Seeking Alpha
Gold & precious metals, macro, research analyst, deep value
Profile| Send Message|
( followers)  

Summary

  • Klondex Mines reports net income of $4.4 million and cash-flow of $14.2 million on revenue of $36.4 million.
  • The company's second quarter was the first of full production, and as I expected the Fire Creek Project is highly profitable.
  • While the current mine plan is short, Klondex's Fire Creek Project has excellent exploration potential making this a compelling speculation stock.

Klondex Mines (OTCQX:KLNDF) just reported fantastic earnings for the second quarter. The company, which began producing towards the end of the first quarter, generated $4.4 million of net income, $14.2 million in operating cash-flow on $36.4 million of revenue. The company produced 22,000 ounces of gold with production costs at just $730/ounce, demonstrating what I have been saying for over a year now (here is my most recent article).

Specifically, I have been pointing out Klondex Mines as one of the few companies in the space that had a high grade deposit in a low-risk jurisdiction that was progressing towards production. The company's figures speak for themselves, although investors need to bear in mind that the company's current mine plan is based on a preliminary economic assessment - the least developed form of mine plan. Given the high quality of the Fire Creek Deposit this isn't that big of a deal given that the company can withstand a fairly wide margin of error.

Investors should also note that this preliminary economic assessment projects a mine life of just 5 years. This isn't a limit, but the company hasn't planned beyond this point. This further makes the company overvalued relative to its discounted cash-flow, which comes in at just $87 million at 8% and $1,300/oz. gold.

However, investors should keep a couple of things in mind. First, the company wasted no time achieving profitability. This is rare with mining companies bringing projects into production, as there are often initial problems. This means that we could perhaps see the project become even more efficient going forward. Second, the mine plan only incorporates a third of the project's resource base. Furthermore, this resource estimate considers only a part of a previously larger resource in order to raise the defined resource's average grade. This means that the mine could easily produce for many more years beyond the current mine plan estimate of 5 years. Finally the company plans on ramping up production so that year 4, or the last full year in the 5 year mine plan, is the most productive year, and if the company updates its mine plan then chances are it will be able to continue operating at this rate for an extended period of time even if it means that costs rise somewhat.

Given these points Klondex remains a compelling speculation stock, and the company's Q2 figures support this thesis.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: Update: Klondex Mines' Q2 Earnings