Why Miners With Positive Cash Flow Deserve Your Attention: Philip Ker

Klondex's ace up its sleeve remains Midas. I believe the entire market, including myself, is still underestimating its potential. Klondex will spend $15 million ($15M) on exploration and development there this year and is expected to target zones along the southern extent of the Colorado Grande vein where Newmont Mining Corp. (NEM:NYSE) planned to spend ~$50M on exploration before it scuttled that work when it acquired Fronteer Gold. We should see a new reserve calculation and mine plan on Midas by Q2/15. I wouldn't be surprised to see the stock move higher and a rerating on the heels of that new reserve and be further supported by exploration success there over 2015.

The recently announced reserve calculation for Midas was a fantastic milestone for the company as reserves were expected to be depleted over 2015. It now contains a 2.8-year mine life with significant potential to convert additional ounces into reserves from the 1.1 million tons (1.1 Mt) within the Measured and Indicated categories. I wouldn't be surprised to see the stock move higher and a rerating on the heels of continued execution and mine expansion at Midas.

TGR: Klondex recently appointed Brian Morris as vice president of exploration. What do you make of that hire?

PK: Klondex continues to bolt on quality management, all of whom have experience in Nevada, particularly at the Midas mine. I think it's a great move for Klondex as it continues to leverage knowledge of previous employees with experience at the Midas mine.

TGR: You mentioned Lake Shore Gold's 144 Gap Zone discovery. Tell us why management is excited about that.

PK: After hitting some wide widths and high grades late in 2014, management decided to more aggressively target this zone. In 2015 the company plans to spend about $15M to drill about 90,000 meters (90,000m), as well as drive an underground drift over to better target that zone in order to delineate the mineralized structure at depth. The 144 Gap Zone has grown quite rapidly and is now identified over 350m along strike and 350m down dip and is positioned only 400m laterally from existing underground infrastructure at Lake Shore's Thunder Creek deposit outside of Timmins, Ontario.

TGR: Will Lake Shore have to raise money to conduction that exploration work?

PK: Not at this point. Late in 2014 the company completed a $15M flow-through financing, which management expects to fully put in the ground over the course of 2015. Also, as I mentioned earlier, Lake Shore significantly strengthened its balance sheet over 2015 by making ~CA$45M in debt repayments and is well funded to advance any pipeline projects with ~CA$60M in cash and bullion.

TGR: What are some equities that you expect to be among your greatest hits in 2015?

PK: We already touched on Klondex. I'm continuing to favor that one again for 2015. Another name to watch is Kirkland Lake Gold Inc. (KGI:TSX). The company is a turnaround story in the making; it also recently announced Eric Sprott as its new chairman. Through the first half of its fiscal 2015, Kirkland Lake generated more than $10M in free cash flow from its 04 Break and South Mine Complex in northern Ontario. Once Q3/15 production is factored in, it will have sold more than 116 Koz gold where in its most recent quarter, it solidly beat our expectations by almost 4 Koz, selling almost 40 Koz. The company should deliver even more positive free cash flow in its upcoming financials and demonstrate to investors the positive momentum being made.

TGR: What is responsible for the turnaround?

PK: Since joining the company in late 2013, Kirkland Lake's CEO George Ogilvie has effectively implemented a new mine plan, more effective equipment utilization, and introduced near-term goals, which have helped reduce all-in cash costs from CA$2,100/oz in FY/14 down to CA$1,300/oz year-to-date. The South Mine Complex is driving into deeper levels, which will see reserve grades increase from 0.57 ounces per ton (0.57 oz/t) on the 5400L to 0.70oz/t in FY/16 on the 5600L. With the completion of a recent CA$35M financing and burgeoning free cash flow, we estimate that Kirkland Lake should have more than CA$75M to continue underground development in the coming quarters, while adequately servicing its debt obligations. I'm quite confident that Kirkland Lake Gold is well positioned to deliver on all fronts and should be rewarded in the near-term in its valuation.

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Disclosure:

1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides ...

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