Kirkland Lake Gold (TSX:KGI) Reaches for Profitability
By James West
MidasLetter.com
Friday, May 1st, 2009
Kirkland Lake Gold (TSX:KGI) is an interesting story. In 2001, Quest Capital, a boutique mining finance company in Vancouver headed by Murray Sinclair and Bryan Bailey, had taken a hit on Brimstone Gold, which had unsuccessfully explored the historic Mayflower mine in Montana under the leadership of David Rovig. Rovig resigned to make way for Brian Hinchcliffe, who was a successful mining entrepreneur and former trader for J.P. Morgan’s J Aron bullion and futures trading arm. (Rovig went on to found Greystar Resources [TSX:GSL], a company operating in Colombia with an 11.5 million ounces measured and indicated gold resource).
Hinchcliffe brought Scottish legendary mining promoter Harry Dobson to the table, who joined as chairman of the board. His first order of business upon joining was to negotiate a deal to acquire the massively prolific Macassa mine which came with a 1,500 tonne per day mill and four additional former producing properties Kinross Gold [NYSE:KGC, TSX:K] for the bargain basement price of CA$5 million, the assumption of $2,043,435 in reclamation bond obligations related to the closure plan for the properties and a net smelter return royalty to Kinross. The company had changed its name to Foxpoint Resources just prior to the acquisition, and by the end of 2001 had raised CA$6.4 million to fund the deal and some initial exploration.
An additional $2 million was raised in February 2002 to fund expanded exploration, and April of that year results were rolling in, demonstrating the focus and determination of the new management to prove there were still plenty of additional ounces to be mined at the combined project.
The Macassa Mine had been in continuous production since 1929. Following 63 years of operations, the Macassa mine was closed in 1999 after protracted labor negotiations proved unsuccessful. During its years in operation the mine produced and milled almost 8 million tons of ore at a head grade of 0.47 ounce of gold , producing three and a half million (3.50 million) ounces of gold.
According to Kinross estimates, total measured and indicated resources of the Macassa property as of December, 2000 were 3,582,000 tons at a grade of 11.4 grams per ton for a total of 1,316,000 ounces of contained gold.
Since 1917, some 22 million ounces of gold have been produced from the five contiguous properties now assembled in the Kirkland Lake trend covering in excess of 10,000 acres of mining rights. Macassa mining operations consisted of two shafts, with shaft #3 at 7000 feet, amongst the deepest shafts in North America, equipped with a hoisting capacity of 1500 tons per day. The Macassa mill, built in 1988, was a 2000 ton CIP plant which until the spring of 2001 was processing ore on a tolling basis from a nearby mine.
By January of 2003, the company had changed its name to Kirkland Lake Gold and was producing ore from the Macassa mine on the 3835 and 4250 levels. The company was continuing dewatering operations to reach the 4750 level, from which point the company would have access to four major levels of the Macassa mine, as well as be able to test the two major mineralized structures that intersected all of the past producing mines in the property package. The company produced a total of 24,589 ounces of gold that first year of operation, thwarted from its goal of 50,000 ounces by a compromised pillar within the mine.
High costs of rehabilitating the various mines and accessing new ore at depth conspired to keep the company unprofitable, and in its 2005 Annual Report, its auditors Price Waterhouse Coopers felt compelled to warn, “There is significant uncertainty associated with the ability of the company to achieve the increase in production or reduction in costs necessary to recover the carrying value of the mineral property and related assets.”
“At 1.2 billion (thousand million) gallons, more than twice the original engineering estimate, the dewatering campaign has revealed the need for a great deal more rehabilitation than was originally forecast,” said Chairman Harry Dobson in a 2004 press release.
Investors didn’t mind and the stock traded up from the $3 – $4 range in 2005 to over $8 in 2006.
In August of 2004 with a workforce of 130 miners Kirkland Lake produced met tonnage and grade targets for the first time, and raised total resources to 1.3 million ounces.
That however, has not been sufficient to make the company profitable. Remarkably, Kirkland Lake Gold has never made a profit from gold mining, yet it continues to raise capital from investors are very premium rates despite this fact.
In its most recent annual report, the company stipulates a requirement of at least 80,000 ounces of gold per year to break even (with a gold price of US$800), something it has not yet been able to achieve.
I was curious as to how a company that kept missing production targets and had yet to make a profit continued to raise money at such premiums.
Historically we’ve been predicting profitability but haven’t been able to deliver due to limitations with our production and engineering team,” explained Brian Hinchcliffe.
“We’ve got a staff of 350 of which 200 are underground miners and the rest work aboveground.
Up to now we’ve been running 4-500 tons per day 20 days per month, and now we’re at 900 tonnes per day every day. 175,000 to 200,000 ounces over 2010, 2011. We’ll be running consistently 1,200 – 1,300 tonnes.
It’s a very very big camp. We’ve got now 9 or ten kilometers of structural controls over the whole camp, and there’s so many exciting things to do and now we’re finally getting our act together and expanding production profitably,” he said
“As far as how we raise money at premiums like this while we’re not profitable, both Chairman Harry Dobson and myself have a long history in mining finance, Harry as a broker in the U.K and me as a gold trader with Goldman Sachs J. Aron. We’ve both got good reputations and have had some big wins, so investors are willing to put up their money and wait for us to get our act together.”
I asked him what he saw coming in terms of production in the next couple of years.
“Our fiscal year is May 1st to April 30th, so we’re just finishing our fiscal 2009 now, so we’re just finishing our year now. We plan to double production, going from 50,000 ounces of gold where we weren’t making money, and now we’re going to produce 100,000 ounces. And then our second phase of production expansion will see us go up to 1200 to 1300 tones per day which will see 160,000 to 180,000 ounces.
Mr. Hinchcliffe has several decades of experience in the mining and resource industry and was the founder of American Pacific Mining Co. Inc. and Jordex Resources Inc. (now called “iTech Capital Corp.”).
American Pacific purchased for US$ 15 million and successfully re-opened the El Mochito zinc and silver mine in Honduras. In doing so it reduced the mine’s operating costs to the lowest third of the industry range. American Pacific then sold the mine to Breakwater Resources Ltd. for US$ 106 million.
Jordex acquired the Loma de Niquel (formerly called ‘Loma de Hierro’) laterite nickel deposit in Venezuela and then sold 85% of the deposit to Anglo American Mining for US$ 65 million with Anglo assuming the responsibility for project financing, development and management. The Loma de Niquel mine was constructed at a cost of US$ 700 million and is a low cost producer of more than 20 million tons of nickel over its 20 year plus life. It was the first major mining project developed in Venezuela for several decades.
Kirkland Lake is staking its future profitability on a new discovery in an area south of the traditional workings of the Macassa Mine that is called the South Mine Complex. (SMC).
According to Hinchcliffe, “This mine complex is a new discovery in the Kirkland lake camp that is going to cost very little to bring into the production stream. We have the infrastructure -- the mill, the shafts, the equipment, and when we bought it six or seven years ago it was because the geology team before the mine shut in 1999 felt that they had made a new discovery out to the south that was going to be something completely new for the camp and be much higher grade you know ¾ of and ounce to an ounce, and that’s the South Mine Complex
That’s where we made the discovery of 124 feet of 1 and a half ounces per tonne gold, which was then verified by a wedge hole that yielded 2.24 ounces per tonne over 90 feet, so we’ve had great exploration success in 2005 and 2006, but lacked the engineering and production team to deliver.
As far as how we raise money at premiums like this while we’re not profitable, both Chairman Harry Dobson and myself have a long history in mining finance, Harry as a broker in the U.K and I was a gold trader with Goldman Sachs J. Aron. We’ve both got good reputations and have had some big wins, so investors are willing to put up their money and wait for us to get our act together.”
SOURCE: http://www.midasletter.com/news/0905...
