VANCOUVER — Nine months ago it became apparent to president and CEO R. Michael Jones and his team at explorer West Kirkland Mining (TSXV: WKM; US-OTC: WKLDF) that the company needed to reassess what it was doing and pinpoint the types of assets that were attracting investment dollars.
Falling gold prices had held up West Kirkland’s advanced-stage TUG gold deposit — located along the Long Canyon trend on the Nevada–Utah border — which led to a new hunt for a development-stage asset that could benefit from institutional fundraising and improved project engineering.
“We looked at what was financeable in the market, and determined exploration-stage projects were just not that attractive,” Jones says during an interview. It put West Kirkland at a disadvantage, since many of its land holdings in Long Canyon are greenfield properties.
“In terms of opportunities, we thought that there were going to be a lot of companies under stress because of that lack of financing, and there would subsequently be some pretty good technical projects that were getting no attention in the market. So the final thing we looked for was a distressed seller that had a very good asset, that wasn’t a high priority,” he continues.
West Kirkland reviewed over 250 projects globally during its search for assets with quality engineering and an internal rate of return (IRR) greater than 22% at US$1,000 per oz. gold. Jones says the criteria “culled 90%” of the available projects, and the company ended up with a short list that had Allied Nevada Gold’s (TSX: ANV; NYSE-MKT: ANV) Hasbrouck and Three Hills properties right at the top.
The other criterion Jones mentions is pragmatic: How much capital could West Kirkland raise in current markets with a dwindling equity valuation? The company wagered it would tap out at US$50 million, though Hasbrouck and Three Hills would cost less.
“To my knowledge Hasbrouck and Three Hills were not assets that were actually ‘on the market’ when we inquired about a deal,” Jones adds. “We concluded the negotiations right at the bottom of the gold price, so I guess our crystal ball was working overtime. But I think it’s a business strategy that’s quite sound: Don’t let the market tell you what to do. Take your founding principles and stick to your guns. This is a classic example of a great acquisition made at the right time, since we had a strong fundamental analysis in place.”
The company agreed to buy the sister gold deposits in a staged deal that would cost US$30 million — with West Kirkland picking up 75% for US$20 million. After 30 months there is what Jones labels a “soft shotgun” clause, where Allied Nevada can opt to sell the remaining 25% for US$10 million, or form a 75–25 joint venture.
And West Kirkland’s investors responded positively to Jones’ message. The company raised $29.2 million in its first tranche of financings, when it issued 195 million units at 15¢ per unit through combined prospectus and non-brokered offerings. The raise gave West Kirkland the money to cover a US$19.5-million acquisition payment, as well as move forward with engineering work at Hasbrouck and Three Hills.
The projects are twin low-sulphidation, epithermal gold–silver deposits along the southern end of the San Antonio Mountains near Tonopah, Nev. Each property has exploration and engineering work dating back to 1975. Between 2010 and 2011 Allied Nevada finished a comprehensive program at the sites that culminated in a PEA on an open-pit, heap-leach operation dated April 2012.
According to that PEA, which uses a US$1,000 per oz. gold price, Hasbrouck and Three Hills carry an after-tax IRR of 60% with a US$98.7-million net present value at a 6% discount rate. Initial capital requirements would be US$78 million, with life-of-mine costs of US$90 million. Under the current model, the operation would produce 135,000 oz. gold and 540,000 oz. silver annually at average cash costs of US$555 per oz., including a by-product silver credit.
“We look at the project a little bit differently. We’d like to high-grade the pits, and that goes back to our fundamental economic model, where we looked at stress-testing assets,” Jones says when asked about Allied Nevada’s engineering work.
“We design off a conservative gold-price point to give us that initial high return, and if the price jumps, you can always push a pit wall back. It’s a scalable project. We’ll look to start at significantly less tonnage per day, and we’d use a contractor-mining scenario. It’s a glorified gravel plant with some carbon columns,” he adds, pointing out that West Kirkland would likely start with an operation on Three Hills’ superior-grade gold resource.
West Kirkland’s first step at Hasbrouck and Three Hills was updating the projects’ resource estimates.
The company unveiled its new calculations on Feb. 24, with Hasbrouck hosting 63.2 million measured and indicated tonnes grading 0.41 gram gold per tonne and 8.91 grams silver per tonne for 811,000 contained oz. gold and 18.15 million contained oz. silver. Inferred resources tack on 53.4 million tonnes of 0.24 gram gold and 6.48 grams silver for 412,000 contained oz. gold and 11.14 million contained oz. silver.
Meanwhile, Three Hills holds 7.7 million measured and indicated tonnes averaging 0.62 gram gold for 151,000 contained oz., along with 10 million inferred tonnes grading 0.48 gram gold for 154,000 contained oz. All estimates assume a 0.17 gram gold cut-off grade.
“We’re doing a lot of engineering, and the big thing we’ll be moving on is the permitting. We’ve had our first round of meetings with all the key regulators already, and we’ve laid out our project approach,” Jones says, citing meetings with Nevada state departments, the Bureau of Land Management, and the town of Tonopah. “We presented our approach and said: ‘Do you see any fatal flaws from an engineering perspective?’ The response was ‘no,’ and in fact our approach was welcomed, and we’ve had positive feedback. We’ll be working on a prefeasibility study to finalize those details.”
Jones also explains that West Kirkland is “really excited” about exploration upside, with a number of promising drill targets identified on both property packages. The company is outlining its strategy with a desktop data study, but will start with a step-out program around Hasbrouck and Three Hills’ defined resources, which are open laterally and at depth.
West Kirkland has just closed a second tranche of financing that raised a gross $3.4 million under the same terms as the first tranche, with funds earmarked for Hasbrouck and general purposes.
The company has traded within a 52-week range of 5¢ to 29¢, and closed at 11.5¢ per share at press time. It has 268 million shares outstanding for a $31-million market capitalization.
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