In general gold mining and exploration juniors have been having a horrendous three or four years since the gold price started its decline from its peak at the end of Q3 2011, but high grade, profitable operations like Kirkland Lake Gold (TSX: KGI) have tended to buck the overall trend – and here it is indeed the gold grade which is the key. In short, Kirkland Lake gold is one of the highest grade operating gold mines in Canada – or indeed in the world. And it is being very successful in maintaining mill grade at very close to reserve grade – achieved by current management under George Ogilvie, former CEO of Rambler Metals and Mining, in not chasing tonnage, but rather putting the emphasis on grades to the mill. It is thus running well under mill throughput capacity of over 2,000 tonnes a day, but generating excellent returns as a result – and leaves it with scope for expansion from existing operations, let alone from the excellent exploration potential across its land holdings. LawrieOnGold interviewed Ogilvie yesterday in London and these are the impressions gained.
Year to date, Kirkland Lake Gold’s share price has outperformed the gold price by 77%, while the GDXJ Junior Gold ETF has fallen by 20% over the same period. Overall the stock price is up around 55% ytd – not a bad performance in a hugely depressed market sector! Kirkland Lake Gold is currently producing at a rate of a little over 150,000 ounces of gold/year and expects to up this to around 170,000 ounces a year in 2016.
The Kirkland Lake camp has been one of Canada’s most prolific gold producers with some of the biggest old mine names in Canadian gold mining under Kirkland Lake Gold’s control – all high grade mines in their time. Interestingly of the company’s production at the moment around 70% comes from what it terms its Macassa South Mine Complex, which is a separate ore occurrence from the main production lodes in the area on what was an unexplored part of the camp. But the grades remain high and appear to be increasing with depth. It is a fairly deep mine by Canadian standards – with operations below 5,000 ft. It is also hot and the area has a history of seismicity, so mining conditions are potentially difficult and need to be monitored closely. However Ogilvie, in times past, worked for Anglo American in some of South Africa’s even deeper mining operations which faced many of the same problems – but on mostly narrower reef structures – so has some excellent relevant experience behind him.
Current ore reserves are estimated at just under 2.6 million tonnes in the Proven and Probable categories grading 19.2 g/tonne gold for gold content of 1.46 million ounces with around 65% in the South Mine complex currently being mined. The ore deposit is open both on strike and at depth. In addition the area resource is estimated at a further 4.2 million tonnes Measured and Indicated at 16.8 g/tonne gold for a contained 2.07 million ounces (Reserves are not included in the Resource figure). There does appear to be huge potential to extend the resource through drilling in areas to the south of the other old mines under Kirkland Lake gold’s control with the prospect of the South Mine Complex ore type being duplicated along strike.
But despite its excellent gold grades, Kirkland Lake gold is a relatively high cost producer with All in Costs and All in Sustaining Costs (currently at CAN$1,234 and CAN$1,193/oz respectively). But these are highish because of relatively high capital expenditures at present, but coming down as production is set to increase. Cash operating costs are at CAN$792/oz and the mine is generating free cash flow estimated at $4 million in the current 8-month ‘stub’year (the company is changing its FY end from April to December). [Note: The current gold price in CAN$ is at a little over $1490 an ounce at the time of writing as compared with the US$ price of $1144 showing the benefit to Canadian miners of the weak Canada to US dollar parity].
As noted above gold grades appear to be increasing at depth. Most current mining is at the 5025 and 5300 level where reserve grades are between 16.5 g/tonne and 16.1 g/tonne, whereas grades at the 5400 and 5600 levels are at between 20.9 g/tonne and 26.4 g/tonne. Even deeper the 5700 level grades are estimated at a very high 35.3 g/tonne and below that at 28.5 g/tonne. This all shows huge potential for increasing output at the current mill throughput, quite apart from a potential increment from some previously unexploited near surface material with an Indicated resource of 330,000 tonnes grading 11.7 g/tonne.
Kirkland Lake Gold is thus not an easy mining operation with the previously mentioned difficulties of depth, heat and seismicity all likely to combine to keep sustaining capital costs relatively high. But there would seem to be enormous potential for extending resources and reserves to both east and west and at depth, while maintaining the high grades for which the area is known. Again, exploring all this costs money, particularly where it involves deep drilling from surface, so management will need to maintain a good balance between continuing cash flow and expenditures and hope the gold price doesn’t fall further in the meantime. In a rising gold price scenario, of course, the profit potential would look to be particularly strong provided costs can be well-controlled.