Midas purchase moves Klondex Mines into mid-sized ranks

It’s been a big year for Paul Huet and his management team at Klondex Mines.

The small firm headquartered in an old industrial building off Packer Way in Sparks last week announced it had entered into a definitive agreement with Newmont Mining Corp. to acquire Newmont’s Midas underground gold mine and ore milling facility for $83 million. In the nine months ended Sept. 30, Newmont produced 185,000 ounces of gold from the operation located 60 miles northeast of Winnemucca, though mining was scheduled to wind down in 2014.

Under the agreement, Klondex will pay $55 million in cash and cover the $28 million federal reclamation bond Newmont had in place for the Midas property. Klondex expects to close the transaction by the end of January.

With the purchase, coupled with progress at its Firecreek property this year, Klondex moves from a small exploration and development firm into a mid-tier gold-production company with a solid revenue stream.

“It transforms the company,” says Huet, the president and chief executive of Klondex. “We are reclassifying everything next year. We are going to be among those (firms) that are among the 100,000-ounce producers, which radically changes the company. 2014 is transformational for this group. We’ll have two assets and a mill that are self funding.”

Newmont had been shopping the Midas mine for quite some time. It entered into a letter of intent with Waterton Global earlier this year to sell the asset, but that agreement expired in October. Due to its location Midas is sort of a one-off project for Newmont, which is unable to capitalize on infrastructure, equipment and labor of the company’s other mine sites or milling facilities in the region.

But it’s a perfect fit for Klondex Mines, which is developing its high-grade Firecreek project 112 miles to the south in Lander County.

It matches up in other ways too: Huet was mine manager at Midas for seven years before leaving to ramp up the nearby Hollister mine for Great Basin Gold, which Waterton Global acquired out of bankruptcy proceedings earlier this year. And Klondex Mine Superintendent Sid Tolbert spent 14 years working at the Midas mine site.

The mill at Midas is one of the most attractive pieces of the purchase. The facility will be used to process ores from the Firecreek property once it is fully permitted and moves into full production in 2016.

“While we were advancing Firecreek, we were always looking for a long-term milling solution,” Huet says. “The person that owns the keys to the mill really has a gold and jewelry box. Now we own the keys to the mill.”

Midas has 218 employees — many of whom were hired by Huet. Positions at the Firecreek site have been left vacant over the past year in order to shuffle the workforce around.

“Our intentions at Firecreek were always to delay hiring some people anticipating that this deal would go through,” Huet says. “We’ve left some vacant positions at Firecreek to offer more positions from the people at Midas.”

Huet was hired by Klondex in September 2012 and assembled a strong team to advance the company’s Firecreek property. Klondex began exploring trial mining methods at Firecreek and planned to produce about 8,000 ounces. Now it expects to produce 15,000-16,000 ounces.

“We advanced the asset a lot in the last 12 months,” Huet says.

Part of that advancement included re-logging more than 240,000 feet of core samples drilled over the past 30 years. Huet hired 14 geologists to take a fresh look at the content of those samples in order to produce a more accurate resource estimate at the Firecreek property.

Klondex expects to advance the resources at the Midas property as well. Newmont was scheduled to close the mine in 2014, but the Klondex team thinks that additional surface and underground exploration drilling could expand the ore body and extend the life of the mine by as much as 10 years.

“I’m very confident of that because of my past knowledge and understanding of the deposit and the land package,” Huet says. “It is a big land package, and we don’t believe for one minute that it is completely exhausted.”

The land package consists of more than 20 square miles.

Timing is another key factor in the decision to purchase the mill from Newmont. Building a mill similar to the one at Midas would cost more than $100 million and take roughly five years to permit, Huet says. Most investors seek quicker returns on their money.

“Mining investors struggle with the permitting — it takes too long. It is hard to find investors who look beyond five to seven years.

“The synergies between these two assets make a lot of sense,” he adds. “A lot of people see this as a really good deal. Firecreek is very unique — we have got probably one of the top three highest resources in the world. When you look at a very strong asset, with a strong management team in a good, safe jurisdiction, you will get the money, and that is what happened in this case.”