One Million Ounces of Gold Panel, Moderated by Frank Holmes
Published in August 5, 2017
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00:00:09 You know Rick had some wonderful sage advice for everyone. I was recently this past week at listen to BBH. It's the only investment firm, banking firm that has it's all run by partners and their best year ever was 2008. They do a lot of custody work. They said all their studies and research is you get rich on a handful of stocks. It's a very small group but then you take money off and you diversify. You diversify into real estate.
00:00:40 You diversify into art. You diversify into a index portfolio. If you want to get rich in this space you have to bet on a few key assets and a few key people however when you run a gold mutual fund you have to have a minimum of 21 names. Out of 88 gold producers in the world, that's 88 gold producers how do you find 21 great CEOs. That’s the real challenge I think on the math of Rick was saying it's very, very hard and most great wealth experiences 50 percent corrections.
00:01:13 Anyone's that’s been building a company and it goes from technology. It goes from media companies. I saw all these interesting data that compliment what Rick was saying. You need the CEOs that can stomach it. I remember one time when Ivanhoe was the pre indo-china was it Rick? I get a call from Robert Friedland and it's three o'clock in the morning. I'm sleeping and he wakes me up and I says three o'clock in the morning.
00:01:42 He says money never sleeps. He said my stock is trading below its cash value per share is being dumped out because of stupid people of this. If you want to go buy it you can pay it's worth $1 in cash. It's trading at $0.75. We have all these assets. It's all free, free, free, free, free, free. That's just the guy with two telephones. You end up betting on these jockeys. It's the ability to overcome difficulty, setbacks, challenges, disappointments and at the same time have a personal life, have a family life and go and built something and then have all these shareholders believing you and there's very few.
00:02:16 That's just a reality of it. We have to go and try to speculate. I hope that today that you'll learn some companies that we've made bets on and they've done a phenomenal job in dealing with adversity and challenges and difficulty. I'd like to first come up with Paul to come up and speak with Klondex. Come on up. Come on for a second. Come on up so every one can see you. I want to make sure every one can see you.
00:02:42 Paul Andre Nuet: Thanks.
00:02:44 Frank Holmes: Here's a guy that hits the ball over the park, great numbers, spectacular numbers and all because he gets caught in the cross wires of GDXJ unwinding positions because of the success of this ETF and his stock gets punished. $5 billion dollars I mention yesterday went to GDXJ last year. All of a sudden they own more than 20 companies of 20 percent and they have to unwind all these positions. They're blowing out $3 billion dollars of gold stocks that has this incredible rippling effect on high quality companies.
00:03:18 We've made a substantial bet and Paul has delivered. He's just delivered for us and he's out performed the GDX and GDXJ and just briefly give your story of a sort of Genesis for the people that want to appreciate it because I think a lot of people here do not know the Klondex story.
00:03:35 Paul Andre Nuet: Yeah. No, I was a hockey player but not a running back. I am from Timmins actually. I'm a third-generation miner. We started off Klondex here with the Fire Creek asset in Nevada. I had worked 12 years in Nevada for Newmont and for another company operating two narrow vein mines. We had a very unique opportunity when we began Klondex. It was a difficult time, very difficult to raise money. We had some good shareholders that followed us along the way.
00:04:08 We started up Fire Creek. It was our single asset. It's one of the highest gold grade mines on the planet currently being mined. The grade has been averaging between 27 to 33 gram head grade into the mill. We quickly acquired the Midas Mine owned by Newmont because we needed a mill real badly and then within four years we consolidated three mines in Northern Nevada. We went from the exploration company with a lot higher risk to a close to a mid tier producer.
00:04:42 We're producing about 225,000 ounces this year gold equivalent ounces and consolidating those three asset in Northern Nevada was key. Three mines, one central mill, tremendous amount of synergies. I was fortunate enough throughout my career to work at two of the mines as a general manager. I know the other two assets quite well. I'm very familiar with narrow vein mining. I was a miner for 10 years of my career. I didn't go to college till I was 30 years old.
00:05:10 Now I'm 46 years old and run Klondex which is a great opportunity right now because of what's happened with the GDXJ. Actually we've had a tremendous turmoil. We ran into a tremendous amount of headwind. The stock done exactly what Rick Rule was talking about, what Frank's talking about. It's run up to about 750 Canadian. It's down to about 420 U.S. right -- or Canadian. One of the best opportunities to buy the company yet because fundamentally nothing has changed in the company.
00:05:40 In fact the company is healthier today than it was when it was 750. Our company has less risk, better operations and we're almost in the final phase of putting two other operations into production with an asset in Canada and that third mine in Nevada. What's very interesting Frank is that because of our success we went up. We got out of to these indexes. Now because of the rebalance we're seeing a lot of selling off of that index and it's really causing us a tremendous amount of harm.
00:06:10 In our case we had another unique situation as a result of our success actually because we have more shareholders in the U.S. we had to change our accounting principles. We went from IFRS which is what most people report in to U.S. GAP. I'll tell you if you don't have to do it try to avoid it. It was painful for us and it's still painful for us. We report in different metrics. We're going to have to start reporting some non GAP measurements so that we can compare apples-apples with the rest of the industry.
00:06:40 It's not a simple metric and because we started reporting that this year coupled with the GB XJ we've seen a lot of selling in the stock. Fortunately we have good liquidity. People who want to get in can get out whenever they want. At these prices you're not going to see these kinds of discounts for a long time with Klondex especially because we keep doing what we said we'd do.
00:07:01 We keep delivering on our promises. If you look at the history of Klondex quarter after quarter we've done what we said we do. This year will be no different. We are planning to do 225,00 ounces and we'll get there Frank.
00:07:13 Frank Holmes: Talk about great people. Rick and I were celebrating last week with a Pierre Lassonde party and for his 70th. He jumps around like a bunny rabbit like he's 50. What's amazing is when we first heard about the story I called Pierre and Pierre automatically said he's the best. He's just fantastic and they have a royalty on your assets.
00:07:39 Paul Andre Nuet: Yeah, they certainly do.
00:07:40 Frank Holmes: They own the Slider Mine.
00:07:41 Paul Andre Nuet: They did own the Kent Diner Mine. That's where I met Pierre Lassonde because I spoke French so relationships are very important actually so I met him. Back then he invested strongly and David Arkwell and the company as you did in the earlier years. Yeah, he still has a royalty today
00:07:57 Frank Holmes: It's about people and there's just a small handful of quality people like Rick was trying to comment on. I think its so important to recognize all this adversity and build it and it's just great to see a Canadian from Timmins.
00:08:10 Paul Andre Nuet: Exactly, yeah. Bad hockey player that's why I went underground.
00:08:17 Frank Holmes: Michael, you want to tell the story in Grand Columbia, the turnaround?
00:08:21 Michael Davies: Yeah, sure. Thanks Frank. When Frank talks about adversity Grand Columbia certainly has had its share of that going back 2014, 2015 when we ended up in a debt restructuring situation. It spent a lot of time trying to negotiate with the various investor groups and our different listed securities, successfully came out of that with the support of our holders who felt that long term Grand Columbia deserved more time, had a high quality assets in Columbia.
00:08:48 We are the largest currently. The largest underground gold producer and I know Ian's going to give us a run for the money on that title. We did 150, 000 ounces last year with an all-in cost of $850 an ounce generating 66 million dollars of EBITDA. We really turned the company around in 2016, 2017. We're continuing along. We've got a target this year 150 to 160, 000 ounces. We're currently on track with that.
00:09:15 Our all in cost will remain under 900. The real catalyst for change has been shifting our focus to the cash we generate. Some we invest in the ground and a large part of it is going back to repay that debt so establishing discipline within the operations that they can't have all the cash. Let's allocate it properly to where we can grow this company properly and the balance has to go back to starting to take the money off the balance sheet and prune the debt level back down.
00:09:43 We do have currently three listed securities, common shares that has everybody in this cycle says are undervalued. We think the 2020s senior secured debentures we have. They pay us 6 percent coupon. They pay it monthly so great for funds to hold. We think it's a very attractive investment for people because it gives them a 6 percent return out of the cash flow the company while they're waiting for the share price to improve and then the optionality of being able to convert to shares.
00:10:09 Later this week $47 million of that debt will be converted into 2024 debentures and start trading on the exchange as we've extended that debt successfully. That will pay an 8 percent coupon monthly to those that invest in that product. I think we've got a really good opportunity for investors not through the just a common but through those listed debentures to get paid out of our cash flow every month and get a good return. It's a discipline, discipline, discipline and sticking to strategy which is proved us to be very important in the last 18 months.
00:10:43 Frank Holmes: I've noticed that Michael has fingernails again so 18 months about we see him he had no fingernails. He was sweating it. He just persevered through it. Now in Ian – Ian is an accountant with tremendous experience from Kazakhstan, worked for Lukas Lundin for a while. He's had had other adventures. He's a serial venture capitalist and when he was creating this mine, this operation in Colombia he put up cameras to show everyone that every week you would get an email and it would show you exactly the development where your money was going.
00:11:19 That was very, very supportive because there's always skepticism over Colombia because it was going through so many difficult times. I think he's done a remarkable job of starting up his mine. Why don’t you tell your story also where I gave you in color.
00:11:34 Ian Slater: Thanks Frank. What's that five years ago I had hair, never mind fingernails. When we founded this company in five, six years ago we first we looked around the world where what countries was a lack of competition but amazing geological potential. Colombia was top of that list. We went to Colombia and then scoured Colombia looking for what had the scale that we needed to get where we wanted to be in a public company.
00:12:04 Then over five years delivered every year on what we said we would do from an initial resource to a larger resource to a PEA, to a feasibility study and then we didn't have the benefit of a grandfathered environmental license. We had to go through -- we were the first to go through the process of a modern environmental license in Colombia which we actually took a year. So a year is a lot better than you would get in most places the world.
00:12:30 I think from Colombia there are issues in Colombia but a lot of it is a misconception. It is definitely possible to work there. We've had support from every level of government the whole time we have been there. We after getting the feasibility study and the permits we had we had to finance this mine at the bottom of the market which was which was challenging. Once financed that is the time to build a mine.
00:12:55 We had the A team from the engineering firms. We didn't have any lead times in our long lead items. They were -- everyone was eager to get going. We built the the plants on time at the end of last year. Now we're currently in ramp up. This is going to be our first quarter of production and that's going into Q2 we should have full-scale of production.
00:13:20 Frank Holmes: That’s great. Paul, when you deal with this thing of accounting is there any factors because yesterday we were chatting and that in our simple quant model that we have found that if the revenue for the last quarter is above the average for the four quarters and it's sold off they come back. It is when the last quarters below the four quarters and there's something negative for news that these stocks take a long time to come back. It's a it's the momentum of fundamental analysis and the same thing for when you do Gap analysis a it does.
00:13:54 When we take all this data and we drop it into our computer systems and if we use Bloomberg we get a complete different set of stocks to buy versus using fact set. Why is that? If you use IBD's WANDA System it gives you another complete different basket of stocks. You may think you're Betty Crocker cake mix is going to give you chocolate cake and it's coming vanilla and but it tastes cherry.
00:14:20 It's recognizing that there can be lots of opportunity when you go from IFS or whatever these changes are so the operative word to look for is free cash flow. It's very hard to play games on revenue so that's a top-line item. That's pure and that momentum is so important and the free cash flow is free cash flow no matter what accounting system. I think that was the big opportunity to tell your story from the financial world and what we're coming before?
00:14:46 Paul Andre Nuet: There're a couple of points on that so just some of the metrics we were talking about with those algorithms. One of them is EPS so even last year as we were reporting through IFRS we were well on track to do a target of $0.18 for the year Frank. As we had to close the year in U.S. GAAP rather than reporting in IFRS about a $0.19 is where we should have been for the year. Actually that's exactly where we were.
00:15:16 Unfortunately we had to report in the different metric so it was a negative $0.02 right there with the algorithms rather than doing $0.18 which was a target, $0.19. We were negative $0.02 and fundamentally everything went perfect. In fact it was a quarter of the year last year. We had a you know a big growth of 150,000 ounces. We did 160,000, lowest cost we've ever had, some of the best grades we'd ever seen. Yet we got we've got plummeted.
00:15:45 That's where we're sitting here today in fact. When we talk about revenue our Q2 production for now Frank is going to be the strongest we've ever had since the company began. We're looking to produce about 70 to 75,000 ounces, almost $80 million dollars of revenue. That's double what we did in revenue in Q1 of this year. That's a function of timing because we couldn't get the ore through the mill.
00:16:09 Again when we see these all this come through the mill in the end of Q2 we're going to have the best 80 plus million dollars in one core. That's pretty phenomenal for a small company, a junior company that's growing up. What's the other thing we had talked about yesterday? it was those two.
00:16:27 Frank Holmes: Sure. You remember your per share is growing.
00:16:29 Paul Andre Nuet: My free cash flow, sorry.
00:16:30 Frank Holmes: And your free cash flow.
00:16:31 Paul Andre Nuet: Yeah so our free cash flow is something we decide and it doesn't change with U.S. GAP or IFRS. Good point actually. We had planned to generate $10 million dollars of free cash flow this yeah. We're going to stick to that. What we're doing is because we're ramping up two mines we're putting the True North project up this year and Hollister. Two mines as we're building and we're still generating $10 million of free cash flow as we're developing and putting them into production.
00:16:55 By Q4 of this year those two operations are going to be adding to the balance sheet of Midas and Fire Creek so what that gets us the 225. It's a rapid growth generating free cash flow while we're putting two mines into production. That's what I was talking about.
00:17:15 Frank Holmes: Good. Have you had any issues over accounting Michael cross-border?
00:17:17 Michael Davies: Not so much cross-border. I do feel the pain that you have with when it comes to earnings per share because under IFRS we found a very odd situation with our old commodity link notes that you know we would have to mark them the market. As the notes were becoming less valuable for holders they were representing gains on our accounting numbers. We were looking wildly profitable as our debt was actually diminishing in value to the holder.
00:00:40 Yet from the company standpoint that's not what I would pay. We found we had to go to adjusted earnings like many people do to back out all this stuff. You know regulators don't really like you're going to adjust at anything because that's not the basis of GAP. Accounting can provide strange perspective because I think in some cases it's meant to be from an investor standpoint but not necessarily from the corporate standpoint.
00:18:02 Frank Holmes: Good and yourself Ian.
00:18:07 Ian Slater: Sure well not right now not only going from a developer to a producer which is obviously very different accounting. We switch from Canadian to U.S. functional and reporting currency because when you're in a Canadian currency in our business everything's in U.S. dollars. Our debts is in U.S. dollars. Our revenues is in U.S. dollars We're getting wild unrealized foreign exchange games that were relevant to our business.
00:18:28 Frank Holmes: They could hear. I don't think they could hear you.
00:18:29 Ian Slater: Sorry. We switched from a Canadian functional and reporting currency to a U.S. functional reporting currency because our debt, our revenue, our cost role were all in U.S. Dollars so it made sense. When you have your reporting and functional currency in Canadian Dollars it was given wild unrealized foreign exchange gains which made no sense. Now everything is in U.S. Dollars.
00:18:50 Frank Holmes: What do you think after get through getting a new group of shareholders Paul what's your big vision for the next two years?
00:18:58 Paul Andre Nuet: The plan is going to be pretty consistent with getting these other two mines up and then continuing to grow from that platform. We have a tremendous amount of exploration. We've just consolidated those three mines in Nevada. We own 103 square miles of prime land in the middle of Northern Nevada. Not a lot of people can say they've consolidated something like this.
00:19:18 In fact people have been trying to consolidate this for 20-plus years. When I think of when we first began Klondex so already know I'm from Timmins. I have a wife and six kids because there's a lot of cold nights.
00:19:32 Frank Holmes: In Timmins?
00:19:32 Paul Andre Nuet: Yeah, that's right. Wife and six kids, my wife and I together we took 80 percent of our worth and put it into this company. 80 percent, not 10 percent, not 30, we put 80 percent of everything we own into Klondex. We've still held it. I think I heard Rick Rule talking about it earlier. Stock options have an expiration date so we sell those off. As far as the stock itself we've never sold one share of Klondex and we still own 80 percentof our worth into this one company.
00:20:07 That's pretty high risk but we were betting on ourselves and you when you're betting on high quality assets we had a good mixture and a good recipe there.
00:20:15 Frank Holmes: Good and Michael would you wish your vision now they've got it turned around and tou have these gold notes what's your vision for the company? Is it just growth or to be if we talked about briefly like a private equity firm?
00:20:29 Michael Davies: I think the comments made earlier it's going to be about taking debt off the table as we go forward so turning our production into cash and cash into taking the debt off the table so that we actually increase the value of our resources, our production and our assets on a per share basis as we move forward. We're out with the excess cash we're generating.
00:20:51 We're buying our 20/20 notes back in the market because for every $1,000 I buy back right now I'm going to save about $160 of interest over the next couple years. I'm buying them at a discount so again I'm taking that off. I'm deleveraging the debt side of our balance sheet to improve the equity return to holders. We'll continue to use our focus right now in our Segovia asset. It's the one that's producing and this market right now cash is king.
00:21:18 We'll continue to focus there and wait and see what happens with a gold rally that gets us to an opportunity to look at then our motto.
00:21:25 Frank Holmes: Yeah and so the concept is by buying back your bonds they're convertible so therefore you automatically have embedded shareholder contraction like Buffett likes buy back your stock. I mentioned I showed you all a chart yesterday that you buy that ETF that's just buying back their stock. You take the SMP and just focus and as far will perform the SMP 500.
00:21:48 The idea that you can increase your value per share by just deleverage your balance sheet and for every million dollars you buy back it's $80,000 of saved income. At the same time these future dilution just starts shrinking rapidly.
00:22:04 Michael Davies: Yeah. I think that's exactly the point.
00:22:06 Frank Holmes: Okay and Ian when will you be able to announce that you're through you're testing, your teething stages of production?
00:22:23 Ian Slater: This will be the first quarter. We should have our first quarter results will be out mid-august and press released. It's not just that as well as this one share zone at Santa Rosa. We have a hundred square kilometers there which we've consolidated with multiple share zones. We have a plant that can do 1,250 tons per day right now. It can ramp up to 2,000 tons per day.
00:22:41 When we do put additional share zones into production we already have the capability in our plant. In addition to consolidating Santa Rosa we've already consolidated the entire Venice District which is parallel to the California District where Ventana was and bought all of the existing mines in the California districts at Ventana didn't consolidate . We already have our pipeline project which we're working towards our first resource on as well.
00:23:08 Frank Holmes: Okay. Uou have lots of opportunity for organic growth?
00:23:10 Ian Slater: Exactly.
00:23:12 Frank Holmes: Good. Now what about the risk in Colombia? Always these cockroaches come out of nowhere that steal your high-grade gold. They seem to burrow through. You hear what these stories. I know you've had some issues Mike chasing these illegal workers off of your properties and have you had those issues too Ian?
00:23:33 Ian Slater: No, Santa Rosa. It was one of the reasons we were attracted to Santa Rosa. It had in when were looking and needed to have the geological potential for the scale we wanted. We wanted it on infrastructure. It's right off the Pan American Highway. It's got hydropower so all of those things but also artisanal. They've had minimal artisanal work currently on it
00:23:50 It peaked in around the 1940s and just on our initial concessions which are now grown to the whole district. We mapped 3,000 adits so at one point in the nine early 1900s that was covered in artisanal and they mined out all of the all of the oxides in the Saprolite but they never touched the sulfide. Anything below 20 meters is what's left for us to mine and they're not there any longer. We don't have an issue.
00:24:17 Frank Holmes: What is your average grade?
00:24:17 Ian Slater: In our feasibility study and it was 5.2 grams. With our infill drilling we've done since then and some of it varies. It's still what we've mined so far has been about 5.2. Some of the Stopes have been double digits.
00:24:33 Frank Holmes: Michael your grades?
00:24:36 Michael Davies: Resource grade averages 11. We're currently mining an average about 14.
00:24:41 Frank Holmes: What's the average grade in the world for a gold producer? Paul do you know this.
00:24:48 Paul Andre Nuet: No, I don't know what it'd be in the world. No. I know what our average graded is. Our average grade our reserve is actually north of 40 gram and we're mining about 25 to 30 gram into the mill from Fire Creek.
00:25:40 Frank Holmes: I believe it's less than 2 grams. The next panel is going to have the gold analyst and we can get the exact explicit numbers. These three operations have substantially higher grade and when you look at the as a quant person if you're looking at these spaces you look at high gross margins and the higher the gross profit margin of any industry the less volatility of its cash flow especially free cash flow. When you say okay how do I apply that for a consumer products company over to the gold mining industry its high-grade.
00:25:35 Its high-grade. Its high-grade. Its high-grade. It's high margin and it lowers your risk so even if you're going into high-risk countries once you get that big grade you can mitigate a lot of that The only problem is that in Colombia's they had all these illegal workers. In particular was a grand Columbia you had a big issues with there Michael.
00:25:53 Michael Davies: Yeah.
00:25:53 Frank Holmes: How many did you have? Explain to people now you've got under control?
00:25:58 Michael Davies: Now we've got over 2,500 artisanal miners under contract with 44 different contracts at the moment. In contrary to the press we are not in the middle of a lawsuit against the government of Columbia. We are in discussion with the illegal miner groups right now as part of a round table process. We're focused right now on the largest of the illegal mines. It's in our territory and that we expect to you know successfully wrap up discussions with and bring them, bring them under our contract mining model which essentially allows them to mine the ore but instead of taking it to illegal mills that use mercury they bring it to our mill doorstep.
00:26:35 We pay a fair price for it. We mill it. We process it and sell it and make a profit on it. We found that that model has really worked well for us in the community because it's a historic mining community that's been around for 150 years and mining is the way of life. By giving them an opportunity to still mine and sell at a fair price we socialized the situation with the illegal's
00:26:55 Frank Holmes: Great so this is a your buying opportunity and it's buying that I guess what I like to say this volatility when there's great fundamentals you come out ahead. I want to thank everyone and what's important here is that you're sort of a ground floor you're dealing with executives that have had so many headwinds and adversity and it just segway perfectly with Rick Rules talking about great CEOs and CFOs and what they do to create fabulous companies.
00:27:30 Thank you all. Thank you gentlemen.
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