Klondex Mines Ltd. (TSX:KDX, NYSE MKT:KLDX) provided an exploration update from its True North Gold Mine (formerly known as Rice Lake) highlighting
the high-grade potential of this asset. While the highlight holes were good, the market is likely to remain skeptical on this asset until an operating
plan is presented later this year. In our view the market appears to be giving little value for this asset in Klondex’s share price and a positive
production decision in Q3 may provide a re-rating opportunity for Klondex's shares.
True North drill results continue to highlight high-grade potential. Results released were highlighted by 122.1 g/t gold over 7.2m (630-16-015),
48.0 g/t gold over 1.1m (630-16-002), and 14.7 g/t over 17.1m (630-16-002). Drilling has been focused on the 710 and 711 zones (Figure 1). These zones
appear to be higher grade and may provide an initial high-grade resource base to start a small scale operation, as they continue to explore the property.
This mine's history appears to have made the market skeptical. Klondex is not the first operator of the True North Gold mine (formerly
known as Rice Lake) to identify high-grade gold with the drill bit. The challenge has been translating drill results into profitable production. Despite
the relatively low price paid for this asset, management’s successful ramp-up of Fire Creek and delivering significant operating improvements at Midas
the market appears to be giving Klondex little value for True North in its share price. Based on consensus estimates, Klondex trades at 1.76x NAV and
5.2x 2017E EBITDA versus peers at 1.69x and 7.2x, respectively.
Since acquiring True North, Klondex’s share price has underperformed peers; demonstrating value should drive a re-rating. After significantly
outperforming peers over the last three years, Klondex is only up 57.6% this year underperforming the GDXJ, which is up 118.9%. In our view, this underperformance
is related to two things: 1) the acquisition of True North and 2) a weak Q1. With a historically strong operating performance and reiterated guidance,
we expect operations to improve. As well, with a positive production decision for True North in Q3 of this year the stock could quickly catch up to
peers as this growth opportunity is priced into the stock.
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