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Wednesday, June 29, 2016 Derek Macpherson

Klondex Releases Good Drill Results from True North


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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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