Item 1. Business
About the Company
Klondex Mines Ltd. is a well–capitalized, junior–tier gold and silver mining company focused on mining, exploration, development, and production in a safe, environmentally responsible, and cost–effective manner. As of
December 31, 2016
, Klondex Mines Ltd. had 100% interests in three producing mines: (1) the Fire Creek mine ("Fire Creek") and (2) the Midas mine and ore milling facility ("Midas"), both of which are located in the state of Nevada, USA, and (3) the True North gold mine and mill in Manitoba, Canada ("True North", formerly known as the Rice Lake mine). The Company also has 100% interests in two recently acquired projects: (1) the Hollister mine ("Hollister"), and (2) the Aurora mine and ore milling facility ("Aurora", formerly known as Esmeralda), both of which are also located in Nevada, USA.
Klondex Mines Ltd. was incorporated on August 25, 1971 under the laws of British Columbia, Canada and its common shares are listed on the Toronto Stock Exchange ("TSX") under the symbol "KDX" and on the NYSE MKT LLC ("NYSE MKT") under the symbol "KLDX".
Klondex Mines Ltd.'s registered office is located at 1055 West Hastings Street, Suite 2200, Vancouver, British Columbia, Canada V6E 2E9 and its corporate headquarters is located at 6110 Plumas St, Suite A, Reno, NV 89519.
In this report, “we”, “us”, “our”, the “Company”, "its", and “Klondex” refer to Klondex Mines Ltd. and its subsidiaries.
Business development and strategy
Prior to February 2014, our only mine was Fire Creek and since that time we have experienced growth in our annual gold and silver production, total assets, and workforce largely due to the acquisitions outlined below:
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Acquisitions:
(1)
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Midas
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True North
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Hollister and Aurora
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Total
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Date acquired:
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February 11, 2014
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January 22, 2016
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October 3, 2016
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Purchase consideration (thousands):
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$
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63,645
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$
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31,100
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$
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109,568
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$
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204,313
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(1)
Refer to
Note 4. Business Combinations
to the
Notes to Consolidated Financial Statements
for additional detail.
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The acquisition of Midas allowed us to begin processing Fire Creek's ore, together with Midas' ore, at the Midas mill, which is located approximately 120 miles away from Fire Creek. True North has a mill and processes its ore on-site. It is currently anticipated that mineralized material from Hollister, which does not have a mill and is an exploration and development stage mineral property, will be processed at the nearby Midas mill (approximately 17 miles away) or, in the case of mineral-bearing concentrate, at the Aurora mill.
During 2016, our producing mines were Fire Creek, Midas, and True North, and in 2017 we expect to produce from these same mines in addition to the mining activities at the Hollister Project under a bulk sampling program. Refer to the
2017 Full Year Outlook
section of
Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
("MDA") for a summary of our expected 2017 production volumes, costs, capital, development, and exploration expenditures.
Gold and silver sales represent 100% of our revenues and the market prices of gold and silver significantly impact our financial position, operating results, and cash flows. Our primary strategy is to increase shareholder value by responsibly achieving our production, cost, and capital targets while attempting to extend our mine lives through development and exploration programs. We also consider acquisitions or other arrangements in the normal course which strategically fit our future growth objectives. We have an experienced management team, a strong financial position, a low-cost production profile, and high-quality assets located in mining-friendly jurisdictions.
Segment information
Our segments include
Fire Creek
,
Midas
,
True North
,
Hollister
,
Aurora
, and
Corporate and other
. The Fire Creek, Midas, True North, Hollister, and Aurora segments include the operations, development, and exploration activities of each respective segment. The Corporate and other segment includes general and administrative costs of the Company. Our
segments generally have revenues, earnings or losses, or assets exceeding 10% of the respective consolidated totals, and each segment is individually reviewed by our Chief Executive Officer
to make decisions about resources to be allocated to the segments and to assess their performance
.
See
Note
20. Segment information
to the
Notes to
Consolidated Financial Statements
for additional information on our segments.
Principal products and market overview
Principal products and revenues
During 2016, our principal products were produced at Fire Creek, Midas, and True North and consisted of gold and silver doré bars which were sent to a third-party refiner to produce bullion that met the required market standards of 99.95% pure gold and 99.90% pure silver before being sold to financial institutions and precious metals traders. Under the terms of our refining agreements, doré bars are refined for a fee, and the separately-recovered gold and silver ounces are credited to our account or, at our instruction, delivered to our buyers' accounts.
In
2016
,
2015
, and
2014
, revenues from gold and silver made up
87.1%
and
12.9%
,
82.6%
and
17.4%
, and
81.7%
and
18.3%
, respectively, of our total revenue and, as such, we currently consider gold to be our principal product. We expect gold and silver sales to be our only source of future revenues. The following charts provide details about our ounces sold and associated revenues for the last three years (revenue labels within bars in millions):
The following charts provide details about the percentage of revenue by site for the last three years:
Principal product uses and prices
Generally, gold and silver have two main categories of use: fabrication and investment. Fabricated precious metals have a variety of end uses, including jewelry, electronics, dentistry, industrial and decorative uses, medals, medallions, and coins. Investors buy gold and silver bullion, coins, and jewelry as investments. Gold prices and silver prices are volatile and are affected by many factors beyond our control, such as sales or purchases by central banks and financial institutions, inflation or deflation and monetary policies, fluctuation in the value of the US dollar and foreign currencies, global and regional demand, and political and economic conditions of countries throughout the world.
The following table presents the annual high, low, and average afternoon fixing prices for gold and silver over the past three years on the London Bullion Market ("LBMA") compared to our average realized sales prices (in U.S. dollars per ounce):
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Gold
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Silver
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Year
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High
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Low
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Average
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High
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Low
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Average
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2014 LBMA
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$
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1,385
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$
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1,142
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$
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1,266
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$
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22.05
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$
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15.28
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$
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19.08
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2014 Klondex Average
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1,258
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18.47
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2015 LBMA
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1,296
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1,049
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1,160
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18.23
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13.71
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15.68
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2015 Klondex Average
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1,156
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15.72
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2016 LBMA
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1,366
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1,077
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1,251
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20.71
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13.58
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17.14
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2016 Klondex Average
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1,245
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17.44
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On
March 21, 2017
, the afternoon fixing prices for gold and silver on the London Bullion Market were
$1,242
per ounce and
$17.31
per ounce, respectively.
Major customers
We have historically sold our metal to five customers. Because our metal is refined to produce bullion that meets the required market standards, we believe the loss of any one of our customers would not adversely affect our ability to sell due to the liquidity of gold and silver markets and the availability of alternative trading counterparties. See
Note
20. Segment information
to the
Notes to
Consolidated Financial Statements
for a listing of revenues by customer.
Employees and contractors
None of our employees are represented by unions. The estimated number of employees and contractors employed by us as at
December 31, 2016
was as follows:
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Segment
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Employees
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Contractors
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Total
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Fire Creek
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70
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116
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186
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Midas
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138
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124
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262
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True North
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139
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135
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274
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Hollister
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8
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39
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47
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Aurora
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5
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—
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5
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Corporate and other
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40
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—
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40
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Total
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400
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414
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814
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Competition
We compete with other mining companies that operate in a general proximity to our mines, some of which are larger and better capitalized, for skilled employees and contractors residing in small communities like Winnemucca, Nevada, Elko, Nevada, and Bissett, Manitoba, Canada. Although we have not historically experienced such, material shortages of skilled employees could lead to production inefficiencies and/or additional costs.
From time-to-time certain production inputs have been in short supply. Shortages of production supplies and raw materials rarely lead to operational issues, but would require us to either substitute with lower quality supplies or to ship these supplies from longer distances. These substitutions and changes could result in production inefficiencies and/or additional costs. To date, we have not experienced any material shortages in production inputs.
Mine safety and health
Despite high-levels of health and safety performance, our philosophy is one of "continuous improvement" combined with a belief that "the miner is the most important thing to come out of a mine." We have mandatory mine safety and health programs that include employee and contractor training, risk management, workplace inspection, emergency response, accident investigation and program auditing. We consider these programs to be essential at all levels to ensure that our employees, contractors, and visitors operate safely.
During
2016
, we had no lost-time injuries at our properties and as of
December 31, 2016
, had operated 1,539 days (~4.0 years) at Fire Creek, 815 days (~2.0 years) at Midas, 344 days (~0.7 years) at True North, and 89 days (~0.3 years) at Hollister and Aurora, without a lost-time injury.
Our United States operations and exploration properties are subject to regulation by the Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). MSHA inspects our mines on a regular basis and issues various citations and orders when it believes a violation has occurred under the Mine Act. The Dodd-Frank Act requires us to provide a mine safety disclosure, which we have done in Part I-
Item 4. Mine Safety Disclosure
of this Form 10-K.
Government regulation of mining-related activities
Government and environmental regulation
Our exploration and development activities are subject to various national, state, provincial and local laws and regulations in the United States and Canada, which govern prospecting, development, mining, production, exports, taxes, labor standards, occupational health, waste disposal, protection of the environment, mine safety, hazardous substances and other matters. We have obtained or have pending applications for those licenses, permits or other authorizations currently required to conduct our exploration and development programs. We believe that we are in compliance in all material respects with applicable mining, health, safety and environmental statutes and regulations in the United States and Canada. For a more detailed discussion of the various government laws and regulations applicable to our operations and potential negative effects of these laws and regulations, see section Item 1A. Risk Factors - Environmental and Regulatory Risks, below.
Available information
We maintain an internet website at
www.klondexmines.com.
Through the "
Investors"
section of the website, we make available, free of charge, any previously filed annual and quarterly reports on Forms 10-K and 10-Q and current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practical after such material is electronically filed or furnished with the SEC. We do not currently make available our Current Reports on Form 8-K on our website, but we will provide you with electronic or paper copies of such reports free of charge (not including any exhibits thereto) upon written request to Klondex Mines Ltd., 6110 Plumas Street, Suite A, Reno, Nevada 89519 Attn: Investor Relations. Our website does not currently contain Interactive Data Files filed or furnished pursuant to Rule 405 of Regulation S-T as we will begin, and be subject to, such filings with the Quarterly Report on Form 10-Q for the three months ended March 31, 2017. In addition, our "Code of Ethics, Trading Restrictions, and Whistleblowing" policy as well as the charters of key committees of our Board are also available on our web site. Our website and the information contained therein or connected thereto are not intended to be, and are not incorporated into this Annual Report on Form 10-K.
You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Copies of such materials also can be obtained free of charge at the SEC’s website,
www.sec.gov
, or by mail from the Public Reference Room of the SEC, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room.
Item 1A. Risk Factors
Any investment in Klondex involves a high degree of risk. You should carefully consider the risks described below and the other information contained in this Annual Report on Form 10-K when making an investment decision related to the Company. Our operations and financial results are subject to various risks and uncertainties, including those described below, that could materially adversely affect our business, financial condition, results of operations, cash flows and the trading price of our securities. The risks described below are not the only ones we face and additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business.
The risk factors described below are grouped into the following categories:
Financial
,
Operational
,
Environmental and Regulatory
, and
Other
.
Financial Risks
Extended declines in the prices of gold and silver would have a material adverse effect on our earnings and cash flows and our ability to repay our outstanding debt as it comes due. Fluctuations in the prices of gold and silver can cause significant volatility in our financial performance and materially and adversely affect the trading prices of our securities.
Our core business is dependent on the prices of gold and silver, which are highly volatile and are affected by numerous factors beyond our control. During the year ended
December 31, 2016
, the low-high prices per ounce of gold and silver ranged from
$1,077
-
$1,366
and
$13.58
-
$20.71
, respectively. Factors tending to influence such metals prices include the following:
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the rates of global economic growth;
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industrial and retail demand, including worldwide demand for products containing gold and silver;
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short-term changes in supply and demand because of speculative hedging activities;
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worldwide supply of these metals including the expected near-term supply from new mine sources;
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the availability and cost of substitute materials;
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the industry production cost curve and the expected cost to develop new sources of supply;
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expectations with respect to the rate of inflation;
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the relative strength of the US dollar (the currency in which the prices of gold and silver are generally quoted), the Canadian dollar and certain other currencies;
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global or regional political conditions, including terrorism and war;
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global or regional economic conditions, including interest rates, central bank lending and currency values; and
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sales by central banks and other holders, speculators and producers in response to any of the above factors.
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The Company historically has not entered into material, long-term hedging arrangements for gold and silver prices longer than 12 months and even if such hedging transactions were entered into, there can be no assurance that the intent to reduce the risk associated with fluctuations in metal prices will be successful.
Any decline in the prices of gold or silver adversely impacts our revenues, net earnings (loss), cash flows, and credit quality and could affect our ability to make necessary capital investments, repay our debt and meet our debt service and other fixed obligations, and depress the trading prices of our securities. Sustained declines in prices could also:
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cause us to revise our operating plans, resulting in reduced output, the placement of our mines on care and maintenance or closure of one or more of our mines or other facilities;
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further reduce revenues through production declines due to cessation of mining of deposits that have become uneconomic;
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reduce funds available for capital expenditures;
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delay or prevent our ability to make accretive acquisitions or conduct exploration work;
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reduce existing reserves due to economic viability; and
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cause us to write down assets and accelerate depletion, reclamation and closure charges.
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Substantial leverage and debt service obligations may adversely affect our cash flows, liquidity and operations.
As of
December 31, 2016
, the aggregate consolidated carrying value of our indebtedness totaled approximately
$30.2 million
, consisting of
$18.0 million
for the Gold Purchase Agreement (as defined herein),
$11.2 million
outstanding under our Revolver (as defined in
Note
8. Debt
to the
Notes to Consolidated Financial Statements
), and
$1.1 million
for capital lease obligations. During the year ended
December 31, 2016
, we recorded
$5.3 million
of interest expense, net to service our indebtedness. Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors many of which are not under our control. Liquidity risk is the risk that we will not be able to meet our financial obligations as they become due, including, among others, debt repayments, interest payments and contractual commitments. We may not continue to generate cash flow from operations in the future sufficient to service the debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, much of our debt is secured by our subsidiaries or operating assets, and a default would result in the right of our lenders to enforce that security.
From time to time, debt instruments to which we are or may become party may require us to satisfy various affirmative and negative covenants and to meet certain financial ratios and tests, as further described in
Note
8. Debt
to the
Notes to Consolidated Financial Statements
. These covenants may limit, among other things, our ability to incur further indebtedness, create certain liens on assets or engage in certain types of transactions. There are no assurances that, in the future, we will not, as a result of such covenants, be limited in our ability to respond to changes in business or competitive activities or be restricted in our ability to engage in mergers, acquisitions
or dispositions of assets. Furthermore, a failure to comply with such covenants could result in an event of default under the debt instruments and may allow the lenders thereunder to accelerate repayment obligations or enforce security (if any).
An extended decline in prices of gold and silver, an increase in operating or capital costs, or a reduction in mineral resource or mineral reserve estimates, among other things, may cause us to record write-downs to long-lived assets or asset groups or production-related inventories, which could negatively impact our results of operations.
When events and circumstances indicate that the carrying amount of our long-lived assets or production-related inventories may not be recoverable or realizable, we evaluate such pursuant to our United States generally accepted accounting principles ("U.S. GAAP") accounting policies which are described in
Note
2. Summary of significant accounting policies
to the
Notes to Consolidated Financial Statements
. The economic environment, gold and silver prices, operating margins, projections of future results and costs, and our share price may be used when considering impairment indicators or net realizable value thresholds for purposes of applying our accounting policies. We may incur write-downs in the future if commodity prices experience a sustained decline, if there are significant downward adjustments to estimates of recoverable quantities to be produced from estimated proven and probable mineral reserves or production quantities and if there are upward adjustments to estimated operating costs and capital expenditures and/or changes in CDN$ to USD$ foreign exchange rates, all based on life-of-mine plans and projections. Asset impairments and production-related inventory write-downs have an adverse impact on our results of operations and may negatively limit our ability to obtain any additional financing and could decrease the outlook of our share price performance.
As discussed in
Note
5. Inventories
to the
Notes to Consolidated Financial Statements,
the application of our lower of average cost or net realizable value accounting policy resulted in write-downs to production inventories of
$2.9 million
,
$1.2 million
, and
nil
during the years ended
December 31, 2016
,
2015
, and
2014
, respectively. We did not experience any impairments of long-lived assets during the
years ended
December 31, 2016
,
2015
, and
2014
.
Mine closure and reclamation costs for environmental liabilities may exceed the provisions we have made and our inability to provide reclamation bonding or maintain insurance could adversely affect our operating results and financial condition.
As of
December 31, 2016
, our asset retirement obligations totaled
$25.4 million
, the amount of which represents a discounted cash flow estimate of future expenditures required to reclaim disturbed areas. We are required by United States federal and state laws and Canadian federal and provincial laws to provide financial assurance sufficient to allow a third party to implement approved closure and reclamation plans if we are unable to do so. These laws are complex and vary from jurisdiction to jurisdiction. The laws govern the determination of the scope and cost of the closure and reclamation obligations and the amount and forms of financial assurance. The amount and nature of the financial assurances are dependent upon a number of factors, including our financial condition and reclamation cost estimates.
As of
December 31, 2016
, we had in place surety bonds totaling
$48.2 million
, which were partially collateralized by restricted cash totaling
$10.0 million
. As our operations expand or reclamation expenses increase, our reclamation obligations and the financial assurances that we are required to provide may increase accordingly. In addition, any perceived challenges to our liquidity may cause our surety bond holders to increase the amount of cash collateral required or refuse to provide the same level of surety bonding going forward. On December 1, 2016, the United States Environmental Protection Agency proposed the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") regulations requiring mining companies to obtain supplemental financial assurance beyond the current bonding requirements administered by federal and state agencies. Increases in our reclamation obligations and financial assurances, as well as the nature of the security to be provided, could significantly increase our costs, making the maintenance and development of existing and new mines less economically feasible. To the extent that the value of the security provided to the regulatory authorities is or becomes insufficient to cover the amount of financial assurance we are required to post, we may be required to replace or supplement the existing security with more expensive forms of security, which might include cash deposits, which would reduce our cash available for operations and financing activities.
In addition, the costs of surety bonds and financial assurance have fluctuated in recent years while the market terms of such bonds and financial assurance have generally become less favorable to mine operators. These changes in the terms of the bonds and financial assurance have been accompanied at times by a decrease in the number of companies willing to issue surety bonds and financial assurance. Increased costs related to surety bonds and financial assurance could have a material adverse effect on our financial condition and liquidity.
Our operations may require further capital, and current global financial conditions and volatility may negatively impact our ability to obtain such further capital.
During the year ended
December 31, 2016
, our cash expenditures for plant, equipment and mine development totaled
$61.7 million
and during
2017
we expect to spend
$57
-
$62 million
on capital expenditures,
$7
-
$9 million
on Hollister development, and
$3
-
$5 million
on regional exploration. The mining, processing, development and exploration of our properties may require substantial additional financing above and beyond what we currently expect in
2017
and later years. Current global financial conditions have been subject to significant volatility, and access to public financing, particularly for resource companies, has been negatively impacted in recent years. These factors may impact our ability to obtain equity or debt financing in the future and additional financing may not be available if needed or, if available, the terms of such financing may be unfavorable to us. Failure to obtain sufficient financing may
result in the delay or indefinite postponement of exploration, development or production on any or all of our properties, or even a loss of property interest.
Our operations are subject to currency fluctuations, which could adversely affect our results of operations and financial condition.
Exchange rate fluctuations may affect the costs that we incur in our operations. Gold and silver are typically sold throughout the world based principally on the U.S. dollar price, but a portion of our metal sales and operating expenses incurred at True North and our corporate headquarters are principally in Canadian dollars. As a result, we are subject to foreign exchange risks relating to the relative value of the U.S. dollar as compared to the Canadian dollar. The appreciation of the Canadian dollar against the US dollar can increase the cost of our production and capital expenditures in US dollars, and our results of operations and financial condition could be materially adversely affected.
We may engage in certain gold, silver and commodity hedging activities which may reduce the realized prices we receive for our gold and silver and may involve credit risk, market liquidity risk and unrealized mark-to-market risk.
From time to time, we may use certain derivative products to hedge or manage the risks associated with changes in gold prices, silver prices or consumable prices. There is no assurance that any hedging program or transactions which we may adopt or utilize in order to reduce the risk associated with changes in gold prices, silver prices or consumable prices will be successful. Although hedging may protect us from an adverse price change, it may also prevent us from benefiting fully from a positive price change. Our hedging activities or similar transactions could impact our earnings in various ways, including recognition of certain mark-to-market gains and losses on derivative instruments. The fair value of our derivative instruments could fluctuate significantly between periods. During the year ended
December 31, 2016
, we recorded losses on forward metal sales of
$3.7 million
.
We entered into a Gold Purchase Agreement with Franco-Nevada GLW Holdings Corp., a subsidiary of Franco-Nevada Corporation, on February 11, 2014 (the "Gold Purchase Agreement"), pursuant to which we have agreed to deliver an aggregate of 38,250 ounces of gold on a monthly basis over a five-year period ending on December 31, 2018. Under the terms of the Gold Purchase Agreement, we are required to deliver an annual amount of 8,000 ounces of gold in each of 2017 and 2018. In addition, we entered into a Gold Offering Agreement with Waterton Global Value, L.P. (“Waterton”), dated March 31, 2011, as amended and restated October 4, 2011 (the "Gold Supply Agreement"), in which we granted Waterton the right to purchase refined bullion (as defined therein) produced from Fire Creek, on a monthly basis, for a five-year period ending February 28, 2018. In the event that Waterton exercises its purchase right, the purchase price is calculated as the average afternoon settlement price per gold ounce on the LBMA for the 30 days immediately preceding the relevant pricing date. Our obligations relating to delivery of gold ounces under each of the Gold Purchase Agreement and the Gold Supply Agreement may require us to engage in hedging activities from time to time. During the year ended
December 31, 2016
, we recorded losses on the Gold Purchase Agreement and Gold Offering Agreement of
$2.2 million
and
$1.1 million
, respectively.
Generally, the use of derivative instruments involves certain inherent risks, including, among other things:
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credit risk - the risk of an unexpected loss arising if a counterparty with which we have entered into transactions fails to meet its contractual obligations;
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market liquidity risk - the risk that we have entered into a derivative position that cannot be closed out quickly, by either liquidating such derivative instrument or by establishing an offsetting position; and
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unrealized mark-to-market risk - the risk that, in respect of certain derivative products, an adverse change in market prices for commodities, currencies or interest rates will result in our incurring an unrealized mark-to-market loss in respect of such derivative products.
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Forecasts of future production are estimates and actual production may be less than estimated.
Forecasts of future production are estimates based on interpretation and assumptions and actual production may be less than estimated. We prepare estimates of future production for our operating mines. Our ability to achieve and maintain the production rates on which such estimates are based is subject to a number of risks and uncertainties. Our production estimates are dependent on, among other things, the accuracy of mineral reserve estimates, the accuracy of assumptions regarding ore grades and recovery rates, ground conditions, physical characteristics of ores, such as hardness and the presence or absence of particular metallurgical characteristics, and the accuracy of estimated rates and costs of mining and processing. Our actual production may vary from our estimates for a variety of reasons. Any possible failure to achieve our production estimates could have a material adverse effect on our results of operations and financial condition.
There is no guarantee that anticipated production costs will be achieved at our mineral projects. Failure to achieve anticipated production costs may have a material adverse impact on our ability to repay certain loans and generate revenue and cash flow to fund operations and future profitability.
Operational Risks
Our business is subject to production and operational risks that could adversely affect our business and our insurance may not cover these risks and hazards adequately or at all.
Mining and metals processing involve significant production and operational risks normally encountered in the exploration, development and production of gold and other base or precious metals, some of which are outside of our control, including, without limitation, the following:
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unanticipated ground and water conditions;
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adverse claims to water rights and shortages of water to which we have rights;
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adjacent or adverse land or mineral ownership that results in constraints on current or future mine operations;
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geological problems, including seismic activity, earthquakes and other natural disasters;
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metallurgical and other processing problems;
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unusual or unexpected mineralogy or rock formations;
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ground or slope failures;
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tailings design or operational issues, including dam breaches or failures;
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structural cave-ins, wall failures or rock-slides;
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periodic interruptions due to inclement or hazardous weather conditions or operating conditions and other force majeure events;
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lower than expected ore grades or recovery rates;
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delays in the receipt of or failure to receive necessary government permits;
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the results of litigation, including appeals of agency decisions;
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delays in transportation;
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interruption of energy supply;
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inability to obtain satisfactory insurance coverage;
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the availability of drilling and related equipment in the area where mining operations will be conducted; and
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the failure of equipment or processes to operate in accordance with specifications or expectations.
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These risks could result in damage to, or destruction of, our mines and milling facilities, resulting in partial or complete shutdowns, personal injury or death, environmental or other damage to our properties or the properties of others, delays in mining, reduced production, monetary losses and potential legal liability. Milling operations are subject to hazards, such as equipment failure or failure of retaining dams around tailings disposal areas that may result in personal injury or death, environmental pollution and consequential liabilities.
In addition, we rely on a few key vendors for our operations. A breach of the applicable contract by any of these vendors, a significant dispute with any of these vendors, a force majeure event or other operational or financial issues affecting one or more of these vendors, including labor strikes or work stoppages, or any other event that would significantly impede the ability of these vendors to perform their contractual obligations to us or that would have a significant negative impact on our contractual relationship with them would adversely affect our ability to produce our primary products, which could have a material impact on our financial condition and results of operations.
Our insurance will not cover all the potential risks associated with our operations. In addition, although certain risks are insurable, we may be unable to maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or, if available, may not be adequate to cover any resulting liability. Moreover, insurance against risks such as environmental pollution or other hazards as a result of exploration, development and production may be prohibitively expensive to obtain for a company of our size and financial means. We might also become subject to liability for pollution or other hazards against which we may not be insured or against which we may elect not to insure because of premium costs or other reasons. Losses from these events may cause us to incur significant costs that could have a material adverse effect upon our business, financial condition and results of operations. Furthermore, should we be unable to fund fully the cost of remedying an environmental problem, we might be required to suspend operations or enter into interim compliance measures pending completion of the required remedy.
We are dependent on the success of the Fire Creek Mine, the Midas Mine and mill and the True North Mine and mill.
Our principal operations are the Fire Creek Mine and the Midas Mine, both in Nevada, and the True North Mine in Canada. We are primarily dependent upon the success of these mines and continual operation of their mills as sources of future revenue and profits. The continued development or expansion of mining operations at these mines may require the commitment of substantial additional
resources for operating expenses and capital expenditures, which may increase in subsequent years as needed, and for consultants, personnel and equipment associated with additional development and commercial production of such properties.
The development of Hollister may require substantial investment.
The exploration, development and anticipated commercial production at Hollister will require substantial additional financing. During 2017, we expect to spend between
$7
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$9 million
in development at Hollister. Failure to obtain sufficient financing may result in the delay or indefinite postponement of exploration, development or production at Hollister. Additional capital or other types of financing may not be available if needed or, if available, the terms of such financing may be unfavorable to us.
Our exploration activities may not be commercially successful.
Our long-term success depends on our ability to identify additional mineral deposits that we can develop into commercially viable mining operations. Mineral exploration is highly speculative in nature, involves many risks and is frequently non-productive. These risks include unusual or unexpected geologic formations and the inability to obtain suitable or adequate machinery, equipment or labor. The success of gold exploration is determined in part by the following factors:
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the identification of potential gold mineralization;
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the availability of government-granted exploration permits;
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the quality of management and geological and technical expertise; and
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the capital available for exploration.
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Substantial expenditures are required, but not guaranteed, to establish mineral proven and probable reserves through drilling and analysis, to develop metallurgical processes to extract metal, and to develop the mining and processing facilities and infrastructure at any site chosen for mining. Whether a mineral deposit will be commercially viable depends on a number of factors, which include, without limitation, the particular attributes of the deposit, such as size, grade and proximity to infrastructure; metal prices, which may fluctuate widely; and government regulations, including, without limitation, regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of minerals and environmental protection. There is no certainty that we will discover or acquire any mineralized material in sufficient quantities to justify continued commercial operations at Fire Creek, Midas or True North or to justify operations at any of our other properties.
Increased operating costs could affect our profitability.
Costs at any particular mining location are subject to variation due to a number of factors, such as changing ore grade, changing metallurgy and revisions to mine plans in response to the physical shape and location of the ore body. In addition, costs at our mining locations may be affected by the price of input commodities, such as fuel, electricity, labor, chemical reagents, grinding media, mill liners, explosives, steel and concrete. The costs of our operating consumables are, at times, subject to volatile price movements, including increases that could make production at certain operations less profitable and changes in laws and regulations affecting their price, use and transport. Reported costs may also be affected by changes in accounting standards. A material increase in costs at any particular mining location could have a significant effect on our profitability and operating cash flow.
Our mining production depends on the availability of sufficient water supplies.
Our operations require significant quantities of water for mining, ore processing and related support facilities. Continuous production at our mines depends on our ability to maintain our water rights and claims. Although our current operations have sufficient water rights and claims to cover current operational demands, we cannot predict the potential outcome of future legal proceedings affecting our water rights, claims and uses. The failure to obtain needed water permits, the loss of some or all water rights for any of our mines, in whole or in part, or shortages of water to which we have rights due to weather, equipment issues or other factors could require us to curtail or close mining production and could prevent us from pursuing expansion opportunities.
A temporary or extended shutdown of any of our operations could expose us to significant costs and adversely affect our access to skilled labor.
From time to time, we may have to temporarily shut down one or more of our operating sites or place one or more of our operating sites on care and maintenance or permanent shutdown, if they are not commercially viable due to factors such as declines in metal prices, increased costs or adverse changes in interest rates or currency exchange rates. During temporary shutdowns or while a site is on care and maintenance, we will have to continue to expend capital to maintain the site or facility and equipment. In addition, reductions in workforce, advance notice requirements under collective labor agreements or applicable law, and severance obligations arising from such suspension or shutdown could cause us to incur significant labor costs. Furthermore, temporary or extended shutdowns may adversely affect our future access to skilled labor, as employees who are laid off may seek employment elsewhere.
In addition, if our operations are shut down for an extended period of time, we may be required to engage in environmental remediation of the plant sites or accelerated reclamation of our mines, which would require us to incur additional costs. The costs of ramping up production at one of our operations following a temporary shutdown could be significant. Given the costs involved in a temporary
shutdown of our operations, we may instead choose to continue to operate those operations at a loss. Such a decision could have a material adverse effect on our results of operations and financial condition.
We are subject to substantial government regulation. Changes to regulation or more stringent implementation could have a material adverse effect on our results of operations and financial condition.
Our mining, processing, development and mineral exploration activities are subject to various laws governing prospecting, development, production, taxes, labor standards and occupational health, mine safety, toxic substances, land use, water use, land claims of local people and other matters. Mining and exploration activities are also subject to various laws and regulations relating to the protection of the environment, such as the federal Clean Water Act and the Nevada Water Pollution Control Law. Although we currently believe that we are in compliance with existing environmental and mining laws and regulations and that our proposed exploration programs will also meet those standards, no assurance can be given that we will remain in compliance with applicable regulations or that new rules and regulations will not be enacted or that existing rules and regulations will not be applied in a manner that could limit or curtail production or development of our properties.
At present, there is no royalty payable to the United States or to the province of Manitoba on production from unpatented mining claims, although legislative attempts to impose a royalty have occurred in recent years. Amendments to current laws and regulations governing our operations and activities of exploration, development mining and milling or more stringent implementation thereof could have a material adverse effect on our business, financial condition and results of operations and cause increases in exploration expenses, capital expenditures or production costs or reduction in levels of production or require delays or abandonment in the development of new mining properties.
In addition, we are required to expend significant resources to comply with numerous
c
orporate governance and disclosure regulations and requirements adopted by U.S. federal and state and Canadian federal and provincial governments, as well as the TSX and NYSE MKT. These additional compliance costs and related diversion of the attention of management and key personnel could have a material adverse effect on our business, financial condition and results of operations.
Reform of the General Mining Law could adversely impact our results of operations.
A portion of our U.S. mining properties are on unpatented mining claims on federal lands. Legislation has been introduced regularly in the U.S. Congress over the last decade to change the General Mining Law of 1872, as amended (the "Mining Law"), under which we hold these unpatented mining claims. It is possible that the Mining Law may be amended or replaced by less favorable legislation in the future. Previously proposed legislation contained a production royalty obligation, new environmental standards and conditions, additional reclamation requirements and extensive new procedural steps which would likely result in delays in permitting. The ultimate content of future proposed legislation, if enacted, is uncertain. If a royalty on unpatented mining claims were imposed, the profitability of our U.S. operations could be materially adversely affected.
Any such reform of the Mining Law could increase the costs of mining activities on unpatented mining claims, or could materially impair our ability to develop or continue operations which derive ore from federal lands, and as a result, could have an adverse effect on us and our results of operations.
Mineral reserves are only estimates which may be unreliable.
Although mineralization may not be classified as a “reserve” unless the mineralization can be economically and legally extracted or produced at the time the “reserve” determination is made, “mineral reserves” are estimates only, and no assurance can be given that the anticipated tonnages and grades will be achieved, that the indicated level of recovery will be realized or that mineral reserves can be mined or processed profitably. Mineral reserve and mineral resource estimates may be materially affected by environmental, permitting, legal, title, taxation, socio-political, marketing and other relevant issues. There are numerous uncertainties inherent in estimating mineral reserves and mineral resources, including many factors beyond our control. Such estimation is a subjective process, and the accuracy of any mineral reserve or mineral resource estimate is a function of the quantity and quality of available data, the nature of the ore body and of the assumptions made and judgments used in engineering and geological interpretation. These estimates may require adjustments or downward revisions based upon further exploration or development work or actual production experience.
Fluctuations in gold or silver prices, results of drilling, metallurgical testing and production, the evaluation of mine plans after the date of any estimate, permitting requirements or unforeseen technical or operational difficulties may require revision of mineral reserve estimates. Prolonged declines in the market price of gold or silver may render mineral reserves containing relatively lower grades of mineralization uneconomical to recover and could materially reduce our mineral reserves. Should reductions in mineral reserves occur, we may be required to take a material write-down of our investment in mining properties, reduce the carrying value of one or more of our assets or delay or discontinue production or the development of new projects, resulting in increased net losses and reduced cash flow. Mineral reserves should not be interpreted as assurances of mine life or of the profitability of current or future operations. There is a degree of uncertainty attributable to the calculation and estimation of mineral reserves and corresponding grades being mined and, as a result, the volume and grade of mineral reserves mined and processed and recovery rates may not be the same as currently anticipated. Any material reductions in estimates of mineral reserves, or of our ability to extract these mineral reserves, could have a material adverse effect on our results of operations and financial condition.
Estimates of mineral reserves, mineral resources and projected cash flows may prove to be inaccurate, which could negatively impact our results of operations and financial condition.
There are numerous uncertainties inherent in estimating mineral reserves and mineral resources and the future cash flows that might be derived from production of mineral reserves. Accordingly, any figures for mineral reserves and future cash flows contained in this Annual Report on Form 10-K are estimates only, including for Hollister which has no mineral reserves. Although we believe that the estimated mineral reserves and mineral resources at Fire Creek, Midas and True North have been delineated with appropriately spaced drilling, inherent variability exists between duplicate samples taken adjacent to each other and between sampling points that cannot be reasonably eliminated. There also may be unknown geologic details that have not been identified or correctly appreciated at the current level of delineation. This results in uncertainties that cannot be reasonably eliminated from the estimation process. Some of the resulting variances may have a positive effect and others may have a negative effect on mining and processing operations. In respect of mineral reserve and mineral resource estimates, no assurance can be given that the anticipated tonnages and grades will be achieved, that the indicated level of recovery will be realized or that mineral reserves can be mined or processed profitably. The ore grade actually recovered may differ from the estimated grades of the mineral reserves.
In addition, actual future cash flows may differ materially from estimates. Estimates of mineral reserves and future cash flows to be derived from the production of such mineral reserves necessarily depend upon a number of variable factors and assumptions, including, among others, geological and mining conditions that may not be fully identified by available exploration data or that may differ from experience in current operations; historical production from the area compared with production from other producing areas; the assumed effects of regulation by governmental agencies and assumptions concerning metal prices; exchange rates; interest rates; inflation; operating costs; development and maintenance costs; reclamation and post-reclamation costs; and the availability and cost of labor, equipment, raw materials and other services required to mine and refine the ore. Market price fluctuations of gold and silver, as well as increased production costs or reduced recovery rates, may render mineral reserves containing relatively lower grades of mineralization uneconomical to recover and may ultimately result in a restatement of mineral reserves. We may be required to make significant downward revisions to estimates of mineral reserves and future cash flows to be derived from the production of such mineral reserves, if commodity prices experience a sustained decline. In addition, there can be no assurance that mineral recoveries in small scale laboratory tests will be duplicated in larger scale tests under on-site conditions or during production.
For these reasons, estimates of our mineral reserves contained in this Annual Report on Form 10-K, including classifications thereof based on probability of recovery, and any estimates of future cash flows expected from the production of those mineral reserves, prepared by different engineers or by the same engineers at different times may vary substantially. The actual volume and grade of mineral reserves mined and processed, and the actual cash flows derived from that production, may not be as currently anticipated in such estimates. If our actual mineral reserves or cash flows are less than our estimates, our results of operations and financial condition may be materially impaired.
Future growth depends on our ability to replenish our mineral reserves, which involves extending our mine lives through development and exploration and acquiring quality mining assets.
Our ability to replenish our mineral reserves is important to our long-term viability. Depleted mineral reserves can be replaced in several ways, including by expanding known ore bodies, locating new deposits or acquiring new mineral reserves from third parties. Exploration projects involve many risks, require substantial expenditures and may not result in the discovery of sufficient additional mineral deposits that can be mined profitably. Once a site with mineralization is discovered, it may take several years from the initial phases of drilling until production is possible, if ever, during which time the economic feasibility of production may change. As a result, there is no assurance that current or future exploration programs, and additional drilling at our existing operating mines, will be successful.
We also intend to grow our business by acquiring quality mining assets. However, our capital available for new exploration projects and acquisitions may be constrained. In addition, there can be no assurance that suitable acquisition opportunities will be identified or, if identified, that acquisitions will be consummated on favorable terms or at all. Our ability to identify, consummate and to integrate effectively any future acquisitions on terms that are favorable to us may be limited by the number of attractive acquisition targets, internal demands on our resources, competition from other mining companies and, to the extent necessary, our ability to obtain financing on satisfactory terms, or at all. In addition, we compete for attractive acquisition targets with other potential buyers that have more financial and other resources. There is a risk that depletion of reserves will not be offset by discoveries or acquisitions. As a result, we cannot provide assurance that our exploration, development or acquisition efforts will result in any new commercial mining operations or yield new mineral reserves to replace or expand current mineral reserves. If we are not able to replace depleted reserves, it could have a material adverse effect on our business, prospects, results of operations and financial position.
Certain of our mines and exploration properties are located on land that is or may become subject to traditional territory, title claims and/or claims of cultural significance by certain Native American tribes or Aboriginal communities and stakeholders, and such claims and the attendant obligations of the provincial and federal governments to those tribal or Aboriginal communities and stakeholders may affect our current and future operations.
Native American and Aboriginal interests and rights as well as related consultation issues may impact our ability to pursue exploration, development and mining at our U.S. and Canadian properties. There is no assurance that claims or other assertion of rights by tribal
or Aboriginal communities and stakeholders or consultation issues will not arise on or with respect to our properties or activities. These could result in significant costs and delays or materially restrict our activities. Opposition by Native American tribes or Aboriginal communities and stakeholders to our presence, operations or development on land subject to their traditional territory or title claims or in areas of cultural significance could negatively impact us in terms of public perception, costly legal proceedings, potential blockades or other interference by third parties in our operations, or court-ordered relief impacting our operations. In addition, we may be required to, or may voluntarily, enter into certain agreements with such Native American tribes or Aboriginal communities and stakeholders in order to facilitate development of our properties, which could reduce the expected earnings or income from any future production.
Shortages of critical parts, equipment and skilled labor may adversely affect our operations and development projects.
The mining industry has been impacted, from time to time, by increased demand for critical resources such as input commodities, drilling equipment, milling equipment, tires and skilled labor. These shortages have, at times, impacted the efficiency of our operations and resulted in cost increases and delays. Any such shortages, cost increases and delays in the future may adversely affect operating costs, capital expenditures and production and construction schedules.
We are required to obtain government approvals and permits in order to conduct operations.
Government approvals and permits are currently required in connection with all of our operations, and further approvals and permits may be required in the future. We must obtain and maintain a variety of licenses and permits, which include or cover without limitation, air quality, water quality, water rights, dam safety, fire safety, emergency preparedness, hazardous materials, mercury control, waste rock management, solid waste disposal, storm water runoff, water pollution control, water treatment, rights of way and tailings operations. Such licenses and permits are subject to change in regulations and in various operating circumstances. The duration and success of our efforts to obtain permits are contingent upon many variables outside of our control. Obtaining governmental approvals and permits may increase costs and cause delays depending on the nature of the activity to be permitted and the applicable requirements implemented by the permitting authority. There can be no assurance that all necessary approvals and permits will be obtained or timely obtained or that they would remain in effect if we were forced into a reorganization, bankruptcy or insolvency proceeding. In addition, there can be no assurance that, if obtained, the costs of the approvals and permits will not exceed our estimates or that we will be able to maintain such approvals and permits. To the extent such approvals or permits are required and not obtained or maintained, our operations may be curtailed, or we may be prohibited from proceeding with planned exploration, development or operation of our mineral properties.
Title to some of our mineral properties may be subject to other claims. Any impairment or defect in title could have a negative impact on our results of operations and financial condition.
Although we believe we have exercised commercially reasonable due diligence with respect to determining title to the properties we own or control, including obtaining title reports with respect to Fire Creek, Midas, True North and Hollister, there is no guarantee that title to such properties will not be challenged or impugned. Our properties may be subject to prior unrecorded agreements or transfers; native land claims; prior unregistered liens; or undetected defects, each of which may affect our title to such properties or otherwise give rise to valid challenges to the title of our properties and which could impair development and/or operations. This is particularly the case in respect of those portions of our properties in which we hold our interest solely through a lease with the claim holders (as opposed to a direct interest in the property), as such interest is substantially based on contract and may have been subject to a number of assignments. As a result, we may be constrained in our ability to operate our properties or unable to enforce our rights with respect to our properties. An impairment to, or defect in, title to our properties could have a material adverse effect on our business, financial condition or results of operations.
Major network failures could have an adverse effect on our business.
Major equipment failures, natural disasters including severe weather, terrorist acts, acts of war, cyber-attacks or other breaches of network systems or security that affect computer systems within our network could disrupt our business functions, including our production activities. Our mines and mills are automated and networked such that a cyber-incident involving our information systems and related infrastructure could negatively impact our operations. A corruption of our financial or operational data or an operational disruption of our production infrastructure could, among other potential impacts, result in: (i) loss of production or accidental discharge; (ii) expensive remediation efforts; (iii) distraction of management; (iv) damage to our reputation or our relationship with customers; or (v) events of noncompliance, which events could lead to regulatory fines or penalties. Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
Environmental and Regulatory Risks
We must comply with comprehensive environmental statutes, regulations and other governmental controls, and we face significant environmental risks.
All phases of our operations are subject to environmental regulation. In Canada and the United States, environmental laws provide for, among other things, restrictions and prohibitions on spills, releases, emissions and discharges of various substances produced in association with, or resulting from, our operations. These laws also require that facility sites and mines be operated, maintained and reclaimed to the satisfaction of applicable regulatory authorities, including long-term obligations. Compliance with such laws, including
without limitation, detailed monitoring and reporting requirements, requires significant expenditures. An exceedance of a permit limitation or failure to comply with a permit requirement may result in the imposition of fines and penalties, some of which may be material. As a result of our exploration, development and operation of mineral properties, we may experience increased costs and delays as a result of compliance with applicable laws, regulations and permits and this may adversely affect our business, financial condition or results of operations.
Our operations are also subject to laws and regulations governing the protection of endangered and other specified species. In May 2015, the U.S. Department of the Interior released a plan to protect the greater sage grouse, a species whose natural habitat is found across much of the western United States, including Nevada. The U.S. Department of the Interior’s plan is intended to guide conservation efforts on approximately 70 million acres of national public lands. No assurances can be made that restrictions relating to conservation will not have an adverse impact on our operations in impacted areas.
Environmental regulation is evolving in a manner that may require stricter standards and enforcement, increased fines and penalties for noncompliance, more stringent environmental assessments of proposed projects, and a heightened degree of training and responsibility for our officers, directors and employees. Existing or future environmental regulation could have a material adverse effect on our business, financial condition and results of operations. We own or have owned, manage or have been in care or control of properties that may result in a requirement to environmentally remediate such properties that could involve material costs. In addition, environmental conditions or hazards may exist on the properties in which we hold interests, such as Fire Creek, Midas, True North, Hollister, Aurora, and on our other properties that are unknown to us at present or that have been caused by previous or existing owners or operators of the properties for which we may be liable. We may also acquire properties with environmental risks, and the indemnification proceeds we receive from the entity we acquire such properties from, if any, may not be adequate to pay all the fines, penalties and costs (including costs of remediation or removal and related response costs) incurred at or related to such properties.
Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions, including compliance and other orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, operation or administration costs or other remedial actions. Due to our engagement in mining operations or in the exploration or development of mineral properties, we may also be required to compensate those suffering loss or damage by reason of such mining activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations. Amendments to current laws, regulations and permits governing operations and activities of mining companies, or more stringent implementation or enforcement thereof, could have a material adverse impact on us and cause increases in exploration expenses, remedial and reclamation obligations, capital expenditures or production costs, reduction in levels of production at producing properties, or abandonment of or delays in development of new mining properties.
Regulation of greenhouse gas emissions effects and climate change issues may adversely affect our operations and markets.
Global climate change continues to attract considerable public, scientific and regulatory attention, and greenhouse gas emission regulation is becoming more commonplace and stringent. As energy, including energy produced from the combustion of carbon-based fuels, is a significant input to our mining and processing operations, we must also comply with emerging climate change regulatory requirements, including programs to reduce greenhouse gas emissions. Our principal energy sources are electricity, purchased petroleum products, propane, and natural gas. In addition, our milling operations and mobile mining equipment emit carbon dioxide.
The Canadian federal and provincial governments may enact an emission trading, carbon tax or similar program to reduce greenhouse gases, which may have a material impact on our business, financial condition or results of operations. Specifically, representatives in the Canadian federal government have announced intentions of instituting a national carbon pricing scheme based on greenhouse gas emissions. Meanwhile, the Province of Manitoba, where our True North mining complex is situated, continues to develop its own plan to reduce greenhouse gas emissions. Any regulation of greenhouse gas emissions by the Canadian federal government or the provincial government of Manitoba may have a material impact on our energy and compliance costs.
The United States federal and state governments may also enact an emission trading, carbon tax or similar program for greenhouse gas emissions, which could significantly increase our energy and regulatory compliance costs. For example, the United States federal government has considered legislation to reduce greenhouse gas emissions through a cap-and-trade system of allowances and credits, among other provisions. In addition, the United States Environmental Protection Agency has developed final rules requiring certain emitters of greenhouse gases to collect and report data with respect to their greenhouse gas emissions.
We are in the process of evaluating the potential impacts on our operations of these new and potential regulations. Either a carbon tax or a cap-and-trade program will likely result in increased future energy costs. The regulations will also likely increase our compliance costs. For example, we may be required to install new equipment to reduce emissions from our processing facilities in order to comply with new regulatory standards or to mitigate the financial impact of a new climate change program. We also may be subject to additional and extensive monitoring and reporting requirements. It is uncertain at this time how provincial and regional initiatives will interact with any federal climate change regulations.
The potential physical impacts of climate change on our operations are highly uncertain and may be particular to the unique geographic circumstances associated with each of our facilities. These may include changes in weather and rainfall patterns, water shortages, changing storm patterns and intensities and changing temperatures. These physical impacts could require us to curtail or close mining
production and could prevent us from pursuing expansion opportunities. These effects may adversely impact the cost, production and financial performance of our operations.
We must remove and reduce impurities and toxic substances naturally occurring in mining and processing ore and comply with applicable laws relating thereto, which could result in remedial action and other costs.
Mineral ores and mineral products, including gold and silver ore and products, contain naturally occurring impurities and toxic substances. Although we have implemented procedures that are designed to identify, isolate and safely remove or reduce such impurities and substances, such procedures require strict adherence and no assurance can be given that employees, contractors or others will not be exposed to or be affected by such impurities and toxic substances, which may subject us to liability. Standard operating procedures may not identify, isolate and safely remove or reduce such substances. Even with careful monitoring and effective control, there is still a risk that the presence of impurities or toxic substances in our products may result in such products being rejected by our customers, penalties being imposed due to such impurities or the products being barred from certain markets. Such incidents could require remedial action and could result in curtailment of operations. Legislation requiring manufacturers, importers and downstream users of chemical substances, including metals and minerals, to establish that the substances can be handled and used without negatively affecting health or the environment may impact our operations and markets. These potential compliance costs, litigation expenses, regulatory delays, remediation expenses and operational costs could negatively affect our financial results.
Our internal control over financial reporting was not effective for the year ended December 31, 2016. We may fail to achieve and maintain the adequacy of our internal control over financial reporting in future periods as per the requirements of the Sarbanes-Oxley Act ("SOX").
We are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of SOX. It requires an annual assessment by management of the effectiveness of our internal control over financial reporting. Our internal control over financial reporting was not effective for the year ended December 31, 2016 based on the material weakness relating to the calculation and presentation of our deferred tax assets and liabilities arising from the transition of the Company’s financial statements from International Financial Reporting Standards to US generally accepted accounting principles described in Item 9A.
We may in the future fail to achieve and maintain the adequacy of our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, and we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of SOX. Our failure to satisfy the requirements of Section 404 of SOX on an ongoing, timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our common shares. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Future acquisitions of companies may provide us with challenges in implementing the required processes, procedures and controls in our acquired operations. Acquired companies may not have disclosure control and procedures or internal control over financial reporting that are as thorough or effective as those required by securities laws currently applicable to us. For more information regarding management's assessment of the effectiveness of our internal control over financial reporting for the year ended December 31, 2016, see Item 9A of this Annual Report on Form 10-K.
Other Risks
We compete with larger, better capitalized competitors in the mining industry and intense competition could reduce our market share or harm our financial performance.
The mining industry is intensely competitive, and we compete with many companies that have more financial and technical resources than we do. Our competitive position is based on the quality and grade of our mineral reserves, our operating performance, our ability to manage our costs compared to other producers throughout the world, our ability to maintain our financial integrity through the lows of the metal price cycles and our ability to manage our vendor and customer relationships. Our costs are governed to a large extent by the location, grade and nature of our mineral reserves; our input costs including energy, labor and equipment; and our operating and management skills. The metals markets are cyclical, and our ability to maintain our competitive position over the long term is based on our ability to manage our costs, acquire and develop quality deposits and hire and retain a skilled workforce. We intend to continue to grow our business through our exploration program and through future acquisitions. Our competitors may have an advantageous market position and have greater financial and other resources, operational experience and technical capabilities than we do and may, therefore, be able to better withstand poor and volatile market conditions, obtain financing on better terms and attract better or more qualified employees, any of which may have an adverse impact on our business, financial condition and results of operations.
We are dependent upon key management personnel and executives.
We are dependent upon the services of a number of key management personnel, employees and consultants. Our ability to manage our financial, operating, legal, development and exploration activities, and hence our success, depend in large part on the efforts of these individuals. We face intense competition for qualified personnel, and there can be no assurance that we will be able to attract and retain such personnel. We have recently implemented formal programs for succession and training of management. We also maintain "key person" life insurance for only certain, but not all such individuals, which insurance would provide us with proceeds in the event of
their death. If such an event were to occur, without “key person” life insurance, we may not have the financial resources to develop or maintain our business until we replace the individual. Accordingly, the loss of the services of one or more of such key management personnel could have a material adverse effect on our business, results of operations and financial condition.
We may from time to time be involved in or subject to legal proceedings, and unfavorable outcomes of such legal proceedings may adversely affect our business and financial condition.
We may from time to time be involved in or subject to legal proceedings related to our business. Such legal proceedings can be complex, costly, and highly disruptive to business operations by diverting the attention and energies of management and other key personnel. There is no guarantee that we will not become subject to such proceedings in the future, and there can be no guarantee of the outcome of any claim. The assessment of the outcome of legal proceedings, including our potential liability, if any, is a highly subjective process that requires judgments about future events that are not within our control. The outcome of litigation, arbitration or other legal proceedings, including amounts ultimately received or paid upon judgment or settlement, may differ materially from management's outlook or estimates, including any amounts accrued in the financial statements. In addition, defense and settlement costs for any legal proceeding can be substantial, even with respect to claims that have no merit. Due to the inherent uncertainty of the litigation process, there can be no assurance that the resolution of any particular legal proceeding will not have a material adverse effect on our financial position or results of operations, and actual outcomes, including judgments, awards, settlements or orders, could have a material adverse effect on our business, financial condition, operating results, or cash flows.
Our securities may be subject to price volatility, and our outstanding shares could be subject to dilution, in which case your investment in our securities could suffer a decline in value.
Securities of mineral resource and mining companies, including our securities, have experienced substantial volatility in the past, often based on factors unrelated to the financial performance or prospects of the companies involved. These factors include macroeconomic developments in North America and globally, and market perceptions of the attractiveness of particular industries. Our securities are also likely to be significantly affected by short-term changes in commodity prices and currency exchange fluctuation. As a result of any of these factors, the market price of our securities at any given point in time may not accurately reflect our long-term value. There can be no assurance that continued fluctuations in price will not occur, which may result in losses to investors.
Broad market and industry factors may adversely affect the price of our securities, regardless of our actual operating performance. Factors that could cause fluctuation in the price of our securities may include, among other things:
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increases in production or capital costs or lower gold and silver prices;
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changes in financial estimates by us or by any securities analysts who might cover our stock;
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speculation about our business in the press or the investment community;
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conditions or trends in our industry, the market or the economy generally;
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changes in the prices of gold or silver;
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stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the mining industry;
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the inability to service or restructure our debt;
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changes in our credit rating or future prospects;
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announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures;
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failure to meet the conditions necessary to remain listed for trading on the TSX, NYSE MKT, or other similar markets;
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additions or departures of key personnel;
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changes in accounting standards, policies, guidance, interpretations or principles, or the failure to comply with accounting standards applicable to us or to maintain effective internal control over financial reporting; and
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sales of our common stock, including sales by our directors, officers or significant stockholders.
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In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources.
In addition, the exercise of stock options and warrants we have already issued, or the issuance of additional stock options, warrants, or equity securities in the future, could result in dilution to our current shareholders.
The purchase of our securities involves a high degree of risk and should be undertaken only by investors whose financial resources are sufficient to enable them to assume such risks. Our securities should not be purchased by persons who cannot afford to lose their entire investment.
We do not anticipate paying any dividends on our common shares in the foreseeable future.
We have not declared a dividend since incorporation and we do not anticipate doing so in the foreseeable future as such action is restricted pursuant to our existing debt agreements. Any future determination as to the payment of dividends will be at the discretion of the Board and will depend on the availability of profit, operating results, our financial position, future capital requirements and general business and other factors considered relevant by the Board. No assurances in relation to the payment of dividends can be given.
Our directors and officers may have conflicts of interest.
Certain of our directors and officers also serve as directors and/or officers of other companies involved in natural resource exploration, development and mining operations. Consequently, there exists the possibility for such directors and officers to be in a position of conflict of interest. The directors are required by law to act honestly and in good faith with a view to the best interests of the Company and to disclose any interest they may have in any project or opportunity of the Company. In addition, each of the directors is required by law to declare his or her interest in and refrain from voting on any matter in which he or she may have a conflict of interest, in accordance with applicable laws. However, to the extent certain of our directors and officers have conflicts of interest and fail to act in accordance with such laws, our business, financial condition and results of operations could be materially adversely affected.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
Overview of terms
Cautionary Note to U.S. Investors
: This section and other sections of this Annual Report on Form 10-K contain the terms “measured mineral resources,” “indicated mineral resources,” “inferred mineral resources,” “proven mineral reserves,” and “probable mineral reserves” as defined in accordance with NI 43-101. Please note the following regarding these terms:
“Proven mineral reserves” and “probable mineral reserves” - The definitions of proven and probable mineral reserves used in NI 43-101 differ from the definitions for “proven reserves” and “probable reserves” as found in SEC Industry Guide 7. However, based on statements from P&E Mining Consultants Inc. and Practical Mining LLC we have determined that the proven and probable reserves reflected in this Annual Report on Form 10-K are equivalent to the proven and probable reserves under SEC Industry Guide 7.
“Measured mineral resources” and “indicated mineral resources” - We advise U.S. investors that although these terms are recognized and required by Canadian regulations, these terms are not defined in SEC Industry Guide 7 and the SEC does not normally permit such terms to be used in reports and registration statements filed with the SEC. U.S. investors are cautioned not to assume that any part or all of the mineral deposits in these categories will ever be converted into reserves.
“Inferred mineral resources” - we advise U.S. investors that although this term is recognized by Canadian regulations, the SEC does not recognize it. “Inferred mineral resources” have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred mineral resource will ever be upgraded to a higher category. Under Canadian rules, estimates of inferred mineral resources may not form the basis of a feasibility study or prefeasibility study, except in rare cases. The SEC normally only permits an issuer to report mineralization that does not constitute “reserves” as in-place tonnage and grade without reference to unit measures. U.S. investors are cautioned not to assume that any part or all of an inferred mineral resource exists or is economically or legally minable.
See “
Cautionary note to U.S. investors regarding estimates of measured, indicated and inferred resources and proven and probable reserves
.”
General overview
We classify our mineral properties into three categories:
Operating
,
Development
, and
Exploration
. Operating properties are those in which we operate a producing mine with proven and probable reserves. Development properties, sometimes referred to as “projects”, are properties which are: 1) producing mineralized material but lack proven and probable reserves, 2) undergoing activities to determine if a positive mineral production decision can be made, or 3) incurring capital development expenditures, development and projects costs, and expenses to increase, define, or establish mineral reserves or estimates of mineralized material. Exploration properties are those not in the operation or development stage where we retain a significant or controlling interest or joint venture. Our exploration properties are located in Nevada, USA and Manitoba, Canada and over the last three years we have not completed any significant exploration or drilling work at such exploration properties, nor do we currently intend to do so in 2017, with the exception of Hollister.
The following table provides a summary of our properties as of and for the year ended
December 31, 2016
, each of which comprises its own reportable segment (see
Note
20. Segment information
to the
Notes to
Consolidated Financial Statements
):
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Ownership Interest
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2016 Production
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Name
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Location
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Classification
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Gold Oz.
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Silver Oz.
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GEOs
(1)
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Fire Creek
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100%
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Nevada, USA
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Operating
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101,286
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80,593
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102,383
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Midas
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100%
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Nevada, USA
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Operating
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29,824
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1,345,989
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48,623
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True North
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100%
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Manitoba, Canada
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Operating
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10,187
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853
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10,199
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Hollister
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100%
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Nevada, USA
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Exploration and Development
(2)
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—
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—
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—
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Aurora
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100%
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Nevada, USA
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Development
|
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—
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—
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—
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141,297
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1,427,435
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161,289
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(1)
This is a non-GAAP measure; refer to the
Non-GAAP Performance Measures
section of the MD&A (as defined herein) for additional detail.
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(2)
Hollister is an exploration and development stage mineral property and as such, future production refers to the estimated quantities resulting from the process of extracting mineralized materials from the earth and treating that material in a mill.
Hollister, which has not reported proven and probable reserves, is expected to produce between 30,000 - 35,000 GEOs in 2017; refer to the
2017 Full Year Outlook
section of the MD&A for additional detail.
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The locations of our mineral properties are shown below:
Operating properties
For a detailed discussion of our operating results and production data for Operating properties, see the Fire Creek, Midas, and True North sections included in Part II - Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
.
Fire Creek
General description
Fire Creek is a 100% owned, fully-permitted, underground gold mine and was acquired by Klondex in 1975. Fire Creek is located in north-central Nevada in Lander County approximately 16 miles south of a major highway (Interstate-80) near other large gold deposits and mines which are owned and operated by major mining companies. Fire Creek’s workforce is largely drawn from Elko, Nevada and Winnemucca, Nevada, both of which are served by a transcontinental railroad and have airports. Access to Fire Creek from Interstate-80 is by State Road 306, a good-quality road. Company-maintained mine and exploration roads provide access throughout the property. Fire Creek receives electrical power provided by NV Energy, a major Nevada power company. Ore mined at Fire Creek is trucked daily to the Midas milling facility for processing.
Fire Creek is a high-grade, epithermal vein deposit, and the land package covers approximately 19,000 acres (~31.5 square miles), consisting of approximately nil private patented claims and 347 unpatented mining claims. Our unpatented claims occupy public lands, administered by the United States Bureau of Land Management ("BLM"). Unpatented claims are governed by the laws and regulations of the U.S. federal government and the state of Nevada. Property taxes are paid annually to the county in which they are held. To maintain our unpatented claims, we must file a notice of intent to maintain the claims within the county they are located and pay the annual mineral claim maintenance fees to the BLM. Some of Fire Creek's claims are subject to royalties, including: Fire Creek Lands LLC 3.0% Net Smelter Return ("NSR"), McCarthy 4.0% NSR, and Pittington 2.5% NSR, some of which have been previously prepaid or advanced and are expected to be reduced for 2017 mining activities. Additionally, the Company may
incur royalty payments that have not been prepaid or advanced in 2017. There is no expiration date on the aforementioned royalties. The Company will also be subject to a 2.5% NSR to Franco-Nevada Corporation from all production commencing in 2019. There is no expiration date on the aforementioned royalty.
Infrastructure, development, and exploration
Fire Creek possesses an underground mine, related mine support infrastructure, mining equipment, and administrative buildings, all of which are in well-maintained, operating condition. During the year ended
December 31, 2016
, capital expenditures at Fire Creek totaled
$23.8 million
and 2017 capital expenditures are currently expected to approximate between
$27
-
$29 million
. At
December 31, 2016
, the gross book cost of the Fire Creek’s mineral properties, plant and equipment totaled $51.4 million.
In
2016
, we drilled approximately 280 surface and underground holes in support of exploration and production efforts, representing approximately 202,490 feet, with a focus on converting mineralized material to reserves, mineralized material growth, and discovering new mineralization. The drilling results obtained were also used to identify 2017 anticipated exploration drilling targets.
Geology
Fire Creek is located in Lander County, Nevada, and in the western half of the Northern Nevada Rift ("NNR") which is a mid-Miocene aged rifting event delineated by bimodal volcanic strata and distinguished by a prominent north-northwest trending aeromagnetic anomaly that extends approximately 300 miles south-southeastward from the Oregon-Nevada border.
The deposit is an epithermal deposit vertically-zoned within high-angle northwest striking structures and consists of low-sulfidation mineralization hosted in a mid-Miocene basalt package. Mineralization occurs in two habits: shallow structurally-controlled mineralization in variably altered Tertiary basalt and primarily native gold mineralization hosted in steeply dipping quartz-calcite veins or structures. A package of middle-Miocene basalt and basaltic andesite flows has been cut by high-angle normal faults related to both NNR and Basin and Range extension that form grabens and half-grabens which are the structural controls for mineralization in the district.
Midas
General description
We acquired the fully-permitted Midas mine and ore milling facility on February 11, 2014. It is located in Elko County in north-central Nevada, one mile from the town of Midas, Nevada. It lies about 58 miles east of Winnemucca on Nevada State Highway 789 from Interstate Highway I-80, and 80 miles from Battle Mountain driving west then north. Midas receives electrical power provided by NV Energy, a major Nevada power company.
Midas is a high-grade, epithermal vein deposit, and the land package covers approximately 30,000 acres (~46 square miles), which includes fee lands, federal unpatented mining claims, seven mining leases, BLM rights-of-way, general agreements, easements, and surface use agreements. Within the land package, there are 1,489 federal unpatented mining claims, of which 1,456 are owned and 33 are leased. Fee lands comprise approximately 2,985 acres of the land package which is a mix of surface-mineral rights and surface rights only. Our unpatented claims occupy public lands, administered by the BLM. Unpatented claims are governed by the laws and regulations of the U.S. federal government and the state of Nevada. Property taxes on fee lands are paid annually to the county in which they are held. To maintain our unpatented claims, we must file a notice of intent to maintain the claims within the county they are located and pay the annual mineral claim maintenance fees to the BLM. Certain of the Midas claims are subject to a royalty. Midas is also subject to a 2.5% NSR to Franco-Nevada Corporation from all production commencing in 2019.
Infrastructure, development, and exploration
Midas includes an underground mine, related mine support infrastructure, mining equipment, a Merrill-Crowe refining
facility, a milling circuit, and administrative buildings, all of which are in well-maintained, operating condition. During the year ended
December 31, 2016
, capital expenditures at Midas totaled
$23.8 million
and 2017 capital expenditures are currently expected to approximate between
$15
-
$17 million
, which includes expected capital related to the mill. At
December 31, 2016
, the gross book cost of Midas’s mineral properties, plant and equipment totaled $115.0 million.
In
2016
, we drilled approximately 148 surface and underground holes in support of exploration and production efforts, representing approximately 80,803 feet, with a focus on converting mineralized material to reserves, mineralized material growth, and discovering new mineralization. The drilling results obtained were also used to identify 2017 anticipated exploration drilling targets.
Processing facility
Ore from Fire Creek and Midas are processed at the Midas mill, which has a design capacity of 1,200 tons per day. Run-of-mine ore is crushed to 100% passing ½” in a conventional two-stage crushing circuit which utilizes a primary jaw crusher and a secondary cone crusher with the circuit closed by a double deck vibrating screen. The crushed product reports to the grinding circuit consisting of an 800 horsepower overflow ball mill and a 250 horsepower vert-mill. The circuit is closed using a bank of four (three operating, one standby) 10-inch cyclones. A portion of the cyclone underflow is sent to a gravity concentrator to remove coarse gold. The gravity concentrate is leached using an Acacia intense cyanidation unit with the gravity tail returned to the grinding circuit for further grinding. The ground product is thickened before being leached with cyanide for 72 hours in a series of eight leach tanks. The leached slurry reports to a conventional five-stage counter current decantation circuit with the overflow solution from the first thickener, together with the pregnant solution from the Acacia reactor, reporting to the Merrill-Crowe circuit where zinc dust is used to precipitate the precious metal from solution. The underflow from the fifth thickener is treated to eliminate the remaining cyanide and pumped to the tailings storage facility. Mercury is removed from the precipitate in a retort oven before being smelted and poured into doré bars. The bars are shipped off site for further refining by a third party.
Geology
Midas is located on the southeast flank of the Snowstorm Mountain range near the eastern margin of the NNR structural domain, and is hosted by a bimodal suite of volcanic rocks.
The Midas deposit consists of a series of steeply dipping, quartz-calcite-adularia mineralized veins hosted by volcanic and volcanoclastic rocks. Mineralization occurs as electrum and is intimately associated with selenide and sulfide minerals. It belongs to a suite of middle Miocene low-sulfidation epithermal mineralization systems associated with magmatism and faulting along the NNR. The mineralization model at Midas is a shallow, low-sulfidation, vertically- and laterally-zoned, epithermal gold-silver system. Rocks in the Midas district are
primarily ash flow, air-fall and lithic tuffs, felsic plugs, volcanoclastic sediments and gabbroic sills and dikes.
True North
General description
We acquired True North, which is our only material property located outside of Nevada, USA, in January 2016. True North is located adjacent to the township of Bissett, Canada on the north shore of Rice Lake in southeastern Manitoba, Canada, 190 miles northeast of the city of Winnipeg, Canada. Bissett can be accessed from Winnipeg via all-weather provincial highways. A small emergency gravel airstrip is located 12 miles east of Bissett. The adjacent Rice Lake serves as a base for float-equipped aircraft during the ice free months.
The True North land package covers approximately 40,257 hectares, and consists of claims, patents and a mineral lease. We hold 18 patented mining claims covering 296 hectares and 300 mining claims covering 39,195 hectares. We own 100% of 273 of the mining claims and own a mineral lease which covers 766 hectares and, subject to annual payments, expires April 1, 2034. We own 50% of the remaining 27 mining claims through a joint venture agreement with Greenbelt Gold Mines Inc.
Infrastructure, development, and exploration
True North includes an underground mine, related mine support infrastructure, housing camps, mining equipment, a flotation and carbon in pulp ("CIP") refining facility, a milling circuit, tailings facilities, and administrative buildings, all of which are in well-maintained, operating condition. During the year ended
December 31, 2016
, capital expenditures and
Development and projects costs
at True North totaled
$11.2 million
and
$5.5 million
, respectively, and 2017 capital expenditures are currently expected to approximate between
$15
-
$16 million
, which includes expected capital related to the mill. At
December 31, 2016
, the gross book cost of True North’s mineral properties, plant and equipment totaled $43.5 million.
In
2016
, we drilled approximately 167 underground holes in support of exploration and production efforts, representing approximately 25,857 meters, with a focus on converting mineralized material to reserves, mineralized material growth, and discovering new mineralization. The drilling results obtained were also used to identify 2017 anticipated exploration drilling targets.
Processing facility
Ore from True North is processed at its mill, which has a design capacity of 2,500 tons per day. Run-of-mine ore is crushed to 100% passing ½” in a conventional two-stage crushing circuit which utilizes a primary jaw crusher and a secondary cone crusher with the circuit closed by a double deck vibrating screen. The crushed product is ground using an overflow ball mill and cyclone bank with a large portion of the cyclone underflow routed to two gravity concentrators to remove the coarse gold. The gravity concentrate is further concentrated using a gravity table in the refinery. The final gravity concentrate is smelted into doré bars and shipped off site for further refining.
The cyclone overflow reports to a flotation circuit where the gold-bearing material is collected in the flotation concentrate for further processing and the flotation tails are collected in the tailings pump box and pumped to the tailings storage facility. The flotation concentrate is reground before being leached in a cyanide solution for approximately100 hours. The leached slurry then flows through a series of six CIP tanks where the precious metals are adsorbed onto the carbon. The remaining slurry is treated to remove remaining cyanide and combined with the flotation tails slurry and pumped to the tailings storage facility. Carbon is removed from the CIP circuit, acid washed, and stripped to remove the precious metal. The carbon is then returned to the CIP circuit for reuse. The precious metal is recovered from solution in the stripping process using electrowinning cells. The precipitate from the cells is smelted to produce doré bars that are shipped off site for further refining.
Geology
True North lies within the Archean Rice Lake greenstone belt located at the west end of the Uchi Volcanic-Plutonic Subprovince of the Superior Province. The Rice Lake greenstone belt is bound to the north and south by the Wanipigow Shear Zone and the Manigotagan Shear Zone, respectively.
All the major mineralization occurrences in the True North area occur as quartz veins or quartz vein systems formed during structural deformation of the host rocks. At True North, mineralization is controlled by quartz-carbonate veins and vein systems in brittle-ductile structures with related hydrothermal alteration halos within or at the margin of particular host rock units. The mineralized veins show a high degree of structural control and are best developed in competent host rock units, particularly in the gabbro sill known as the San Antonio Unit.
All of the mineralized zones at True North are hosted in rocks of the Bidou Lake Assemblage, which forms a north-facing stratigraphic sequence of tholeiitic basalt to intermediate volcanic flows, dacite crystal tuffs and breccias overlain by well stratified felsic epiclastic rock interpreted to be of pyroclastic and sedimentary origin. The stratigraphic sequence is intruded by tholeiitic gabbro sills, and by dikes and felsic porphyry dikes.
The best-known gabbro sill is the San Antonio Unit, host rock of the mineralization at the True North deposit. The Bidou Lake Assemblage is unconformably overlain by feldspathic sandstone of the San Antonio Assemblage. The mineralized veins show a high degree of structural control and are best developed in competent host rock units.
Proven and probable reserves
Our reserve estimates are calculated in accordance with CIM Definition Standards and NI 43-101, which differ from the definitions for "proven reserves" and "probable reserves" as found in SEC Industry Guide 7. However, based on statements from P&E Mining Consultants Inc. and Practical Mining LLC we have determined that our proven and probable reserves calculated in accordance with CIM Definition Standards and NI 43-101, and reflected in this Annual Report on Form 10-K, are equivalent to proven and probable reserves as defined under SEC Industry Guide 7. Our reserve estimates are calculated using prices of $1,200 per ounce for gold and $17.00 per ounce for silver, both of which are less than the LBMA average metal prices for the past three years of approximately $1,226 per ounce for gold and $17.30 per ounce for silver. The table below summarizes the most recent reserve estimates, all of which were released during the third quarter of 2016 with the following effective dates: Fire Creek - June 30, 2016, Midas - May 31, 2016, and True North - June 30, 2016.
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Ounces per ton
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Ounces (thousands)
|
Mineral reserves
(1)(2)(3)
|
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Ore tons (thousands)
|
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Gold
|
|
Silver
|
|
Gold equivalent
(3)
|
|
Gold
|
|
Silver
|
|
Gold equivalent
(4)
|
Fire Creek
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proven
|
|
121
|
|
|
1.703
|
|
|
1.37
|
|
|
1.722
|
|
|
206
|
|
|
166
|
|
|
208
|
|
Probable
|
|
119
|
|
|
0.715
|
|
|
0.50
|
|
|
0.722
|
|
|
85
|
|
|
59
|
|
|
86
|
|
Proven & probable
|
|
240
|
|
|
1.213
|
|
|
0.94
|
|
|
1.226
|
|
|
291
|
|
|
225
|
|
|
294
|
|
Midas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proven
|
|
141
|
|
|
0.261
|
|
|
9.18
|
|
|
0.388
|
|
|
37
|
|
|
1,295
|
|
|
55
|
|
Probable
|
|
307
|
|
|
0.335
|
|
|
3.84
|
|
|
0.388
|
|
|
103
|
|
|
1,180
|
|
|
119
|
|
Proven & probable
|
|
449
|
|
|
0.311
|
|
|
5.52
|
|
|
0.388
|
|
|
140
|
|
|
2,475
|
|
|
174
|
|
True North
|
|
|
|
|
|
|
|
|
|
|
|
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Proven
|
|
153
|
|
|
0.241
|
|
|
—
|
|
|
0.241
|
|
|
37
|
|
|
—
|
|
|
37
|
|
Probable
|
|
199
|
|
|
0.245
|
|
|
—
|
|
|
0.245
|
|
|
49
|
|
|
—
|
|
|
49
|
|
Proven & probable
|
|
352
|
|
|
0.243
|
|
|
—
|
|
|
0.243
|
|
|
86
|
|
|
—
|
|
|
86
|
|
True North tailings
|
|
|
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Probable
|
|
1,170
|
|
|
0.028
|
|
|
—
|
|
|
0.028
|
|
|
32
|
|
|
—
|
|
|
32
|
|
Total
|
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Proven
|
|
415
|
|
|
|
|
|
|
|
|
280
|
|
|
1,461
|
|
|
300
|
|
Probable
|
|
1,795
|
|
|
|
|
|
|
|
|
269
|
|
|
1,239
|
|
|
286
|
|
Proven & probable
|
|
2,210
|
|
|
|
|
|
|
|
|
549
|
|
|
2,700
|
|
|
586
|
|
(1)
Mineral reserves at Fire Creek and Midas have been estimated using gold and silver prices of $1,200/oz. and $17.00/oz., respectively, and at True North were estimated using a gold price of CDN$1,500/oz and a CDN$:USD$ exchange rate of 0.80:1.0 (or US$1,200/oz.).
|
(2)
For Fire Creek and Midas, metallurgical recoveries for gold and silver are 94% and 92%, respectively, and at True North 94% for gold.
|
(3)
Cut off grades for mineral reserves at Fire Creek and Midas are 0.343 and 0.305 opt GEO, respectively, 0.13 opt gold at True North, and 0.026 opt gold for True North tailings.
|
(4)
Gold equivalent grades and ounces were calculated using a silver to gold ratio of 72.1:1 at Fire Creek and Midas. This is a non-GAAP measure; refer to the
Non-GAAP Performance Measures
section of the MD&A for additional detail.
|
Mineral resources
Pursuant to applicable Canadian securities laws, we are required to disclose the following mineral resource estimates. We advise U.S. investors that although these terms are recognized and required by Canadian regulations, these terms are not defined in SEC Industry Guide 7 and the SEC does not normally permit such terms to be used in reports and registration statements filed with the SEC. U.S. investors are cautioned not to assume that any part or all of the mineral deposits in these categories will ever be converted into reserves. Our mineral resource estimates are calculated in accordance with National Instrument 43-101
Standards of Disclosure for Mineral Projects.
The table below summarizes the most recent resource estimates, all of which were released during the third quarter of 2016 with the following effective dates: Fire Creek - June 30, 2016, Midas - May 31, 2016, and True North - June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ounces per ton
|
|
Ounces (thousands)
|
Mineral resources
(1)(2)(3)(4)(5)
|
|
Tons (thousands)
|
|
Gold
|
|
Silver
|
|
Gold equivalent
(4)
|
|
Gold
|
|
Silver
|
|
Gold equivalent
(6)
|
Fire Creek
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured
|
|
180
|
|
|
1.637
|
|
|
1.30
|
|
|
1.655
|
|
|
294
|
|
|
234
|
|
|
298
|
|
Indicated
|
|
346
|
|
|
0.591
|
|
|
0.51
|
|
|
0.598
|
|
|
205
|
|
|
176
|
|
|
207
|
|
Measured & indicated
|
|
526
|
|
|
0.948
|
|
|
0.78
|
|
|
0.959
|
|
|
499
|
|
|
411
|
|
|
505
|
|
Inferred
|
|
931
|
|
|
0.538
|
|
|
0.48
|
|
|
0.544
|
|
|
501
|
|
|
446
|
|
|
507
|
|
Midas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured
|
|
417
|
|
|
0.400
|
|
|
7.97
|
|
|
0.511
|
|
|
167
|
|
|
3,325
|
|
|
213
|
|
Indicated
|
|
697
|
|
|
0.362
|
|
|
4.73
|
|
|
0.428
|
|
|
252
|
|
|
3,295
|
|
|
298
|
|
Measured & indicated
|
|
1,114
|
|
|
0.376
|
|
|
5.94
|
|
|
0.459
|
|
|
419
|
|
|
6,620
|
|
|
511
|
|
Inferred
|
|
671
|
|
|
0.303
|
|
|
2.93
|
|
|
0.344
|
|
|
203
|
|
|
1,966
|
|
|
231
|
|
True North
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured
|
|
455
|
|
|
0.232
|
|
|
—
|
|
|
0.232
|
|
|
106
|
|
|
—
|
|
|
106
|
|
Indicated
|
|
931
|
|
|
0.202
|
|
|
—
|
|
|
0.202
|
|
|
188
|
|
|
—
|
|
|
188
|
|
Measured & indicated
|
|
1,386
|
|
|
0.212
|
|
|
—
|
|
|
0.212
|
|
|
294
|
|
|
—
|
|
|
294
|
|
Inferred
|
|
2,793
|
|
|
0.165
|
|
|
—
|
|
|
0.165
|
|
|
460
|
|
|
—
|
|
|
460
|
|
True North tailings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indicated
|
|
2,138
|
|
|
0.024
|
|
|
—
|
|
|
0.024
|
|
|
51
|
|
|
—
|
|
|
51
|
|
Inferred
|
|
47
|
|
|
0.022
|
|
|
—
|
|
|
0.022
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured
|
|
1,052
|
|
|
|
|
|
|
|
|
567
|
|
|
3,559
|
|
|
617
|
|
Indicated
|
|
4,112
|
|
|
|
|
|
|
|
|
696
|
|
|
3,471
|
|
|
744
|
|
Measured & indicated
|
|
5,164
|
|
|
|
|
|
|
|
|
1,263
|
|
|
7,030
|
|
|
1,361
|
|
Inferred
|
|
4,442
|
|
|
|
|
|
|
|
|
1,165
|
|
|
2,412
|
|
|
1,199
|
|
(1)
Mineral resources which are not mineral reserves do not have demonstrated economic viability. The estimate of mineral resources may be materially affected by environmental, permitting, legal, title, taxation, sociopolitical, marketing, or other relevant issues. The quantity and grade of reported inferred resources in this estimation are uncertain in nature and there has been insufficient exploration to define these inferred resources as an indicated or measured mineral resource and it is uncertain if further exploration will result in upgrading them to an indicated or measured mineral resource category.
|
(2)
Mineral resources at Fire Creek and Midas have been estimated using gold and silver prices of $1,400/oz. and $19.83/oz., respectively, and at True North were estimated using a gold price of CDN$1,750/oz and a CDN$:USD$ exchange rate of 0.80:1.0 (or US$1,400/oz.).
|
(3)
For Fire Creek and Midas, metallurgical recoveries for gold and silver are 94% and 92%, respectively, and at True North 94% for gold.
|
(4)
Cut off grades for mineral resources at Fire Creek and Midas are 0.228 and 0.196 opt GEO, respectively, 0.09 opt gold at True North, and 0.015 opt gold for True North tailings.
|
(5)
Mineral resource estimates are inclusive of proven and probable mineral reserves.
|
(6)
Gold equivalent grades and ounces were calculated using a silver to gold ratio of 72.1:1 at Fire Creek and Midas. This is a non-GAAP measure; refer to the
Non-GAAP Performance Measures
section of the MD&A for additional detail.
|
Development properties
Hollister
General description
The Hollister exploration and development project is a fully-permitted past producing underground and open pit operation, located in north-central Nevada in Lander County, which we acquired in October 2016. Hollister is located
approximately 61.5 miles east-northeast of Winnemucca, Nevada. Hollister
receives electrical power provided by NV Energy, a major Nevada power company. We classify the Hollister Project as both exploration and development, as each activity has been concurrently performed following our acquisition.
Hollister comprises 1,005 unpatented lode claims and 11 unpatented mill site claims that cover an area in excess of 18,000 acres. Patented claims occupy private lands and our unpatented claims occupy public lands, administered by the BLM. Unpatented claims are governed by the laws and regulations of the U.S. federal government and the state of Nevada. To maintain our patented claims in good standing, we must pay the annual property tax payments to the county in which the claims are held. To maintain our unpatented claims in good standing, we must file a notice of intent to maintain the claims within the county and pay the annual mineral claim filing fees to the BLM. Certain claims and areas of Hollister are subject to royalties, including: 5% and 3% NSR to Franco Nevada Corporation, 5% to Newmont, 1% to Hillcrest Mining Corporation, 1% to Finley River Company L.L.C., 2% to Hi-Tech, 2% to Finley, and 1% to Waterton after 500,000 ounces of gold production. The Company is expected to incur royalty payments of approximately 5% of revenue from Hollister in 2017. There is no expiration date on the aforementioned royalties.
Infrastructure, development, and exploration
Hollister includes an underground mine, former open pit mines, related mine support infrastructure, mining equipment, and administrative buildings, all of which are in well-maintained, operating condition. It is currently anticipated that ore from Hollister, which does not have a mill, will be processed at the nearby Midas mill (approximately 17 miles away) or the Aurora mill (approximately 277 miles away), or at a combination of both. During the year ended
December 31, 2016
, capital expenditures and
Development and projects costs
at Hollister totaled
$0.8 million
and
$3.4 million
, respectively, and 2017 capital expenditures are currently expected to approximate between
$7
-
$9 million
. At
December 31, 2016
, the gross book cost of Hollister's mineral properties, plant and equipment totaled $111.2 million.
Geology
Hollister is located at the northwestern end of the Carlin Trend, that is approximately five miles wide by 40 miles long. It forms a portion of the eastern edge of the larger NNR, a major, north-northwest trending structural feature that extends for at least 298 miles, from south-central Nevada to the Oregon-Nevada border.
The NNR is distinguishable on regional-scale magnetic maps as a prominent north-northwest-trending lineament of magnetic highs. This distinctive positive magnetic anomaly is caused by Miocene-age syn-rift which is associated with the deposition of bimodal volcanic rocks ranging from basaltic to rhyolitic in composition.
The geologic setting at Hollister includes Ordovician Vinini Formation at the base of the sequence consisting of basinal sedimentary quartzite, siltite, and argillite rocks. The unconformity surface is a fanglomerate conglomerate/breccia with angular and sub-angular Vinini clasts within a silt, sand and tuffaceous matrix. Ordovician rocks are intruded and overlain by late Eocene intrusive, welded tuff, and mafic rocks.
Disseminated mineralization occurs in altered Miocene volcanic units in the Hollister open pits. Other zones of volcanic-hosted, disseminated mineralization are also known to exist beneath near-surface mineralization at Clementine, Velvet, and Butte, north of the Hollister pits.
Veins at Hollister contain the bulk of the high-grade mineralization known within the property. The principal veins, Clementine and Gwenivere, comprise semi-continuous vein systems with internal mineralization shoots, and local en echelon steps or splays. The veins in mineralized areas typically range from 0.5 to 2.0 ft in width, but locally can be more than 5.0 ft in width. The veins are mostly hosted below the Tertiary-Ordovician contact.
Aurora
General description
The Aurora project is a fully-permitted past producing underground and open pit operation, located in west-central Nevada in Mineral County, which we acquired in October 2016.
Infrastructure, development, and exploration
Aurora includes an underground mine, former open pit mines, related mine support infrastructure, mining equipment, a milling circuit, and administrative buildings, all of which are in a well-maintained condition. During the year ended
December 31, 2016
, capital expenditures and
Development and projects costs
at Aurora totaled
$0.6 million
and
nil
, respectively. At
December 31, 2016
, the gross book cost of the Aurora's mineral properties, plant and equipment totaled $13.6 million.
Aurora consists of 93 patented mining claims, 160 acres of fee lands, and 287 unpatented lode-mining claims, totaling over 5,004 contiguous acres that encompass the entire district.
Patented claims occupy private lands and our unpatented claims occupy public lands, administered by the BLM. Unpatented claims are governed by the laws and regulations of the U.S. federal government and the state of Nevada. To maintain our
patented claims in good standing, we must pay the annual property tax payments to the county in which the claims are held. To maintain our unpatented claims in good standing, we must file a notice of intent to maintain the claims within the county and pay the annual mineral claim filing fees to the BLM. A portion of the patented and unpatented claims owned or leased by Klondex and the leased fee lands are subject to underlying royalties, such as a 3% royalty to Waterton.
Processing facility
We do not currently operate the Aurora mill, but are considering opportunities to process Hollister concentrates or toll-milling. The Aurora mill uses a jaw crusher to crush the run-of-mine ore. The crushed product is ground using a SAG mill and two over flow ball mills with the circuit closed by a bank of cyclones. The cyclone overflow reports to a series of 8 carbon in leach ("CIL") tanks where cyanide is added and precious metal is leached from the ore and adsorbed onto the carbon. The remaining slurry is treated to remove remaining cyanide and pumped to the tailings storage facility. Carbon is removed from the CIL circuit, acid washed, and stripped to remove the precious metal. The carbon is then returned to the CIL circuit for reuse. The precious metal is recovered from solution in the stripping process using electrowinning cells. The precipitate from the cells is smelted to produce doré bars that are shipped off site for further refining. Maintenance activities were in process in the fourth quarter of 2016.
Geology
Aurora is located within the Walker Lane structural belt of western Nevada. The Walker Lane is characterized by northwest-trending en echelon right-lateral strike slip faults that have tilted and rotated structural blocks since mid-Miocene through the Quaternary. Mineralized veins typically occur along northeasterly orientations. Northeast structures mostly host post-date vein mineralization in the district.
Mineralization at Aurora occurs as low-sulfidation epithermal veins, breccias, and stockwork zones in Miocene intermediate to felsic composition volcanic rocks. The Prospectus and Humboldt areas are underlain by a complex series of andesitic flows, conglomerates, and lahars. The Martinez area is underlain by a more “porphyritic” volcanic/subvolcanic rock of andesitic to dacitic composition. Mineralized veins are typically composed of several generations of silica accompanied by variable amounts of adularia, sericite, pyrite, base metal sulfides, sulfosalts and electrum.
Exploration properties
We currently have exploration properties in Manitoba, Canada and in Nevada, USA, which include the following: Maggie Creek, Reef, and Hot Springs. None of these properties currently have proven or probable reserves as defined by
SEC
Industry Guide 7
of the Exchange Act or NI 43-101 or mineral resource estimates calculated in accordance with NI 43-101. At the end of 2016, these properties covered approximately 2,831 acres. Over the past three years, we have not performed any significant exploration campaigns at these properties and do not currently have any plans to perform significant exploration activities at these properties in 2017. We continually evaluate these properties to determine how to best advance them by improving or increasing the identified mineralized materials and/or selling them or entering into joint venture or royalty agreements.