VANCOUVER — For a capital investment of US$50 million, Klondex Mines (TSX: KDX) could turn its Fire Creek project into an underground mine churning out 56,000 oz. gold annually at an all-in cost of US$636 per oz., according to a preliminary economic assessment (PEA) of the Nevada project.
With capital and production costs so reasonable, Klondex would recoup its investment in just six months.
Two traits power Fire Creek’s economics. First, the deposit is rich: the material being mined would carry, on average, 23.3 grams gold per tonne and 11.7 grams silver per tonne.
Second, Klondex would not build a mill at Fire Creek. Instead the ore would be trucked to Midas, the mine and mill 110 km south that Klondex bought from Newmont Mining (NYSE: NEM) in late 2013.
Midas is an underground gold–silver operation with a conventional gravity, leach and Merrill–Crowe precipitation processing plant. As soon as it took over at Midas, Klondex blended material from its underground development at Fire Creek into the mill feed. Over two months the mill processed 7,800 tons of Fire Creek mineralization and recovered 96% of its gold and 95% of its silver.
The mill handles the material well because Fire Creek and Midas both host low-sulphidation, epithermal vein mineralization in similar host rocks.
The PEA outlines an underground mine at Fire Creek producing 265 tonnes of ore daily. Current resources support five years of operation, during which time the mine would produce 280,000 oz. gold and 139,000 oz. silver.
It should cost US$636 to produce each ounce of gold, net of silver credits and including the cost of moving ore from Fire Creek to Midas, which is estimated at US$36.75 per ton.
Using a US$1,250 per oz. gold price, a US$18 per oz. silver price and a 5% discount rate, Fire Creek carries an after-tax net present value of US$141.5 million. Since the mine would repay its capital costs and become cash-flow positive in less than a year, an internal rate of return is not applicable.
The PEA’s mine life is just five years, but Klondex is confident there is more mineralization at Fire Creek because the PEA only considers resources that can be readily accessed from the planned underground development platform. Work on this underground system has been underway since May 2013, and to date the Joyce and Vonnie structures have seen 750 metres of development.
By drifting these developments, Klondex has already found a new vein: the Karen vein. It runs parallel to Joyce and Vonnie, and Klondex discovered it last year while advancing a secondary egress. Now nine drill holes and sampling along 25 metres of exploration development have revealed a well-mineralized vein structure.
Samples taken along the exploration drift returned a weighted grade of 74.9 grams gold across a 0.5-metre width. Some of the better drill intercepts include 20.76 grams gold over 11.4 metres, 26.1 grams gold over 6.5 metres and 8.08 grams gold over 15 metres.
The drill work suggests the Karen vein extends 550 metres north and 100 metres south from the current work area.
“This is encouraging news for Fire Creek because it is further evidence of the asset’s considerable potential, and a classic example of how additional mineralization typically is during underground development in these epithermal vein systems,” Klondex chief operating officer Brent Kristof said. “These initial results further support our theory that Fire Creek is under-drilled.”
The current mine plan excludes the North and Far North zones, because mining them would require more underground development. However, if Klondex adds to the known resources in those areas, mining could be extended northwards.
Work to that end is planned this year. In recent years Klondex has focused on infill drilling to inform the economic assessment, but this year the company has allocated funds to stepout drilling.
Klondex spent US$83 million to acquire Midas, financed with a $42.6-million equity raise, a $25-million debt package and a gold loan from Franco-Nevada (TSX: FNV; NYSE: FNV) for US$35 million. Including the small amount of ore from Fire Creek, Midas is expected to produce 100,000 oz. gold this year.
In production since 1998, Midas has churned out 2.2 million oz. gold and 26 million oz. silver. Midas also came with US$30-million worth of mobile equipment — half of which Klondex would likely use at Fire Creek. The Midas mill can handle 1,200 tonnes per day, but Klondex is running it at half capacity, which means there is plenty of room for Fire Creek ore down the road.
The mill will see another feed source soon, as French Gulch Nevada Mining delivers material from its Washington mine. French Gulch recently signed a one-year contract with Klondex to toll-mill its gravity concentrates at Midas.
Klondex’s share price has climbed slowly over the past year, rising from $1.20 in early 2013 to sit at $1.95 at press time. The company has 111 million shares outstanding.
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