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Wednesday, July 27, 2016 Derek Macpherson

Hollister Finally in the Right Hands


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Klondex Mines Ltd. (TSX:KDX, NYSE MKT:KLDX) finally announced that it has entered into a purchase agreement to acquire the Hollister mine, along with other assets for ~US$90 million (cash, debt, shares and warrants). Klondex’s management team knows the asset well and the Midas mill, which Klondex acquired in early 2014, has always been a logical destination for Hollister’s ore. This acquisition has long been expected and we believe Hollister should add to Klondex’s growth profile. We expect both Hollister and True North development plans to be positive catalysts for Klondex’s share price later this year.


Focus is the acquisition of Hollister, but it’s not the only asset to be acquired. Klondex plans to aquire from Waterton Precious Metals Fund ll Cayman, LP the Hollister mine, the Esmeralda Mine and ore milling complex, a corporate office in Winnemucca, Nevada, a core shed and corporate house, a laboratory in Lovelock, Nevada, a mobile fleet of underground mining equipment, other land interests and related assets. We estimate total consideration to be ~US$90 million (excluding the warrants). Consideration includes: 1) US$63 million in cash, 2) US$17 million in debt (6% interest rate, repayable in four equal installments over the 4-year term), 3) 2.6 million shares (~US$10 million based on the financing price) and 4) 5 million share purchase warrants (with a 15.5 year term with a C$6/share exercise price and an acceleration clause). The cash portion was financed through a C$114.5 million equity financing at C$5/share.

Price appears steep relative to Waterton’s acquisition cost but value added over the last 3 years. In May of 2013, Waterton purchased Hollister out of bankruptcy for US$15M; however, since then Waterton built a US$17 million power line to reduce operating costs, completed the mine’s EIS which is critical for advancement and built a water treatment facility. As well, asset values have increased since that time. Recall, that Hollister is a past producing mine and was in operation from 2008 to 2013, with a historic production rate of 350-400 tpd resulting in annual production of ~80k AuEq ounces. We highlight that based on the most recent resource statement, Klondex paid ~C$41/oz AuEq per ounce (1.637 million AuEq oz M&I plus 1.274 million AuEq ounces inferred). While this resource statement is out of date, this valuation compares favourably to high-grade North American developers which are trading at C$60/oz. In our view, taking the above into account and the fact that Klondex’s senior management has an intimate knowledge of the asset, we view the price proposed for Hollister as very good.

Growth from Hollister and True North does not appear to be priced into Klondex’s share price. Based on consensus estimates, which do not include the Hollister acquisition, Klondex trades at 2.2x NAV and 5.7x 2017E EBITDA versus peers at 1.6x and 6.3x, respectively. In our view this well priced acquisition along with the potential growth associated with this purchase and last year’s acquisition of the True North mine (formerly known as Rice Lake) are not priced into the stock. As well, with both acquisitions Klondex has demonstrated a willingness to leverage its technical expertise allowing it to pay below market prices for assets. In our view, if both acquisitions ultimately prove to be accretive Klondex should warrant a premium valuation versus peers. We expect development plans for both Hollister and True North are likely to be meaningful catalysts for the stock later this year.

Company description: Klondex Mines Ltd. (TSX:KDX, NYSE MKT:KLDX) is a gold and silver mining company which has 100% interests in two producing mineral properties: the Fire Creek Mine and the Midas Mine and ore milling facility, both of which are located in the state of Nevada, USA, as well as the recently acquired True North mine and mill in Manitoba, Canada.

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