.13.14 | About: Klondex Mines (KLDX)

Klondex Mines Ltd. (OTCQX:KLNDF) Q2 2014 Earnings Conference Call August 13, 2014 10:00 AM ET

Executives

Barbara Cano – IR

Paul Huet – President and CEO

Barry Dahl – CFO

Analysts

Josh Wolfson – Dundee Capital Markets

Mike Balcott [ph] – TD Waterhouse

Derek Macpherson – M Partners

Operator

Welcome to the Klondex Mines’ Second Quarter 2014 Conference Call. As a reminder, all participants are in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

At this time, I’d like to turn the conference over to Barbara Cano of the Breakstone Group. Please go ahead, Barbara.

Barbara Cano

Thank you, Ross. Hello everyone and welcome to Klondex Mines’ second quarter 2014 results conference call today, August 13, 2014. Today’s call is for investors and analysts only. Questions from the media will not be taken at this time.

Presenting on the call are Paul Huet, Klondex Mines’ President and CEO; and Barry Dahl, Klondex Mines’ Chief Financial Officer; Brent Kristof, Chief Operating Officer; and Mike Doolin, VP of Business Development and Technical Services are also present and will be available for your questions later on in the call.

Paul will begin by opening with remarks and a discussion of the second quarter. After which, Barry will review the quarter’s financial results. We will then open the line to your questions.

Before we begin, I’d like to mention that certain comments made during the conference call may constitute forward-looking statements regarding future events of the company’s financial performance. These statements are based on management’s current assumptions and on the information currently available for which we do not guarantee the company’s future performance. The timing of certain events and actual results may differ materially from those projected by forward-looking statements due to a number of factors including, but not limited to those inherent to our industry, as well as commercial economic and other risks and uncertainties.

Listeners are referred to the section entitled “forward-looking information” in the company’s MD&A for the quarter. The information provided to be considered in conjunction with the company’s financial statements for the three and six months ended June 30, 2014, as well as the related MD&A, both of which, are available under the company’s issuer profile on SEDAR at www.sedar.com.

Listeners are also encouraged to consult the risk factors provided under the header called “Risk Factors” in the company’s Annual Information Form dated March 31, 2014, which is also available on SEDAR.

With that, I’d like to turn the call over to Mr. Paul Huet. Mr. Huet, please go ahead.

Paul Huet

Thanks, Barbara. Good morning everyone, and thank you for joining us today. As a reminder, we have a placed a presentation on the Klondex website under the IR tab for those who want to follow with the presentation.

Klondex had another successful and eventful quarter. For the first time in history, Klondex completed the quarter in which we achieved positive cash flow. We’re pleased to report our second quarter results which underscore the unique experience and strength of the Klondex team as we continue building and transforming the company quarter-by-quarter from an exploration company to an operating company.

This quarter we really focused on reducing costs and increasing productions, while continuing to evaluate our assets Midas and Fire Creek to formulate mine plans that will allow us to not only maintain, but to achieve sustainable year-over-year growth. While there were some challenges, as can always be expected, this quarter was one I am really proud of.

I am also pleased to comment that there were no operational surprises in the second quarter as far as benchmarks and deliverables. Our progress has remained. One of Klondex’s major accomplishments this quarter was of course the preliminary economic assessment we filed in June related to our Fire Creek project.

I trust that those on the call have read the PEA, so I won’t take time here to discuss it in too much detail. But I’d like to take this opportunity and make a few specific comments. PEA is very unique and that most PEAs in our industry are derived from a simple drill-hole database which is standard procedure than the construction phase typically begin.

In our case, the company already has a majority of the infrastructure in place and in use including RAM, the substation, power line, the water treatment plant, [indiscernible] surface offices in secondary egress, all of these which were constructed last year at the PEA phase.

Also outlined in the PEA, Fire Creek mineralized material extracted under the bulk sample permits is being processed at the Midas facility. No additional permitting or capital expenditure for new milling facilities will be required.

The fact that most of the infrastructure is already in place, also means that fewer capital expenditures will be required reducing the overall financial and construction risks related to this project.

Another unique fact to the PEA is that Fire Creek will be cash flow positive in the first year of operation. That’s quite uncommon on PEA. This will provide Klondex with a strong foundation for future growth.

For the quarter Klondex sold 25,725 gold equivalent ounces at a production cost of $730 per gold equivalent ounce. And I really want to pause here and point out that that $730 per gold equivalent ounce is Canadian currency. That’s approximately US$657 per gold equivalent ounce in U.S. currency, compared to a production cost of $906 in the first quarter, again those are Canadian dollars, $906, fell approximately US$815 in the first quarter.

So I just want to make sure I point out that there is a currency thing all the reporting in the MD&A and in the numbers we’re discussing here are Canadian dollars.

As we continue to ramp-up production at Midas, we expect this trend to continue dropping. Fire Creek continues to show progress and improvement. This quarter, we received our permit for the construction of the rapid infiltration basin, another important milestone for us.

The RIB will provide dewatering capacity up to 3,000 gallons per minute, which is more than adequate for underground operations even over life of mine. We expect the RIB to be constructed during the third quarter of this year, marking the completion of a long-term water management solution for the project.

This also marks the final major construction project at Fire Creek. We’ve now set our sites on acquiring the additional permit for full productions, which we’re targeting to obtain in the second half of 2015.

This quarter we also provided updates on underground infill and exploration drilling at Fire Creek. Additional 2014 drilling is scheduled to the North and to the South of these intercepts to continue defining extensions of both the Joyce and Vonnie Vein. Our recent drill results from the Western Zone, the Karen and the Hei Wu Veins have generated additional opportunities for further exploration and additional resources for us.

As we move into the second half of 2014, we plan to continue our core drilling and development in these areas to increase our understanding of these structures.

Turning over to Midas, the fully permitted mines has been in operation since 1998. Many of you know I’ve had the opportunity to work there for seven years myself during my career. The mill and equipment remain in excellent condition.

Currently, we are evaluating options to increase the tailing storage capacity. On the exploration front, we continue drilling that mine and expect to accelerate our efforts to follow-up on previously discovered high priority drill targets near current mine working. This will allow us to leverage the net proceeds from our bought deal equity financing, which closed subsequent to the quarter end and which Barry will discuss in further detail.

I am honored to let you know [Technical Difficulty] that we have been recognized by the Nevada Mining Association as the 2013 Safest Mine of the Year for our efforts in work done at our Fire Creek mine. This is a direct reflection on our safety standards, our culture and how we operated during the year.

Additionally, we have three individual Klondex employees who will be receiving awards for their personal commitments to health and safety.

However, it’s with great sadness that I let you know that Klondex experienced an incident at the Midas mine on April 28 that resulted in a loss of life. It’s critical for me to be very clear that careful mining, and meeting or exceeding, safety standards are important and paramount to Klondex, nothing at all, not production numbers, nothing is more important to us than the safety and the wellbeing of our employees.

Before turning the call over to Barry, I’d like to close with a few final thoughts. Looking ahead, management will continue to focus on cost control and growing the resources. Organic growth is critical for us. Our management team has considerable share ownership in our company providing for its strong alignment of interest between management and shareholders.

As I have commented in the past, the team remains focused on enhancing value for Klondex shareholders and strengthening the company. I want to thank our shareholders for their patience and for their ongoing support.

I also want to thank the Board of Directors, and a special thanks to all Klondex employees at Midas and Fire Creek. It’s because of their efforts, sacrifice and hard work that we get to report on this strong quarter.

Looking back, based on our results from the first half of 2014, we remain on track with our year-end production guidance between 70,000 and 85,000 gold equivalent ounces. That’s in our first year of production ever, and we’re quite impressive for this little company.

With that, I’ll now turn the call over to Barry to comment on our second quarter financial results. Thank you very much.

Barry Dahl

Thank you, Paul. I will begin with a brief summary of our second quarter, operational performance, followed by a review of our financial statements.

Our mineralized tons or ore tons mined in Q2 were 54,700 consisting of 23,600 ounces of gold and 37,500 of silver. In Q2, our average ore grade per ton per gold was 6.85 ounces. We expect ore grads to remain relatively steady during the second half of the year.

In Q2, we milled 46,000 tons continued 3,000 gold equivalent ounces consisting of 17.6 gold ounces and 340 silver ounces. Gold and silver recoveries for the quarter were 93% and 95% respectively.

In Q2, we produced 22,000 gold equivalent ounces consisting of 17.1 ounces of silver and 325,000 ounces of silver. Gold equivalent production increased 39% from 16.1 ounces in Q1 reflecting our success in ramping up the Midas mine and mill, which we acquired in mid-February and higher volumes from the bulk sampling program at Fire Creek.

Let’s move onto Q2 financial results. The financial information contains in our financial statements and MD&A are in Canadian dollars and not U.S. dollars.

In Q2, revenues were $36.4 million compared to $2.6 million in Q1, reflecting higher sales volumes. Keep in mind that we recognized our first quarter of revenue from Midas, full quarter of revenue from Midas, and our first revenue from Fire Creek through the P&L.

And the second quarter results of 25,700 gold equivalent ounces at an average realized price of $1,423, which is approximately US$1,305 and silver price per ounce of $22 or US$20. Our production cost for gold equivalent ounce sold in Q2 was $730, a decline of 19% from Q1, mainly reflecting the higher ounces from Fire Creek, which had a lower unit costs than Midas.

Moving down the P&L, gross profit totaled $11.1 million in Q2, compared to $0.7 million in Q1. The gross profit is driven by the higher volume of precious metal sold at a higher contribution for gold equivalent ounces.

General and administrative expenses total $2.2 million in the second quarter, compared to $2.2 million in the first quarter. G&A expenses are anticipated to continue at approximately this level.

In Q2, income from operations totaled $8.9 million, compared to a loss of $1.6 million in Q1. Income taxes for 2014 are estimated to be 41.2%. The adjusted to the expected tax rate are included in the current quarter and income or losses are allocated by tax jurisdictions. Canadian losses are not benefited as we do not have a future source of income in Canada to utility the net operating losses.

U.S. income is subject to U.S. hurdle taxes at a rate of 35% and State of Nevada net proceeds tax at 5%. Under certain conditions, U.S. tax bylaws are subject so that the U.S. alternative minimum tax, which is at 20%.

Income tax expense in Q2 was $3.4 million compared to a credit of $1.4 million in Q1. Net income totaled $4.4 million or $0.04 per share in the second quarter, compared to a loss of $0.02 per share in the first quarter. Year-to-date income is $2 million.

During the quarter, we generated cash flow operating activities of $14.2 million, compared to cash flow used in operating activities of $3 million in the first quarter, primarily reflecting higher net income and non-cash items such as depreciation, share-based compensation, change in fair value of derivatives, unrealized foreign exchange etcetera.

Turning to the balance sheet. At the end of the second quarter, our cash totaled $15.1 million, compared to $13.5 million at the end of 2013. Working capital at the quarter end totaled $21.2 million, a significant increase from the corresponding balance of $300,000 at the end of 2013. We have improved our working capital by replacing cash by federal and state regulatory agencies with shortened bonds.

We recorded a receivable of US$7 million as of June 30 and have subsequently received the funds. Inventory is $50.1 million and is mainly for work-in-process and finished goods. Work-in-process are stock piled in metal and circuits and finished goods are poured dore and refined metals.

[Technical Difficulty] under the gold purchase agreement are $7 million and current portion of bonds payable are $1 million. Subsequent to the quarter-end, we substantially improved our financial position by closing on the bought deal, financing transactions for aggregate gross proceeds of $16.1 million or net proceeds of $15.3 million.

Net proceeds from this offering will be used primarily to accelerate exploration and development at our Midas mine and Fire Creek exploration projects, both of which in our view demonstrate upside potential. We will share greater details on these capital programs in the future.

In rough terms, we currently estimate that our total capital expenditures for 2014 will be $30.2 million, including approximately $12.9 million for Fire Creek and Midas, $1 million for Nevada and corporate activities.

In terms of project categories, capital expenditures for 2014 are expected to be approximately $9.1 million for exploration costs and $11.3 million for waste development, $4.5 million for accelerated exploration and development at Midas and Fire Creek, $1.9 million for water treatment and $3.4 million for other capital expenditures.

Our actual capital expenditures of $11.4 million during the first half of 2014 are in line with our capital plan for the full-year. Going forward, we intent to be disciplined in our capital management while growing production and optimizing our operations.

I’d like to close by saying that coming out of the Q [ph], we are well on track this year to meet our guidance of 70,000 to 85,000 gold equivalent assets recovered. We are well funded through our cash balance of $50.1 million as of 6/30 from the recent bought deal financing and from expected cash flows provided by operating activities.

Also we anticipate that warrants that expire in the fourth quarter will be exercised. As a result, Klondex will be able to inject $30 million and to sustain capital, service our debt, repay the Franco-Nevada gold purchase agreement and still report free cash flow.

With that, I’d like to thank you for your attention, and will now turn the call back over to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. We would now begin the question-and-answer session. (Operator Instructions) Our first question today comes from Josh Wolfson of Dundee Capital Markets. Please go ahead.

Josh Wolfson – Dundee Capital Markets

Hi good morning everyone. I just had two questions. First off for Fire Creek. I just was wondering how you, sort of, see costs there materializing relative to throughput? So I guess, in event that – are we expecting little bit of change at all before the EA is approved, and then if not, how are costs going to change?

Paul Huet

Thanks Josh. This is Paul. So, specifically to Fire Creek. First, the cost that were in MD&A, I just want to point out again that they were [Technical Difficulty] so just keep that in mind, because that we reported.

When we look at the cost to-date, we’ve been really mining along all drifting. All the ounces in tons that are coming out Fire Creek have been setting up for stoping. We haven’t done any stoping at that operation yet. We’ve been putting in base levels. So as we progress quarter-over-quarter, we expect to continue to develop infrastructure, putting in some additional headings, allowing us to continue to mine on our bulk permit and begin stoping.

And with the stoping additional tons, you’re going to see the costs come even closer in line with the PEA. We don’t necessarily require the EA to drive costs down. We will be driving costs down ahead of that.

Josh Wolfson – Dundee Capital Markets

So I guess, looking at this quarter, cost per ton or per metric are about 500 bucks, short tons $450 or so, I guess that implies you expect to about shave about 100 bucks a ton onto that. And you will expect to see that, I guess by 2015?

Paul Huet

Yes, again remain the current sting, but we are expecting to get tighter and tighter with the PEA, and 2015 is a good target, because we’re looking at end of third quarter and into fourth quarter for starting the stope.

Josh Wolfson – Dundee Capital Markets

Okay. And then in terms of throughput that 150 short tons per day, that’s something that you’ll stay stable at for now?

Paul Huet

Yes, there is no reason today to believe that we can’t sustain that, especially with the additional working bases that we’ve acquired to the western side.

Josh Wolfson – Dundee Capital Markets

Okay. And then I have a question at Midas. Just looking at the processed grades of 0.12 ounces per ton, and I guess comparing that to what the diluted M&I grades were, which were more than double that at roughly 0.3. What is the discrepancy there? Is this an issue of dilution or this is an area of sequencing?

Paul Huet

No. It’s really a function of timing. The dilution effort that we’ve done, actually have reduced dilution and improved grade. It’s really setting up stopes from the LMS [ph] and different mining method. So as we get those into the fourth quarter into our mine plan, we’re going to see the grades improve.

The efforts on dilution are actually coming in a lot actually. So we do see a slight variance, but as we continue to open up the headings and change mining methods, we’ve put in a lot of new system at Midas. Remember we inherited a mine plan. We’ve made a lot of changes to that mine plan.

Some of those changes are starting to take effect into the third quarter and into the fourth quarter, where we are going to see an improvement in grades. We’re taking over a mine that we believe to be almost done and we’ve share so much costs and added so much life to it already. Midas is coming in to be a good success story for us.

Josh Wolfson – Dundee Capital Markets

Okay. So then I guess, is it relative to the M&I grades – M&I diluted grades. Is it, I guess, a forecast in the mine plan that you’ll be able to extract that or at those grades?

Paul Huet

Yes. Look its mine method and timing, because we’re going to be – right now we’re primarily doing more than 95% of the stoping is coming from [indiscernible]. That ratio changes in third and fourth quarter. So there is absolutely no doubt that we will be coming closer in line with the M&I.

Josh Wolfson – Dundee Capital Markets

Okay. Great, that’s it for me. Thanks so much.

Paul Huet

Thanks Josh.

Operator

The next question comes from Mike Balcott [ph] of TD Waterhouse. Please go ahead.

Mike Balcott [ph] – TD Waterhouse

Hi Paul. I just wanted to get some clarification on Midas. The net financing that was recently done. Most of the money is going to be spent at Midas. I am just trying to get a clarification really as to what your expectations are for Midas and from Midas?

Paul Huet

So when we acquired Midas, we always knew that it had been started for capital for a significant amount of time. We believe a lot in Midas. The money that we raised was to accelerate waste development and drilling at Midas, because we have many known discoveries to follow-up on. And what we did is we raised a portion of the money that we required.

In fact, we’re going to be using approximately $24 million to $26 million in an exploration program. We raised $16.1 million. The rest of the money is going to come directly from our own operations. So we expect that we’re going to be very aggressive at Midas, and following up on already identified drill targets. We’re not looking for the needle in the haystack. It’s already been discovered. We need to understand how big this is.

And again I just want to – it’s important to mention that. Midas has been so starch for capital that it really needed any kind of capital, so that it could sustain what we’ve already been doing. To sustain these numbers, we really need to grow the resource.

Mike Balcott [ph] – TD Waterhouse

Okay. Thank you.

Operator

(Operator Instructions) Our next question comes from Derek Macpherson of M Partners.

Derek Macpherson – M Partners

Good morning guys, and congratulations on a very good quarter. This question is more for, Barry, and I am just curious about the depreciation at Fire Creek came ahead of what I was expecting. What is the resource base that you’re using to do to calculate that depreciation?

Barry Dahl

Actually we look at the PEA and increase that by 10%.

Derek Macpherson – M Partners

Okay, all right. So we should expect, sort of, till any resource comes out, we should expect that the depreciation to stay in the current run rate?

Barry Dahl

Right. Yes, so as management we need to make determination on which the resource should be amortized. So we will review that every time that we have new information. So as we go forward and we have new discovery or exploration results that roll into a PEA, we’ll examine that basis on our amortization. We’re anticipating that we would have additional resources in the future, but until that is actually proven, we won’t use that number.

Derek Macpherson – M Partners

Okay. All right, that was all the questions I had. Thanks guys.

Paul Huet

Thanks Derek.

Operator

(Operator Instructions) Okay. There appears to be no further questions at this time. I’ll now hand the call back over to Mr. Huet for any closing comments.

Paul Huet

Thank you. Just as I close, I just want to thank again everyone, our shareholders for supporting us. We’ve had a good quarter. We’re onto quarter three now. We’ve got the production set in our sites now. We anticipate having another strong quarter, leading up to a good year in our first year of production ever.

And again, I just really want to thank all the employees who’ve made a lot of sacrifices, and without their efforts, we wouldn’t be where we are today. It’s a different feeling than where we were a year ago with respect to the company as a whole from an exploration company to a producing company with cash flow is a very different dealing and it’s really because of the efforts of all the hard work and the support of our shareholders. So again thank you very much and have a great wonderful day everyone.

Operator

This concludes today’s conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.

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