Klondex Mines Ltd. (NYSEMKT:KLDX) Q4 2015 Earnings Conference Call March 24, 2016 10:30 AM ET
John Seaberg - IR
Paul Huet - CEO
Barry Dahl - CFO
Mike Doolin - COO
Ovais Habib - Scotiabank
Alex Whiting - Canaccord Genuity
Oliver Turner - GMP Securities
Andrew Mikitchook - M Partners
Don Blyth - Paradigm Capital
Danny Ochoa - Haywood Securities
Thank you for standing by. This is the conference operator. And welcome to the Klondex Mines' Fourth Quarter Full Year 2015 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to John Seaberg, Senior Vice President of Investor Relations. Please go ahead.
Thank you, Operator, and good morning, everyone. Welcome to the Klondex Mines' fourth quarter and full year 2015 earnings conference call. Please note that we are webcasting the presentation to coincide with today's call. If you have not accessed the webcast please do so now and we will be referring to information on the slides. The link to the webcast can be found on the homepage of our website. Before we begin I'd like to remind everyone that unless otherwise noted all numbers in this presentation will be in U.S. dollars. On the call today we have Paul Huet, our President and Chief Executive Officer; Mike Doolin, Chief Operating Officer; and Barry Dahl, Chief Financial Officer. The other members of our executive team will also be available to answer questions at the end of the call.
Turning to Slide 2, the cautionary language, I want to remind listeners that some of today’s discussion may contain forward-looking information. Please keep in mind that actual results and future events could differ materially from the respective conclusions, forecast or projections. I'll refer everyone to the section on the forward-looking information in the Company's latest MD&A and other filings available on SEDAR and EDGAR. A recording of this call will be available for replay, the details of which are posted on our website at klondexmines.com.
With that, I will turn the call over to Paul Huet, our President and CEO.
Thanks, John. Good morning everyone and thank you for joining us here today. I'm pleased to provide you with our fiscal 2015 fourth quarter and full year results as well as an update on our operations, including recent developments at our newly acquired Rice Lake mines in Manitoba.
Turning to Slide 4, before we get to the specific results for the quarter I wanted to take a moment to reflect just how far Klondex has come over the last three years and how we differentiate ourselves from our competitors. When I first became the CEO of Klondex in the fall of 2012 all we had was the Fire Creek project with no mill and no production. Our balance sheet was strained and we had no cash coming through the door.
Today our company looks very different and our future has never looked brighter. We now have two flagship assets in the Nevada both the Fire Creek and Midas mines feeding one central mill at Midas. We also continue to gain scale in North America with the potential for a third operation with the Rice Lake acquisition which was completed in January of this year.
Let me be really clear, our focus remains in Nevada with the development of our two mines where we expect to produce between a 145,000 and a 150,000 gold equivalent ounces in 2016 which is a 16% increase from last year at production cash costs of approximately $600 to $650 per gold equivalent ounce, positioning us well to generate significant free cash flow at current metal prices.
We are fortunate that our mines are located in some of the most prolific gold mine districts in the world. And we are confident that we have significant exploration upside at all of our operations. At Fire Creek we have only tested 7% of our land position and it's one of the highest gold grade mines in the world today. Fire Creek is open on all directions and we expect to provide an update to the market in the near future. At Midas we have discovered significant mineralization both to the West and to the South of Midas' main workings.
We are extremely excited to continue our surface drill program, once we have accessed to the priority target. Midas is not done, not even closed. I personally believe that whole heartedly actually. At Rice Lake we have started the work to conform its resource reliability, while it's still early days we are excited to have the opportunity to reinvigorate Rice Lake under Klondex's leadership.
At the end of 2015 Klondex had the strongest balance sheet in its history with approximately $60 million in the treasury an additional $24 million in inventory that is very liquid. Additionally, subsequent to year end we successfully secured a $25 million revolving credit facility at attractive terms and we added a minimal amount of debt from the Rice Lake acquisition in the amount of $12 million. This could not have been accomplished a year ago and I'm very proud of my team for this achievement.
Most importantly I'm happy to serve with the tremendous group of people that have established an impressive track record. First and foremost safety remains our top priority at all our operations. You have all heard me say this before but I know for a fact that safety and profitable production go hand in hand. We have now gone more than three years without a lost time accident at Fire Creek and more than one year without a loss time accident at Midas. My congratulations to everyone involved.
We have also consistently delivered on our commitments. We know we work for our shareholders and when we commit to something we are expected to deliver. This track record is very important to me and our team and we will continue to work hard to deliver on our promises. Our senior team also happens to be uniquely versed in narrow-vein mining with a collective 200 plus years of experience in underground mining in Nevada and Canada. In that regard I would like to congratulate Mike Doolin on his recent appointment as the Company's Chief Operating Officer. Mike's experience and relentless pursuit of excellence will serve the company well as we embark on the next chapter of our growth story.
Turning to Slide 5, I'm going to touch briefly on the 2015 highlights and leave the details to both Mike and Barry to talk about later on the call. 2015 was a banner year for our company in many respects. Our relentless focus on safety resulted in no lost time accident during the entire year. This is the accomplishment I'm most proud of. Our production was 21% higher than the prior year and a record for the company. We ended the year with approximately $60 million in cash, an increase of approximately 30% after paying off approximately $19 million of senior notes in debt. And we announced the acquisition of the Rice Lake mine and mill in Manitoba.
To conclude my introductory comments we have made excellent progress on many fronts, including incurring no lost time accidents, managing our costs and improving our operational efficiencies and strengthening our balance sheet. We are well positioned to achieve our 2016 production and cost targets which should generate significant free cash flow for our shareholders.
At this point I will turn the call over to our Chief Operating Officer, Mr. Mike Doolin.
Thanks, Paul. And good morning everyone. Moving to the operational highlights beginning on Slide 7, our operational performance in the fourth quarter and year-to-date has been strong. We produced just over 30,000 gold equivalent ounces in the quarter at a cash operating cost of $593 per gold equivalent ounce sold. It’s our lowest cost quarter for the year. For 2015 we produced approximately a 128,000 gold equivalent ounces, an increase of 21% from last year. Additionally, our 2015 operating cash cost and all in sustaining costs were within guidance.
The average mill grade for the fourth quarter was 0.48 gold equivalent ounces per ton. Mill recoveries in the fourth quarter for gold and silver were approximately 91% and 90% respectively. Year-to-date mill recoveries for gold and silver are 93.4 and 92.3 respectively. The lower mill recoveries in the fourth quarter include the effects of our annual stock piled inventory reconciliation which this year resulted in a minor downward ounce adjustment for both gold and silver.
For specific highlights from the operation let's begin with Slide 8, compared to our plan the first half of 2015 production benefited from higher tons and grade at Midas, while the second half was positively impacted by the higher tons from Fire Creek. We processed approximately 70,000 tons in the fourth quarter, an average of 750 tons per day. We remained focused on filling the mill from our Nevada operations while we maintained consistent grade from our mines.
Moving on to Slide 9, as previously announced we expect to produce between a 145,000 and 150,000 gold equivalent ounces in 2016. A 16% increase from last year at an operating cash cost of between $600 and $650 per gold equivalent ounce consistent with our 2015 performance. More importantly our all in costs which we feel is a more meaningful and relevant measure of our true of production is expected to be between $950 and a $1000 per gold ounce just slightly lower than our 2015 results. As Paul stated this will give us the opportunity to generate significant free cash flow at the current metal prices.
We expect our 2016 production to increase from the first quarter through the fourth quarter as we increased our mining rates and throughput at the mill. Our targeted annual production is expected to be back end weighted with approximately 40% to 45% in the first half and 55% to 60% in the second half as we develop more working phases at both operations. We also expect to spend between $45 million and $50 million in capital at our Nevada operations. Approximately 60% will be spent at Fire Creek as we aggressively develop the property, 30% will be spent at Midas where we are focused on maintaining its current production level and the remaining 10% will be spent in the mill.
Turning to Slide 10 for an update on Midas, in Q4 the mill processed an average of 503 tons per day of Midas ore at an average grade of 0.24 ounces per ton gold equivalent for a total production of approximately 10,000 gold equivalent ounces. The lower ore grades were the result of planned mine sequencing as we reached the vertical limit in multiple locations in the 405, 805 and 905 veins. The Midas cash cost per gold equivalent ounce sold increased in the fourth quarter to just over a $1,000 due to these lower mine grades. For the year the cash costs at Midas were just over $900 per gold equivalent ounce sold which was in line with our plans. In addition construction of the Phase VI tailings lift at the Midas mill was completed in the fourth quarter.
Turning to Slide 11 the fourth quarter win has expected at Fire Creek. The average gold equivalent grade for the quarter was 0.95 ounces per ton. The mill processed an average of 253 tons per day from Fire Creek resulted in a production of approximately 20,000 gold equivalent ounces for the quarter. As a note, the cash cost per gold equivalent ounce sold were reduced to $401, our lowest cost quarter of the year, largely attributed to the successful transition to longhole stoping in the Karen, Hui Wu and Joyce veins which in the fourth quarter represented approximately 26% of the tons mined at Fire Creek. As previously announced and worth repeating we received the environmental assessment for Fire Creek early in 2016 and now have all the required permits for the mine. We will be aggressively investing in Fire Creek in 2016 as it remains our core asset and the best opportunity to unlock additional values for all of our shareholders.
Turning to Slide 12 for a brief update on Rice Lake. We continue to ramp up the activity level at the mine. Our plan is focused on generating a new Klondex resource estimate, completing an in-fill drill program in the 710 and 711 zones to support a new reserve and developing a detailed mine plan focused on minimizing dilution and increasing the grades. As you can see on the diagram on the left of the slide minimizing the width of our stope will have a dramatic impact on our average grade. This is how we will be successful at Rice Lake. Finally, our production decision is expected in the second half of the year for Rice Lake.
I will now turn the call over to our Chief Financial Officer, Barry Dahl for the financial review.
Thank you, Mike. Turning to Slide 14, in Q2 our revenue was 37.2 million from the sale of 33,600 gold equivalent ounces. For the full year, our revenue was 155.2 million from the sale of 133,084 gold equivalent ounces, both records for the Company. Production cash cost for the fourth quarter of 2015 were $20 million or $593 per gold equivalent ounce sold. Year-to-date reduction cash cost were $626 per gold equivalent ounce sold, down from $645 per gold equivalent ounce sold in 2014 or approximately 3%. Cash profit was 17.2 million for the quarter or 46% of revenue and approximately 72 million for the year or 46% of revenue.
Turning to Slide 15, our net income totaled 6.4 million or $0.05 per share for the quarter and $0.17 per share for the year, which includes the foreign exchange gain of 14.9 million primarily on inter-company loans. All in sustaining cost was $887 per gold ounce for the fourth quarter and $786 per gold ounce year-to-date in line with our original guidance of $750 to $800 per gold ounce. I will speak to this metric in more detail in the next Slide. Year-to-date capital expenditures were 45.6 million slightly above the current guidance of 43 million.
Turning to Slide 16, I wanted to break down the components of our all in sustaining cost. As a reminder, in calculating all in sustaining cost we follow the guidelines established by the World Gold Council. Given the nature of our mines and stages of mine development and exploration, our allocation of capital between sustaining and growth increased from the prior quarter and the fourth quarter at the split between sustaining capital and expansion capital was more heavily weighted towards a sustaining capital with 65% allocated to sustaining capital and 35% towards expansion capital which was expected based on our full year capital spending which front loaded our expansion capital in the first half of 2015.
Our growth capital in the fourth quarter is largely related to underground development and drilling related to identifying mineralization outside of our current resource boundaries. In other words, such activities are not necessarily required to produce the ounces contained in our most recent resource. All in cost which we feel is more relevant metrics than all in sustaining cost and includes 100% of our capital was $1,044 per gold ounce sold for the year. As Mike mentioned we expected our all in costs could be less than $1,000 per gold ounce in 2016.
Turning to Slide 17, we continue to improve the strength of our balance sheet in the fourth quarter. Our operating cash flows totaled 10.8 million in the fourth quarter and 47.4 million for the year. We ended the year with a cash balance of approximately $60 million this combined with our inventory at market price gave us over $80 million of liquidity at year-end. Our working capital was $62 million and our working capital ratio was 3.7 subsequent to year-end we secured a 25 million revolving credit facility. We review our capital allocation strategy on a regular basis. Capital deployment options include organic growth, external growth opportunities and debt repayments.
We will allocate our capital to whichever option provides the greatest value to our shareholders. I will now turn the call back over to Paul.
Thanks Barry and Mike. When I think about Klondex and where we’ve come from and where we’re heading, it's hard not to get excited about talking about the Company I always get a lot of passion and get very excited just speaking about it.
When I look at Slide 18, I appreciate this Slide because it serves as a scorecard for me and our team. We continue to check the box on the promises we’ve made to our shareholders. At the same time, we recognize that our work is never done and we hold ourselves accountable to the additional commitments needed to grow our business and improve returns to our shareholders.
I am very proud of our team for our most recent accomplishments with the Rice Lake acquisition which will add significant value for our shareholders. The receipt of the environmental assessment at Fire Creek which was the fastest EA issued in Nevada for metal/non-metals mine and securing the $25 million revolving credit facility further strengthening our balance sheet and positioning us well to deliver on our production and cost guidance in 2016. Additionally, we continue to look forward to our reserve update in the third quarter of this year and commit to making a production decision at Rice Lake in the second half of the year.
Ongoing we continue to focus on our top priorities, unlocking the exploration potential of our properties and ultimately filling our mill at Midas. I want to congratulate the Klondex team for another fantastic year and thank our shareholders and the Board of Directors for their continued support. We are excited for the future of our Company and look forward to another record setting year in 2016.
I will now open up the call to questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Ovais Habib from Scotiabank. Please go ahead.
Just a quick question on the recoveries, I know you guys mentioned in terms of -- it looks like an inventory adjustment, but if you can elaborate on what the situation is with the recoveries and where do you see recoveries in 2016?
Yes, we did make an inventory adjustment based on our year end reconciliation of stock piled inventory and metals. As you look at the year-to-date recoveries of 93.4 and 92.3, the expectations are we continue at that rate, we always thrived to increase it throughout the year so I don't see much of changes in the upcoming future.
And just moving onto a little bit to exploration wise, where do you guys see the largest upside in the next year in terms of Fire Creek and Midas and could you give us some guidance in terms of when we should expect some results?
There's excitement at both operations, at Fire Creek we continue to test to the north to the south at depth and we continue to get very good results. We are planning to put out an update at Fire Creek within the next say six weeks, we're going to have something out to the market hopefully on some previous drilling and some results that we've had.
At Midas we announced in the fourth quarter some really good results and very favorable intercepts to the West side, those are going to be the targets we're going to following up initially as soon as the weather permits. The ground is just a little too soft right now to put in some drills, but we're going to be following up there first and then to the South of the workings as well at Midas. So the reality is when we consider both projects, both mines, there is a lot of upside and a lot of exploration excitement at both the assets.
And Paul just in terms of Rice Lake are we going to see any sort of exploration drilling or in-fill drilling at Rice Lake?
We will provide some updates as we drill, what we're going to be looking for as we produce the new technical reports for ourselves with the resource, the reserve and the new mines land we will be twinning some holes in the areas that we're going to be mining in the first two to three years. So, our goal and objective is to drill some areas that have the highest grades to make sure that when we get there with our mine plan that those grades really do exist. So, as we drill in those in-filled areas, we will be announcing those results just to compare them to what the initial resource that we are working with. So, we're not going to wait till the very end to announce them, we're going to announce them as we have results.
The next question comes from Alex Whiting with Canaccord Genuity. Please go ahead.
Paul, you indicated that the grades at Midas are expected to be closer to half 250 levels in the first half of 2016 and it’s supposed to improve in the second half of the year, what about the Fire Creek, should we expect a more uniform grade profile throughout 2016?
The Fire Creek is going to be very similar to what we did in 2015. Our goals and our objective to the mine has always been to maintain a grade above 0.9, in 2015 I believe we were 1 ounce, 0.98 and a 0.95. So, very-very close to that one ounce target. At Fire Creek we are blending several areas, we're taking areas that have higher grades and even grades that are down to be about 0.25 and blending everything to make sure we have that mixture, that is achieving above that 0.9 target that we want so, Fire Creek expects above a 0.9 up to about a 1 ounce, very similar to 2015.
The next question is from Oliver Turner with GMP Securities. Please go ahead.
A couple of questions here, first one is on the Rice Lake, obviously we've got the details laid out in the press release, but just wondering in terms of your budget for Rice Lake this year, how much you guys plan to spend on some of that drilling and the resource estimation work and then some of the assessment work as well?
In this year we're planning to spend approximately CAD$10 million in the first half of the year. We will assess what our spending and our budget of these will be after we have results from the resource, the reserves and we don’t want to put out a number until we see some of those results though until we can make a production decision, our commitment is $10 million initially that will give us the technical work that we need and it will do some rehab in the shaft the shafts, some minor rehabs in the shaft and on the main 2,600 level we’re going to be repairing some track there, getting ourselves setup.
And then just switching over to Midas here in the fourth quarter of last year due to some of the weather constraints you guys have there, there is some tons you weren’t able to put through the mill. Have you guys fully caught up in those tons in the first quarter?
We have been successful in putting those tons through the mill. But as Mike pointed out this year because of development we’re pushing development at both mine sites each quarter. Our ounce profile is going to be similar to what our fourth quarter was in the first quarter of this year, so we’re not going to -- we’re going to see very similar results to what the fourth quarter production numbers were as we ramp up throughout the year to achieve our 150,000 ounces. We are definitely on track without doubt to achieve our 145,000 to 150,000 ounce guidance that we put out.
And then just in terms of the Midas grades coming up towards the end of the year, is that primarily due to that 505 being coming on and some of the historical workings? Or is that from some of your new targets as well?
No, it's really based on what you just said and some of the areas that we’re mining and sequencing at Midas, we’ve extended some areas, some extra drifting which would create some extra stoping and we’re actually including now, looking at the detailed mine plan, we’re including some areas on the upper limit of the existing Midas vein. So those upper extremities don’t have top cuts [ph], so we’re drilling those with blind upper. So they naturally have a little lower grade, but they’re very easy ounces to get, we’re not going to leave them behind because all the development and everything is in place. So those naturally have some -- a little bit more dilution and little less grades to them.
The next question is from Andrew Mikitchook with M Partners. Please go ahead.
Congratulations on the quarter guys. Just maybe if you could explain or give us an idea of how the -- I think you guys mentioned 26% of the tons from Fire Creek came from longhole. How that would compare to the other quarters in 2015? And conceptually at least on a full year basis, how that would compare with 2016 mine plan?
Thanks. I’ll let our Chief Operating Officer, Mike Doolin, add to that. Mike?
I believe in Q3 we were around 15% of the tons from longhole stope, increasing the 26% in Q4 and the goal is to maintain that level through 2016 maybe get to 30% at best, but that would be us.
I think that answers my questions, thank you very much and I’ll let someone else.
[Operator Instructions] The next question is from Don Blyth with Paradigm Capital. Please go ahead.
Paul you started to say you would be providing some updates before on the Rice Lake before you reached the go or no go decision on that. Will we be releasing the updated reserve resource when you calculate that and would that likely come out by the end of Q2?
Don good question. We won’t withhold information, I don’t want to tie us down to a date on when we’re going to release the new resource. I just want to remind people that when we did the exact same thing in 2013 at the Fire Creek we produced a new resource, a new reserve and a new mine plan. That total process took us about eight months and it wasn’t eight months to get to the mine plan, it was quicker for the resource.
So, as we get information we will release it and not withhold it. But vetting it down to a Q2 date, I am a little reluctant to say today I am hoping that we’ll do it or beat it. But I’d rather just not commit to a date and just release information as we get it.
All right, that’s good enough I do want to see the pieces as they come.
The next question is from Danny Ochoa with Haywood Securities. Please go ahead.
Just want to talk on Midas, in the MD&A it states that additional design work, rehabilitation and underground development are required to get to some of the higher grade areas. Just wanted to know, is that work ongoing or is that scheduled for further down the road?
That work has been ongoing and we’ve been doing it consistently as we’ve had Midas. When we originally got Midas it was only six month mine plan at Midas, we’ve extended that to almost a year and a half already but that is a stuff that we've been continually ongoing and doing.
And then and I guess that's part of the higher grades in the second half of the year? Access to all those --.
Okay, and my last question is just on the CapEx for the year, I was hoping you could split it for Fire Creek and Midas between growth and sustaining?
I'll have to get back to you on that, and I don't have it at the top of my head and I don't think Barry does either. But we do have it. We definitely can get back to you on it. We just split it out -- we're really focused on the all in costs this year, so we're not so much focused on the growth versus non-growth because our -- at the end of the day our all in costs, our total capital is really what matters to us and it's really how we can get money onto our balance sheet and add money to treasury every quarter.
So, we do have the split, I don't have it at the tip of my tongue but I can say that Klondex will be focusing very hard this year including both of those numbers and providing the market with an all in cost.
This concludes the question-and-answer session. I would like now turn the call so back over to Paul Huet for closing remarks.
I'd like to thank everyone for their continued support. I'll look forward to speaking with many of you again over the next few months. And again have a great day and look forward to seeing you all.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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