Quarterly Report (10-q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

o (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to

Commission file number: 001-37563

KLONDEX MINES LTD.

(Exact name of registrant as specified in its charter)



British Columbia		98-1153397
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
6110 Plumas Street, Suite A Reno, Nevada		89519
(Address of principal executive offices)		(Zip Code)

(775) 284-5757

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

On November 6, 2017 , there were 179,608,280 shares of the registrant's common stock with no par value per share, outstanding.

KLONDEX MINES LTD.

FORM 10-Q

For the Quarter Ended September 30, 2017

INDEX




		Page

	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	43

	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities and Use of Proceeds	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	44
	Signatures	44

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Cautionary statement regarding forward-looking statements

This Quarterly Report on Form 10-Q contains forward-looking information within the meaning of Canadian securities laws and forward-looking statements within the meaning of the United States securities laws (collectively, "forward-looking statements") and are intended to be covered by the safe harbors provided by such regulations. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, identified by words or phrases such as “expects”, “is expected”, “anticipates”, “believes”, “plans”, “projects”, “estimates”, “assumes”, “intends”, “strategy”, “goals”, “objectives”, “potential”, “possible” or variations thereof or stating that certain actions, events, conditions or results “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved, or the negative of any of these terms and similar expressions) are not statements of historical fact and may be forward-looking statements. Our forward-looking statements may include, without limitation, statements with respect to:


•	estimates of future mineral production, mining activities and sales (including graphs or other visual representations of future production forecasts);


•	estimates of future production costs and other expenses for specific operations and on a consolidated basis;


•	estimates of future capital expenditures, construction or production activities and other cash needs, for specific operations and on a consolidated basis, and expectations as to the funding or timing thereof;


•	estimates as to the projected development of certain mineral projects, including the timing of such development, the costs of such development and other capital costs, financing plans for these deposits and expected production commencement dates;


•	estimates of mineral reserves and mineral resources, timing of updated studies and statements regarding future exploration;


•	statements regarding the availability of, and, terms and costs related to, future borrowing and financing;


•	estimates regarding future exploration expenditures, results and reserves and resources;


•	estimates regarding potential cost savings, productivity and operating performance;


•	expectations regarding the start-up time, ramp up time or ability to put a mine into production;


•	expectations regarding the design, mine life, mill availability, production and costs applicable to sales and exploration potential of our mines and projects;


•	statements regarding future transactions; and


•	statements regarding the impacts of changes in the legal and regulatory environment in which we operate.

Forward-looking statements have been based upon our current business and operating plans, as approved by our Board of Directors; our cash and other funding requirements and timing and sources thereof; results of pre-feasibility and technical reports; mineral resource and reserve estimates; exploration activities; any required permitting processes; and current market conditions and project development plans. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors that could cause actual events or results to differ from those reflected in the forward-looking statements, including, without limitation:


•	the prices of gold, silver, and other metals and commodities;


•	the cost of operations;


•	currency fluctuations;


•	inflation or deflation;


•	geological and metallurgical assumptions;


•	risks and uncertainties relating to the interpretation of drill results, the geology, grade and continuity of our mineral deposits;


•	operating performance of equipment, processes and facilities; including the impact of weather on such operating performance;


•	timing of receipt of necessary governmental permits or approvals;


•	domestic and foreign laws or regulations, particularly relating to the environment, mining and processing;


•	changes in tax laws;


•	domestic and international economic and political conditions;


•	our ability to obtain or maintain necessary financing;


•	other risks and hazards associated with mining operations;


•	uncertainty of estimates of capital costs, operating costs, production and economic returns;


•	uncertainty related to inferred mineral resources;


•	labor relations and our need and/or ability to attract and retain qualified management and technical personnel; and

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•	increased regulatory compliance costs relating to the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The foregoing list is not exhaustive of the factors that may affect any of our forward-looking statements. Forward-looking statements are statements about the future and are inherently uncertain, and our actual achievements or other future events or conditions may differ materially from those reflected in the forward-looking statements due to a variety of risks, uncertainties and other factors, including, without limitation, those referred to in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for fiscal year ended December 31, 2016 .

Our forward-looking statements contained in this Quarterly Report on Form 10-Q are based on the beliefs, expectations and opinions of management as of the date of this report. We do not assume any obligation to update forward-looking statements if circumstances or management’s beliefs, expectations or opinions should change, except as required by law. For the reasons set forth above, investors should not place undue reliance on forward-looking statements in this Quarterly Report on Form 10-Q.

Cautionary note to U.S. investors regarding estimates of measured, indicated and inferred resources and proven and probable reserves

As used in this Quarterly Report on Form 10-Q, the terms “mineral reserve”, “proven mineral reserve” and “probable mineral reserve” are Canadian mining terms as defined in accordance with Canadian National Instrument 43-101-Standards of Disclosure for Mineral Projects (“NI 43-101”) and the Canadian Institute of Mining, Metallurgy and Petroleum (CIM)-CIM Definition Standards on Mineral Resources and Mineral Reserves, adopted by the CIM Council, as amended (“CIM Definition Standards”).

These definitions differ from the definitions in the U.S. Securities and Exchange Commission's ("SEC") Industry Guide 7 (“SEC Industry Guide 7”) under the U.S. Securities Exchange Act of 1934 (the "Exchange Act").

The terms “mineral resource”, “measured mineral resource”, “indicated mineral resource” and “inferred mineral resource” are defined in, and required to be disclosed by NI 43-101; however, these terms are not defined terms under SEC Industry Guide 7 and are normally not permitted to be used in reports and registration statements filed with the SEC. Investors are cautioned not to assume that all or any part of a mineral deposit in these categories will ever be converted into reserves. “Inferred mineral resources” have a lower level of confidence than an "indicated mineral resource" and must not be converted to a mineral "reserve". 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. Under Canadian rules, estimates of inferred mineral resources may not form the basis of feasibility or pre-feasibility studies, except in rare cases.

Disclosure of “contained ounces” in a resource is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report in place tonnage and grade without reference to unit measures for mineralization that does not constitute “reserves” by SEC standards. Accordingly, information contained in this report and the documents incorporated by reference herein contain descriptions of our mineral deposits that may not be comparable to similar information made public by U.S. companies subject to the reporting and disclosure requirements under the United States federal securities laws and the rules and regulations thereunder.

Brian Morris, our Senior Vice President, Exploration (who is a "qualified person" for purposes of NI 43-101), has approved the disclosure of all the scientific and technical information contained in this Quarterly Report on Form 10-Q.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

KLONDEX MINES LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(US dollars in thousands)



	Note	September 30, 2017			December 31, 2016
Assets
Current assets
Cash and cash equivalents		$	20,607		$	47,636
Inventories	3	43,067			21,310
Prepaid expenses and other	4	4,694			4,678
Derivative assets	9	1,406			1,247
Total current assets		69,774			74,871
Mineral properties, plant and equipment, net	5	291,556			276,223
Derivative assets	9	152			1,545
Restricted cash		9,555			10,055
Deferred tax assets		18,696			17,284
Total assets		$	389,733		$	379,978
Liabilities
Current liabilities
Accounts payable		$	32,082		$	23,797
Accrued compensation and benefits		5,451			4,672
Derivative liabilities	9	385			1,721
Debt	6	10,171			8,502
Provision for legal settlement		—			3,000
Income taxes payable		4,326			—
Total current liabilities		52,415			41,692
Derivative liabilities	9	—			331
Debt	6	14,930			21,689
Deferred share units liability	8	1,298			812
Asset retirement obligations	7	26,705			25,436
Deferred tax liabilities		14,134			11,964
Total liabilities		109,482			101,924
Shareholders' Equity
Unlimited common shares authorized, no par value; 177,642,154 and 175,251,538 issued and outstanding at September 30, 2017 and December 31, 2016, respectively		—			—
Additional paid-in capital		369,898			363,899
Accumulated deficit		(74,207		)	(58,280		)
Accumulated other comprehensive loss		(15,440		)	(27,565		)
Total shareholders' equity		280,251			278,054
Total liabilities and shareholders' equity		$	389,733		$	379,978

The accompanying notes are an integral part of the condensed consolidated financial statements.

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KLONDEX MINES LTD.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited)

(US dollars in thousands, except per share amounts)



		Three months ended September 30,						Nine months ended September 30,
	Note	2017			2016			2017			2016
Revenues		$	48,853		$	55,641		$	177,355		$	142,075
Cost of sales
Production costs		26,108			27,774			94,035			70,681
Depreciation and depletion		10,673			6,885			33,273			19,114
Write-down of production inventories	3	6,394			—			12,309			—
		5,678			20,982			37,738			52,280
Other operating expenses
General and administrative		5,738			4,837			15,953			11,435
Exploration		3,667			3,421			5,093			8,263
Development and projects costs		2,288			—			11,674			5,530
Asset retirement and accretion		382			256			1,143			755
Business acquisition costs		—			818			—			1,870
Provision for legal settlement		—			—			—			2,250
Loss on equipment disposal		201			105			343			109
(Loss) Income from operations		(6,598		)	11,545			3,532			22,068
Other income (expense)
(Loss) on derivatives, net	9	(219		)	(1,297		)	(699		)	(15,578		)
Interest (expense), net	6	(1,028		)	(1,218		)	(3,285		)	(3,949		)
Foreign currency (loss) gain, net		(4,652		)	328			(8,756		)	(2,222		)
Interest income and other (expense), net		(65		)	52			40			57
Income (loss) before tax		(12,562		)	9,410			(9,168		)	376
Income tax (expense)	13	(830		)	(2,141		)	(6,759		)	(4,254		)
Net income (loss)		$	(13,392	)	$	7,269		$	(15,927	)	$	(3,878	)

Net income (loss) per share
Basic	14	$	(0.08	)	$	0.05		$	(0.09	)	$	(0.03	)
Diluted	14	$	(0.08	)	$	0.05		$	(0.09	)	$	(0.03	)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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KLONDEX MINES LTD.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(US dollars in thousands)



	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Net income (loss)	$	(13,392	)	$	7,269		$	(15,927	)	$	(3,878	)
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net of tax (expense) benefit of ($2,248) and $1,147 for the three months ended September 30, 2017 and 2016, respectively and ($4,260) and ($1,010) for the nine months ended September 30, 2017 and 2016, respectively.	6,398			(3,264		)	12,125			2,876
Comprehensive income (loss)	$	(6,994	)	$	4,005		$	(3,802	)	$	(1,002	)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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KLONDEX MINES LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(US dollars in thousands)



		Three months ended September 30,						Nine months ended September 30,
	Note	2017			2016			2017			2016
Operating activities
Net income (loss)		$	(13,392	)	$	7,269		$	(15,927	)	$	(3,878	)
Significant items not involving cash
Depreciation and depletion		10,673			6,940			33,435			19,162
Asset retirement and accretion		382			256			1,143			755
Derivative fair value adjustments		(503		)	(1,740		)	(334		)	8,477
Write-down of production inventories	3	1,759			—			3,749			—
Foreign exchange, net		5,567			(2,861		)	9,994			(2,890		)
Deferred tax expense (benefit)		1,412			878			758			1,628
Share-based compensation	12	1,050			731			2,771			1,769
Deliveries under Gold Purchase Agreement ⁽¹⁾		(2,045		)	(1,692		)	(5,861		)	(4,452		)
Loss on equipment disposal		201			105			343			109
Deferred share unit expense	8	(8		)	1,007			396			1,007
Non-cash interest expense		138			144			411			144
Provision for legal settlement		—			—			—			2,250
		5,234			11,037			30,878			24,081
Changes in non-cash working capital
Trade receivables		—			76			—			(31		)
Inventories		(11,067		)	(2,613		)	(15,525		)	(6,051		)
Prepaid expenses and other		(1,176		)	1,942			57			1,766
Accounts payable		4,986			(1,344		)	7,979			6,762
Accrued compensation and benefits		2,049			1,698			735			1,338
Provision for legal settlement		—			—			(3,000		)	—
Income taxes payable		(581		)	(11		)	4,326			(15		)
Net cash (used) provided by operating activities		(555		)	10,785			25,450			27,850
Investing activities
Expenditures on mineral properties, plant and equipment		(20,890		)	(17,275		)	(55,906		)	(42,970		)
Change in restricted cash, net		500			—			500			2,098
Cash paid for acquisitions		—			—			—			(20,000		)
Net cash used in investing activities		(20,390		)	(17,275		)	(55,406		)	(60,872		)
Financing activities
Issuance of share capital, net of costs		—			95,722			—			95,722
Cash transactions related to share-based compensation		22			2,304			1,547			6,611
Cash received from warrant exercises		—			2,848			1,681			3,310
Repayment of capital lease obligations		(164		)	(110		)	(395		)	(364		)
Payment of debt issuance costs		—			—			(233		)	(832		)
Net cash (used) provided by financing activities		(142		)	100,764			2,600			104,447
Effect of foreign exchange on cash balances		146			(10		)	327			619
Net increase (decrease) in cash		(20,941		)	94,264			(27,029		)	72,044
Cash, beginning of period		41,548			36,877			47,636			59,097
Cash, end of period		$	20,607		$	131,141		$	20,607		$	131,141
⁽¹⁾ Represents Revenue less Interest Expense attributable to the Gold Purchase Agreement (as defined herein).

See Note 16. Supplemental cash flow information for additional details.

The accompanying notes are an integral part of the condensed consolidated financial statements.

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KLONDEX MINES LTD.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)

(US dollars in thousands, except shares)



	Note	Common shares	Additional paid-in capital			Accumulated deficit			Accumulated other comprehensive loss			Total
Balance at December 31, 2016		175,251,538	$	363,899		$	(58,280	)	$	(27,565	)	$	278,054
Share-based compensation expense	12	—	2,771			—			—			2,771
Option exercises	12	1,042,189	1,758			—			—			1,758
Warrant exercises	11	1,140,800	1,681			—			—			1,681
Restricted share unit vestings, net of shares withheld to satisfy tax withholding		207,627	(211		)	—			—			(211		)
Net loss		—	—			(15,927		)	—			(15,927		)
Foreign currency translation adjustments		—	—			—			12,125			12,125
Balance at September 30, 2017		177,642,154	$	369,898		$	(74,207	)	$	(15,440	)	$	280,251

The accompanying notes are an integral part of the condensed consolidated financial statements.

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Klondex Mines Ltd.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Basis of presentation

The accompanying unaudited Condensed Consolidated Financial Statements of Klondex Mines Ltd. and its wholly-owned subsidiaries (the "Company") have been prepared in accordance with United States generally accepted accounting principles ("GAAP") and applicable rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations of the SEC. Therefore, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited Consolidated Financial Statements and related note disclosures of the Company's Annual Report on Form 10-K for the year ended December 31, 2016 . In the opinion of management, all adjustments and disclosures necessary to fairly present the interim financial information set forth herein have been included. These interim financial statements, with the exception of any recently adopted accounting pronouncements described in Note 2. Recent accounting pronouncements , follow the same significant accounting policies disclosed in the Company's most recent Annual Report on Form 10-K.

The results reported in these Condensed Consolidated Financial Statements are not necessarily indicative of the results that may be expected for the entire year or for future years.

All amounts are expressed and presented in thousands of United States dollars (unless otherwise noted) and references to "CDN$" refer to Canadian dollars.

2. Recent accounting pronouncements

Recently adopted

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, "Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting." ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an accounting policy election for forfeitures, and classification on the statement of cash flows. ASU No. 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, which for the Company meant the first quarter of the year ending December 31, 2017. The Company has adopted ASU 2016-09, which other than presentation and disclosure changes, did not have a material impact on its financial statements.

Recently issued

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which has been amended several times. The new standard provides a five-step approach to be applied to all contracts with customers and also requires expanded disclosures surrounding revenue recognition. ASU No. 2014-09 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2017, which for the Company means the first quarter of the year ending December 31, 2018. The Company has evaluated the potential impacts of ASU No. 2014-09 and does not expect it will have a material impact on its financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases." ASU No. 2016-02 requires lessees to recognize assets and liabilities on the balance sheet for the rights and obligations resulting from leases. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, which for the Company means the first quarter of the year ending December 31, 2019. The Company is currently evaluating the impact that ASU No. 2016-02 will have on its financial statements.

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments." ASU No. 2016-15 addresses eight specific cash flow issues with the objective of reducing the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, which for the Company means the first quarter of the year ending December 31, 2018. The Company is currently evaluating the impact that ASU No. 2016-15 will have on its financial statements.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows - Restricted Cash." ASU No. 2016-18 requires that restricted cash or restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU No. 2016-18 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, which for the Company means the first quarter of the year ending December 31, 2018. The Company is currently evaluating the impact that ASU No. 2016-18 will have on its financial statements.

In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations." ASU No. 2017-01 clarifies the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. ASU No. 2017-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December

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15, 2017, which for the Company means the first quarter of the year ending December 31, 2018. The Company is currently evaluating the impact that ASU No. 2017-01 will have on its financial statements.

In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation." ASU No. 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under Topic 718. ASU No. 2017-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, which for the Company means the first quarter of the year ending December 31, 2018. The Company is currently evaluating the impact that ASU No. 2017-09 will have on its financial statements.

In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities." ASU No. 2017-12 provides amendments that aim to simplify the derivative and hedging accounting guidance under Topic 815 and better align the measurement and presentation of qualifying hedging relationships with risk management activities. ASU No. 2017-12 is effective for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, which for the Company means the first quarter of the year ending December 31, 2019. The Company is currently evaluating the impact that ASU No. 2017-12 will have on its financial statements.

3. Inventories

The following table provides the components of Inventories (in thousands):



	September 30, 2017		December 31, 2016
Supplies	$	8,936	$	5,541
Production related inventories:
Stockpiles	19,635		6,604
In-process	13,180		7,316
Doré finished goods	1,316		1,849
	$	43,067	$	21,310

As of September 30, 2017 and December 31, 2016 , the Company's stockpiles, in-process, and doré finished goods inventories included approximately $7.9 million and $2.0 million , respectively, of capitalized non-cash depreciation and depletion costs.

The period-end market value of the Company's production-related inventories is determined in part by using the period-end prices (per ounces) of gold and silver and is sensitive to these inputs. Write-downs have resulted solely from the Company's application of its lower of average cost or net realizable value accounting policy and were unrelated to any ounce adjustments or changes to recovery rates. Write-downs for the three and nine months ended September 30, 2017 were related to Midas and True North (both as defined herein).

The following table provides information about the Company's write-downs (in thousands, except per ounce amounts):



	Three months ended September 30,				Nine months ended September 30,
Type of previously incurred cost	2017		2016		2017		2016
Cash production costs	$	4,635	$	—	$	8,560	$	—
Allocated depreciation and depletion	1,759		—		3,749		—
Write-down of production inventories	$	6,394	$	—	$	12,309	$	—

The period-end prices used in the write-down calculation for September 30, 2017 were $1,287 and $16.86 per gold and silver ounce, respectively. Further declines from September 30, 2017 metal price levels and/or future production costs greater than the September 30, 2017 carrying value included in Inventories could result in, or contribute to, additional future write-downs of production-related inventories.

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4. Prepaid expenses and other

The following table provides the components of Prepaid expenses and other (in thousands):



	September 30, 2017		December 31, 2016
Prepaid taxes	$	384	$	1,390
Vendor prepayments	801		315
Prepaid claim maintenance and land holding costs	1,238		909
Prepaid insurance	739		518
Utilities, rent, and service deposits	188		178
Prepaid software maintenance	146		60
Royalties	115		82
Other	1,083		1,226
	$	4,694	$	4,678

5. Mineral properties, plant and equipment, net

The following table provides the components of Mineral properties, plant and equipment, net (in thousands):



	September 30, 2017			December 31, 2016
Mineral properties	$	164,191		$	163,012
Facilities and equipment	108,756			97,054
Mine development	99,654			54,070
Land	3,888			3,828
Asset retirement cost assets ⁽¹⁾	3,191			2,887
Construction in progress	17,310			16,472
	396,990			337,323
Less: accumulated depreciation and depletion	(105,434		)	(61,100		)
	$	291,556		$	276,223
⁽¹⁾ Asset retirement cost assets relate to changes in asset retirement obligations at sites with proven and probable reserves.

Facilities and equipment included $2.6 million and $1.5 million at September 30, 2017 and December 31, 2016 , respectively, for the gross amount of mobile mine equipment acquired under capital lease obligations. Accumulated depreciation on such mobile mine equipment totaled $0.9 million and $0.5 million at September 30, 2017 and December 31, 2016 , respectively.

At September 30, 2017 , construction in progress of $17.3 million included $11.1 million related to facilities and equipment, $4.8 million of mine development, $1.1 million of mineral properties, and $0.3 million of other.

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6. Debt

The following table summarizes the components of Debt (in thousands):



	September 30, 2017		December 31, 2016
Debt, current:
Gold Purchase Agreement	$	9,412	$	8,023
Capital lease obligations	759		479
	$	10,171	$	8,502
Debt, non-current:
Revolver ⁽¹⁾	$	11,285	$	11,165
Gold Purchase Agreement	2,686		9,935
Capital lease obligations	959		589
	$	14,930	$	21,689
⁽¹⁾ Net of unamortized issuance costs of $0.7 million.

The following table summarizes the components of Interest expense, net (in thousands):



	Three months ended September 30,					Nine months ended September 30,
	2017		2016			2017		2016
Gold Purchase Agreement	$	627	$	957		$	2,111	$	3,106
Promissory Note	—		235			—		648
Revolver interest and stand-by fees	348		225			1,022		287
Capital lease obligations	14		11			29		42
Other	39		25			123		139
Less: capitalized interest	—		(235		)	—		(273		)
	$	1,028	$	1,218		$	3,285	$	3,949

Revolver

On March 23, 2016, the Company, as borrower, and Investec Bank PLC ("Investec"), as lender and security agent, entered into a $25.0 million secured revolving facility agreement (the "Revolver"). The Revolver was amended on October 27, 2016 to increase the borrowing capacity by $10.0 million to $35.0 million . During the year ended December 31, 2016, the Company drew $12.0 million from the Revolver to retire the Promissory Note (as defined herein) related to the acquisition of True North (as defined herein). Borrowings under the Revolver bear interest per annum at LIBOR plus Margin plus Risk Premium, as such terms are defined in the Revolver. Margin is determined by the Company's Gearing Ratio (a measure of debt to EBITDA) and ranges from 2.75% - 4.00% per annum and the Risk Premium is 0.35% per annum, until the Gold Purchase Agreement balance is less than $10.0 million , at which time the Risk Premium is no longer applicable (as such terms are defined in the Revolver). Revolver borrowings may be utilized by the Company for working capital requirements, general corporate purposes, and capital investments and expenditures.

On March 31, 2017, pursuant to an amendment, the Revolver's maturity date was extended from March 23, 2018 to December 31, 2019, unless otherwise extended by the parties, and the reserves and resources required to be maintained by the Company under the Revolver were amended. The Revolver is secured by all of the Company's assets on a pari passu basis with the Gold Purchase Agreement.

Gold Purchase Agreement

The Company's February 2014 gold purchase agreement with a subsidiary of Franco-Nevada Corporation (the "Gold Purchase Agreement") requires physical gold deliveries to be made at the end of each month, each of which reduces the Gold Purchase Agreement balance and accrued interest. The repayment amortization schedule was established on the transaction date and incorporates then current forward gold prices (ranging from $1,290 to $1,388 ) and an effective interest rate of approximately 18.3% . Gold deliveries will cease on December 31, 2018 following the delivery of a total of 38,250 gold ounces. The Gold Purchase Agreement is secured by all the Company's assets on a pari passu basis with the Revolver.

During the three and nine months ended September 30, 2017 and 2016 , the Company delivered 2,000 and 6,000 gold ounces, respectively, for each period under the Gold Purchase Agreement. The Company is required to deliver 2,000 gold ounces per quarter ( 8,000 gold ounces per year) during fiscal years 2017 and 2018.

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Capital lease obligations

The Company's capital lease obligations are for the purchase of mobile mine equipment and passenger vehicles, bear interest at approximately 4.0% per annum, and carry 36 or 48 -month terms. The Company's capital lease obligations are secured by the underlying assets financed.

Debt covenants

The Company's debt agreements contain certain representations and warranties, restrictions, events of default, and covenants that are customary for agreements of these types. Additionally, the Revolver contains financial covenants which require the Company to maintain a Tangible Net Worth not less than $100.0 million , a Gearing Ratio (a measure of debt to EBITDA) not greater than 4.00 :1, a Cash Balance not less than $10.0 million , and a Current Ratio not less than 1.10 :1 (as such terms are defined in the Revolver). The Company was in compliance with all debt covenants as of September 30, 2017 and December 31, 2016 .

7. Asset retirement obligations

The Company’s asset retirement obligations are related to its mining operations, projects, and exploration activities. The Company's asset retirement obligations are estimated based upon present value techniques of expected cash flows, estimates of inflation, and a credit adjusted risk-free discount rate. The following table provides a summary of changes in the asset retirement obligation (in thousands):



	September 30, 2017		December 31, 2016
Balance, beginning of period	$	25,436	$	12,387
Changes in estimates	—		2,866
Accretion expense	1,143		1,122
Additions resulting from Hollister Acquisition - Hollister	—		4,481
Additions resulting from Hollister Acquisition - Aurora	—		2,677
Additions resulting from True North Acquisition	—		1,793
Effect of foreign currency	126		110
Balance, end of period	$	26,705	$	25,436

As of September 30, 2017 , the Company's asset retirement obligations were secured by surety bonds totaling $48.4 million , which were partially collateralized by Restricted cash totaling $9.5 million . During the nine months ended September 30, 2017 , the Company reduced the amount of restricted cash collateralizing the surety bonds by $0.5 million .

The following table provides a listing of the Company's asset retirement obligations by property (in thousands):



	September 30, 2017		December 31, 2016
Midas	$	13,145	$	12,616
Hollister	6,397		6,110
Aurora	2,868		2,741
Fire Creek	2,412		2,303
True North	1,883		1,666
	$	26,705	$	25,436

8. Deferred share units liability

In May 2016, the Board of Directors adopted the Deferred Share Unit Plan (the "DSU Plan") to: (1) assist the Company in the recruitment and retention of qualified non-employee directors and (2) further align the interests of directors with shareholders. The DSU Plan is administered by the Compensation and Governance Committee of the Board of Directors of the Company. Under the DSU Plan, non-employee directors may receive a portion of their annual compensation in the form of Deferred Share Units ("DSUs"). The value of a DSU is determined as the weighted average closing price of the Company's common shares for the five days preceding such valuation date (the "DSU Value"). DSUs are fully vested at the time of grant and are retained until a director is separated or terminated from the Board of Directors of the Company, at which time the number of DSUs credited to such director's account multiplied by the DSU Value is to be paid out in cash. In the event the Company pays cash dividends, additional DSUs are to be credited to each director's account in an amount equal to the cash value that would have been received by the directors had the DSUs been held as common shares of the Company divided by the DSU Value. DSUs have no voting rights.

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The fair value of DSUs granted each year, together with the change in fair value of all outstanding DSUs, is recorded within General and administrative and totaled nil and $0.4 million during the three and nine months ended September 30, 2017 , respectively.

The following table provides a summary of the Company's outstanding DSUs:



		Nine months ended September 30, 2017
Outstanding at beginning of period		180,183
Granted		180,183
Redeemed		—
Outstanding at end of period		360,366

9. Derivatives

The following table provides a listing of the Company's derivative instruments (in thousands):



Description	Recorded Within	September 30, 2017		December 31, 2016
Gold Purchase Agreement embedded derivative	Derivative assets, current	$	534	$	1,247
Forward metal sales	Derivative assets, current	173		—
Gold Collar	Derivative assets, current	699		—
		1,406		1,247
Gold Purchase Agreement embedded derivative	Derivative assets, non-current	152		1,545
		$	1,558	$	2,792

Gold Offering Agreement	Derivative liabilities, current	$	385	$	1,721
Gold Offering Agreement	Derivative liabilities, non-current	—		331
		$	385	$	2,052

The following table lists the net amounts recorded for (Loss) on derivatives, net (in thousands):



	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Gold Purchase Agreement embedded derivative	(304		)	114			(1,703		)	(4,982		)
Gold Offering Agreement	(663		)	(113		)	(630		)	(1,948		)
Currency swap	—			(809		)	—			(809		)
Forward metal sales	173			(489		)	935			(7,839		)
Gold Collar	575			—			699			—
	$	(219	)	$	(1,297	)	$	(699	)	$	(15,578	)

Gold Purchase Agreement embedded derivative

The Company's Gold Purchase Agreement (as defined and discussed in Note 6. Debt ) contains an embedded compound derivative for: 1) the prepayment option, which is at the discretion of the Company, and 2) the forward sales component, which was established on the transaction date and incorporates the then current forward gold prices. In addition to recurring fair value adjustments, gains and losses on the Gold Purchase Agreement's embedded derivative relate to the difference in the forward gold price received by the Company and the spot price of gold on each delivery date. The following table summarizes information about past and future gold deliveries under the Gold Purchase Agreement:

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	Outstanding Future Deliveries				Three months ended September 30,				Nine months ended September 30,
	2018		2017		2017		2016		2017		2016
Gold ounces	8,000		2,000		2,000		2,000		6,000		6,000
Average forward gold price	$	—	$	—	$	1,336	$	1,310	$	1,329	$	1,306
Average gold spot price on delivery date	n/a		n/a		$	1,287	$	1,325	$	1,260	$	1,264

Gold Offering Agreement

In March 2011, the Company entered into a gold offering agreement, as amended in October 2011 (the "Gold Offering Agreement"), which granted the counterparty the right to purchase, on a monthly basis, the refined gold produced from the Fire Creek mine ("Fire Creek") for a five -year period which began in February 2013 and ends in February 2018. When/if the counterparty elects to purchase the refined gold, the purchase price is calculated as the average PM settlement price per gold ounce on the London Bullion Market Association for the 30 trading days immediately preceding the relevant purchase election date. In addition to recurring fair value adjustments, gains and losses on the Gold Offering Agreement relate to: 1) the difference in the gold price paid to the Company from the counterparty and the spot price of gold on the applicable delivery date, and 2) losses incurred by the Company to net cash settle any obligations arising from the Gold Offering Agreement. The following table summarizes information about gold purchased under the Gold Offering Agreement:



	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Gold ounces purchased by counterparty	20,907		18,984		77,692		48,957
Average gold price paid to the Company	$	1,257	$	1,314	$	1,231	$	1,214
Average gold spot price on delivery date	$	1,298	$	1,335	$	1,260	$	1,247

Forward metal sales

In order to increase the certainty of expected future cash flows, from time to time, the Company enters into fixed forward spot trades for a portion of its projected gold and silver sales. These agreements are considered derivative financial instruments. The following table summarizes information about the Company's forward trades entered into during the respective periods:



	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Gold ounces covered	78,976		6,300		169,826		103,390
Average price per gold ounce	$	1,285	$	1,325	$	1,268	$	1,250
Silver ounces covered	343,983		—		937,882		1,421,516
Average price per silver ounce	$	17.10	$	—	$	17.39	$	16.56

Gold Collar

The Company entered into short-term zero cost gold collars. The collars total 40,503 gold ounces from October 1, 2017 through September 30, 2018 with a floor ranging from $1,200 to $1,300 per ounce and a ceiling ranging from $1,318 to $ $1,385 per ounce. The value of these collars at September 30, 2017 was $0.7 million .

10. Fair value measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities recorded at fair value in the Condensed Consolidated Financial Statements are classified using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurements. The fair value hierarchy has the following levels:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2 – Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for the full term of the asset or liability; and

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and are not observable.

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Financial assets and liabilities are classified in their entirety based upon the lowest level of input that is significant to the fair value measurement. There were no transfers between fair value hierarchy levels during the nine months ended September 30, 2017 . The following table provides a listing (by level) of the Company's financial assets and liabilities which are measured at fair value on a recurring basis (in thousands):



		September 30, 2017						December 31, 2016
Assets:	Note	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Gold Purchase Agreement embedded derivative	9	$	—	$	686	$	—	$	—	$	2,792	$	—
Forward metal sales	9	—		173		—		—		—		—
Gold Collar	9	—		699		—		—		—		—
		$	—	$	1,558	$	—	$	—	$	2,792	$	—

Liabilities:
Deferred share units liability	8	$	—	$	1,298	$	—	$	—	$	812	$	—
Gold Offering Agreement	9	—		—		385		—		—		2,052
		$	—	$	1,298	$	385	$	—	$	812	$	2,052

Gold Purchase Agreement embedded derivative - This asset was valued by a third-party consultant (and reviewed by the Company) using observable inputs, including period-end forward gold prices and historic forward gold prices from the Gold Purchase Agreement's February 2014 transaction date and, as such, is classified within Level 2 of the fair value hierarchy.

Forward metal sales - Forward metal sales are valued using observable inputs, which are forward metal prices. Such instruments are classified within Level 2 of the fair value hierarchy.

Gold Collar - The Company's gold collar is valued based on a Black-Scholes model with various observable inputs. These inputs include contractual terms, gold market prices, volatility of gold prices, and risk free interest rates. These derivatives are classified within Level 2 of the valuation hierarchy.

Deferred share units liability - This liability was valued using the number of outstanding DSUs and quoted closing prices of the Company’s common shares, which are traded in active markets, and as such is classified within Level 2 of the fair value hierarchy. The fair value was calculated as the number of DSUs outstanding multiplied by the period end DSU Value.

Gold Offering Agreement - This liability was valued by a third-party consultant (and reviewed by the Company) using a simulation-based pricing model and is classified within level 3 of the fair value hierarchy as it incorporates an estimate of the Company's future gold production from Fire Creek, which is not an observable input, as well as quoted prices from active markets and certain observable inputs, such as, forward gold prices and the volatility of such prices. The Company's 2017 gold production from Fire Creek is estimated to range from 107,000 - 110,000 ounces, the amounts of which were incorporated into the September 30, 2017 valuation.

Items disclosed at fair value - Other than the above, the carrying values of financial assets and liabilities approximate their fair values, other than Debt, which is carried at amortized cost. As of September 30, 2017 , the fair value of the Gold Purchase Agreement, including the embedded features, was approximately $12.6 million .

Level 3 information

The following table provides additional detail for the Company's Level 3 financial liability (in thousands):



Gold Offering Agreement liability:	September 30, 2017
Balance at beginning of the period	$	2,052
Gain from change in fair value	(1,667		)
Balance at end of the period	$	385

(Loss) gain on derivative, net:
Settlement losses	$	(2,297	)
Gain from change in fair value	1,667
	$	(630	)

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11. Share capital

Common shares

The authorized share capital of the Company is comprised of an unlimited number of common shares with no par value. Common shares are typically issued in conjunction with corporate financing efforts, the exercise of warrants (discussed below), and pursuant to share-based compensation arrangements (see Note 12. Share-based compensation ).

Share Purchase Warrants

The Company has previously issued share purchase warrants in conjunction with its acquisition of Hollister and Midas (both as defined herein) in 2016 and 2014, respectively, and other past debt and equity financing transactions. The following table summarizes the Company's warrant activity:



	September 30, 2017
Warrants	Number of Warrants		Weighted Average Exercise Price - CDN$
Outstanding, beginning of period	11,140,800		$	3.86
Exercised	(1,140,800	)	1.95
Outstanding, end of period	10,000,000		$	4.08
Exercisable, end of period	10,000,000		$	4.08

The following table provides a summary of the Company's outstanding warrants:



	September 30, 2017
Exercise price per share - CDN$	Number outstanding	Weighted average remaining life (years)	Weighted average exercise price - CDN$
$2.00 - $2.49	5,000,000	11.37	2.15
$6.00	5,000,000	14.51	6.00
	10,000,000	12.94	$	4.08

12. Share-based compensation

The Company has a Share Option and Restricted Share Unit Plan (" New Share Plan ") to compensate eligible participants, which can include directors, officers, employees, and service providers to the Company. The New Share Plan is administered by the Board of Directors of the Company and is subject to conditions and restrictions over award terms, grant limits, and grant prices. The New Share Plan was approved at the June 15, 2016 annual and special meeting of shareholders. Subject to certain adjustments, the maximum number of common shares available for grant under the New Share Plan is equal to 8.9% of the common shares then outstanding less the aggregate number of common shares reserved for issuance under all of the Company's other share-based compensation plans. Additionally, the maximum number of common shares available for issuance pursuant to grants under the restricted share unit portion of the New Share Plan is subject to a sub-cap and cannot exceed 4.0% of the total number of common shares outstanding at the time of grant of the applicable award.

The New Share Plan replaced the Company's Share Incentive Plan (the " Legacy SIP "), which permitted the granting of share options and common share awards. Awards outstanding under the Legacy SIP will continue to vest in accordance with their grant terms and reduce the number of shares available for issuance under the New Share Plan (discussed above).

Share-based compensation costs

The following table summarizes the Company's share-based compensation cost by award type (in thousands):

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	Three months ended September 30,				Nine months ended September 30,
Share-based compensation cost by award	2017		2016		2017		2016
Share options	$	115	$	342	$	460	$	1,142
Restricted share units - time vesting criteria	697		325		1,803		563
Restricted share units - performance vesting criteria	236		51		492		51
Common share awards	2		13		16		13
	$	1,050	$	731	$	2,771	$	1,769

The following table summarizes activity of the Company's share-based compensation for restricted share units ("RSUs"), common share awards, and share options:



	Nine months ended September 30, 2017
	Restricted share units - time-based vesting ⁽¹⁾			Restricted share units - performance-based vesting		Common share awards		Share options
Outstanding, beginning of period	948,038			212,243		56,665		5,233,105
Granted	968,339		⁽⁴⁾	295,390	⁽⁵⁾	—		—
Forfeited	(121,579	)		—		—		(73,333	)
Vested and issued ⁽²⁾	(262,616	)		—		(56,665	)	—
Exercised ⁽³⁾	—			—		—		(1,042,189	)
Outstanding, end of period	1,532,182			507,633		—		4,117,583
⁽¹⁾ Includes awards with comparable terms and characteristics of RSUs, even if such awards are not called "RSUs" under the plan they were granted.
⁽²⁾ Not applicable to Share options .
⁽³⁾ Only applicable to Share options .
⁽⁴⁾ The weighted average grant-date fair value of time-based RSUs granted during the nine months ended September 30, 2017 was CDN$4.62.
⁽⁵⁾ The weighted average grant-date fair value of performance-based RSUs granted during the nine months ended September 30, 2017 was CDN$4.60.

13. Income taxes

Major components of our income tax (expense) benefit for the three and nine months ended September 30, 2017 and 2016 are as follows (in thousands):



	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Current:
Canada	$	—		$	—		$	—		$	—
United States	490			(1,263		)	(6,001		)	(2,629		)
Total current income tax (expense) benefit	490			(1,263		)	(6,001		)	(2,629		)
Deferred:
Canada	—			—			—			—
United States	(1,320		)	(878		)	(758		)	(1,625		)
Total deferred income tax (expense)	(1,320		)	(878		)	(758		)	(1,625		)
Total income tax (expense) benefit	$	(830	)	$	(2,141	)	$	(6,759	)	$	(4,254	)

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14. Net (loss) income per share

Basic net income (loss) per share is calculated by dividing net income by the weighted average number of shares outstanding for the period. Diluted net income (loss) per share reflects the potential dilution that would occur if outstanding share-based instruments were executed. The following table provides computations of the Company's basic and diluted net income (loss) per share (in thousands, except per share amounts):



	Three months ended September 30,					Nine months ended September 30,
	2017			2016		2017			2016
Net income (loss)	$	(13,392	)	$	7,269	$	(15,927	)	$	(3,878	)
Weighted average common shares:
Basic	177,594,562			144,672,654		177,164,321			142,373,930
Effect of:
Share options	—			3,994,831		—			—
Warrants	—			4,728,274		—			—
Common share awards	—			410,906		—			—
Restricted share units ⁽¹⁾	—			429,770		—			—
Special warrants	—			563,043		—			—
Diluted	177,594,562			154,799,478		177,164,321			142,373,930
Net income (loss) per share
Basic	$	(0.08	)	$	0.05	$	(0.09	)	$	(0.03	)
Diluted	$	(0.08	)	$	0.05	$	(0.09	)	$	(0.03	)
⁽¹⁾ Represents restricted share units with time-based and performance-based vesting criteria.

For the three and nine months ended September 30, 2017 , the impact of dilutive share-based instruments was determined using the Company's average share price, which was CDN$ 4.17 and CDN$ 5.16 , respectively. For the three and nine months ended September 30, 2016 , the impact of dilutive share-based instruments was determined using the Company's average share price, which was CDN$ 6.54 and CDN$ 4.76 , respectively.

Diluted net income (loss) per share excludes common share-based instruments in periods where inclusion would be anti-dilutive. During the three and nine months ended September 30, 2017 , the Company's basic weighted average common shares and diluted weighted average common shares were the same because the effects of potential execution was anti-dilutive due to the Company's net loss. Had the Company generated net income during the three months ended September 30, 2017 , the effects from executing 2,420,865 warrants, 549,618 share options, and 342,279 restricted share units would have been included in the weighted average common shares calculation. Had the Company generated net income during the nine months ended September 30, 2017 , the effects from executing 2,420,865 warrants, 2,027,216 share options, and 435,231 restricted share units would have been included in the diluted weighted average common shares calculation. During the nine months ended September 30, 2016 , had the Company generated net income, the effects from executing 4,332,177 warrants, 3,181,792 share options, 479,358 common share awards, 144,302 restricted share units, and 189,051 special warrants would have been included in the diluted weighted average common shares calculation.

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15. Segment information

The Company's reportable segments are comprised of operating units which have revenues, earnings or losses, or assets exceeding 10% of the respective consolidated totals, each of which is reviewed by the Company’s Chief Executive Officer to make decisions about resources to be allocated to the segments and to assess their performance . The tables below summarizes segment information:



Three months ended September 30, 2017	Fire Creek		Midas			Hollister			Aurora			True North			Corporate and other			Total
Revenues	$	29,726	$	11,245		$	679		$	—		$	7,203		$	—		$	48,853
Cost of sales
Production costs	11,768		9,142			633			—			4,565			—			26,108
Depreciation and depletion	5,088		3,994			116			—			1,475			—			10,673
Write-down of production inventories	—		1,569			—			—			4,825			—			6,394
	12,870		(3,460		)	(70		)	—			(3,662		)	—			5,678
Other operating expenses
General and administrative	256		595			264			—			354			4,269			5,738
Exploration	1,418		—			2,123			—			126			—			3,667
Development and projects costs	—		—			1,822			466			—			—			2,288
Asset retirement and accretion	36		176			96			42			32			—			382
Loss on equipment disposal	—		174			—			—			27			—			201
Income (loss) from operations	$	11,160	$	(4,405	)	$	(4,375	)	$	(508	)	$	(4,201	)	$	(4,269	)	$	(6,598	)
Capital expenditures	$	7,694	$	4,172		$	4,308		$	541		$	4,139		$	36		$	20,890
Total assets	$	55,849	$	85,864		$	133,408		$	16,742		$	59,969		$	37,901		$	389,733



Three months ended September 30, 2016	Fire Creek		Midas			Hollister			Aurora		True North		Corporate and other			Total
Revenues	$	36,462	$	17,843		$	—		$	—	$	1,336	$	—		$	55,641
Cost of sales
Production costs	13,716		13,446			—			—		612		—			27,774
Depreciation and depletion	3,187		3,483			—			—		215		—			6,885
Write-down of production inventories	—		—			—			—		—		—			—
	19,559		914			—			—		509		—			20,982
Other operating expenses
General and administrative	280		288			—			—		—		4,269			4,837
Exploration	1,450		1,971			—			—		—		—			3,421
Development and projects costs	—		—			—			—		—		—			—
Asset retirement and accretion	42		183			—			—		31		—			256
Business acquisition costs	—		—			613			—		205		—			818
Loss on equipment disposal	—		—			—			—		—		105			105
Income (loss) from operations	$	17,787	$	(1,528	)	$	(613	)	$	—	$	273	$	(4,374	)	$	11,545
Capital expenditures	$	7,557	$	6,041		$	—		$	—	$	3,677	$	—		$	17,275
Total assets	$	48,560	$	94,805		$	—		$	—	$	50,652	$	137,295		$	331,312

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Nine months ended September 30, 2017	Fire Creek		Midas			Hollister			Aurora			True North			Corporate and other			Total
Revenues	$	109,427	$	46,182		$	679		$	—		$	21,067		$	—		$	177,355
Cost of sales
Production costs	39,495		35,178			633			—			18,729			—			94,035
Depreciation and depletion	14,078		14,180			116			—			4,899			—			33,273
Write-down of production inventories	—		2,939			—			—			9,370			—			12,309
	55,854		(6,115		)	(70		)	—			(11,931		)	—			37,738
Other operating expenses
General and administrative	685		956			450			—			782			13,080			15,953
Exploration	2,007		476			2,484			—			126			—			5,093
Development and projects costs	—		—			10,553			1,121			—			—			11,674
Asset retirement and accretion	108		529			288			127			91			—			1,143
Loss on equipment disposal	36		280			—			—			27			—			343
Income (loss) from operations	$	53,018	$	(8,356	)	$	(13,845	)	$	(1,248	)	$	(12,957	)	$	(13,080	)	$	3,532
Capital expenditures	$	22,178	$	14,432		$	5,929		$	1,311		$	11,673		$	383		$	55,906
Total assets	$	55,849	$	85,864		$	133,408		$	16,742		$	59,969		$	37,901		$	389,733



Nine months ended September 30, 2016	Fire Creek		Midas			Hollister			Aurora		True North			Corporate and other			Total
Revenues	$	92,726	$	48,013		$	—		$	—	$	1,336		$	—		$	142,075
Cost of sales
Production costs	33,285		36,784			—			—		612			—			70,681
Depreciation and depletion	8,115		10,784			—			—		215			—			19,114
Write-down of production inventories	—		—			—			—		—			—			—
	51,326		445			—			—		509			—			52,280
Other operating expenses
General and administrative	618		626			—			—		—			10,191			11,435
Exploration	5,838		2,425			—			—		—			—			8,263
Development and projects costs	—		—			—			—		5,530			—			5,530
Asset retirement and accretion	125		538			—			—		92			—			755
Business acquisition costs	—		—			723			—		1,147			—			1,870
Provision for legal settlement	2,249		—			—			—		—			1			2,250
Loss on equipment disposal	—		—			—			—		—			109			109
Income (loss) from operations	$	42,496	$	(3,144	)	$	(723	)	$	—	$	(6,260	)	$	(10,301	)	$	22,068
Capital expenditures	$	18,496	$	18,356		$	—		$	—	$	5,758		$	360		$	42,970
Total assets	$	48,560	$	94,805		$	—		$	—	$	50,652		$	137,295		$	331,312

16. Supplemental cash flow information

The following table provides a summary of significant supplemental cash flow information:



	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Cash paid for federal and state income taxes	$	—	$	—	$	638	$	1,915
Cash paid for interest	1,028		1,218		3,285		3,949
Mineral properties, plant and equipment acquired through Promissory Note	—		—		—		12,000
Mobile equipment acquired through capital lease obligations	409		—		1,045		—

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17. Commitments and contingencies

From time to time the Company is involved in legal actions related to our business; however, management does not believe, based on currently available information, that contingencies related to any pending or threatened legal matter will have a material adverse effect on the Company’s financial position, although a contingency could be material to the Company’s results of operations or cash flows for a particular period depending on the results of operations and cash flows for such period. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense costs, diversion of management resources, and other factors.

Royalty commitments

Certain patented and unpatented mining claims at all mine sites are subject to lease and royalty agreements that require payments to holders based on minimum annual payment schedules and/or a percentage of the mineral values produced from, or transported through, the royalty claims. Amounts due pursuant to royalty agreements are not recorded in the Condensed Consolidated Financial Statements until such time when the amounts are actually payable. The primary type of royalty agreement applicable to the mine sites is a net smelter return ("NSR") royalty. Under an NSR royalty, the amount paid by the Company to the royalty holder is generally calculated as the royalty percentage multiplied by the market value of the minerals produced less charges and costs for milling, smelting, refining, and transportation. During the three and nine months ended September 30, 2017 , and 2016 , the Company paid nil and $0.2 million , respectively, all of which were related to minimum and advance royalty payments.

18. Subsequent events

On October 19, 2017 (the "Closing Date"), the Company completed its previously announced arrangement with Bison Gold Resources Inc. ("Bison"), pursuant to which the Company acquired all the issued and outstanding common shares of Bison. On the Closing Date, the Company paid consideration of approximately $7.0 million (CDN $8.8 million ) on a fully-diluted basis by its issuance of 1,956,126 shares of its common shares to the Bison shareholders and assumed 10,000 warrants to acquire Bison shares. Each former Bison shareholder received 0.1242 of a common share of Klondex for each Bison common share held prior to the completion of the arrangement.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management's Discussion & Analysis of Financial Condition and Results of Operations ("MD&A") contains forward-looking statements (as previously defined) which are subject to numerous risks and uncertainties, as more fully described in the Cautionary statement regarding forward-looking statements section of this Quarterly Report on Form 10-Q. This MD&A provides a discussion and analysis of the financial condition and results of operations of the Company and includes the Company's subsidiaries. This MD&A should be read in conjunction with our other reports filed with the U.S. Securities and Exchange Commission (the "SEC") as well as our interim unaudited Condensed Consolidated Financial Statements and notes thereto included in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016 . The following discussion has been prepared based on information available to us as of November 9, 2017 . All dollar amounts included in this MD&A are expressed in thousands of United States dollars unless otherwise noted. References to CDN$ refer to Canadian dollars. References to "Notes" refer to the notes to Condensed Consolidated Financial Statements .

In this MD&A, we use the non-GAAP performance measures "Cash revenue from operations", "Cash production costs from operations", "Cash margin from operations", " Production cash costs per gold equivalent ounce sold ", " All-in sustaining costs per gold ounce sold " and " All-in costs per gold ounce sold ", which should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. See the Non-GAAP performance measures section of this MD&A for additional detail.

Introduction and strategy

We are a junior–tier gold and silver mining company focused on exploration, development, and production in a safe, environmentally responsible, and cost–effective manner. As of September 30, 2017 , we had 100% interests in four producing mines: (1) the Fire Creek mine ("Fire Creek"), (2) the Midas mine and ore milling facility ("Midas") and (3) the Hollister mine ("Hollister"), all of which are located in the state of Nevada, USA, and (4) 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 the Aurora mine and ore milling facility ("Aurora", formerly known as Esmeralda), which is also located in Nevada, USA. All of our mines are located in safe political jurisdictions.

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 growth at Fire Creek and to the acquisitions of Midas (February 2014), True North (January 2016), and Hollister and Aurora (October 2016).

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 and reducing our costs through operational efficiencies. We also consider acquisitions or other arrangements in the normal course which strategically fit our future growth objectives.

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Executive summary

Our third quarter 2017 highlights included the following, which are discussed in further detail throughout this MD&A or elsewhere in this Quarterly Report on Form 10-Q:

•

Health, safety, and environmental - We remained committed to our most important core values by operating in an environmentally responsible manner while protecting the health and safety of our employees and contractors. No lost-time injuries occurred at our properties during the quarter and as of September 30, 2017 , we had operated 1,812 days (~5.0 years) at Fire Creek, 1,088 days (~3.0 years) at Midas, 617 days (~1.7 years) at True North, and 362 days (~1.0 years) at Hollister and Aurora, without a lost-time injury.


•	Consolidated performance - We mined a total of 54,172 gold equivalent ounces (" GEOs"), in line with management’s expectations. Mined ounces are calculated using tons hauled from underground to surface (or tons hauled from tailings) multiplied by the assays from production sampling. We produced a total of 40,819 GEO's

•

Nevada performance - At Fire Creek, Midas, and Hollister, we mined 92,333 ore tons in the third quarter at an average mined head grade of 0.48 GEOs per ton. Our mining activities performed as planned, which resulted in an estimated 44,266 GEOs mined. Production cash costs per gold equivalent ounce sold in Nevada was $696 which is slightly above our expected range of $625 to $650 . We anticipate total annual cash costs per gold equivalent ounce sold in Nevada to be in line with our updated guidance of $625 to $650 . The Company ended the third quarter with a stockpile in Nevada of approximately 43,000 tons containing approximately 18,000 GEOs. The Company began processing Hollister ore at the Midas mill at the end of the third quarter with blend feed optimization ongoing.


•	Fire Creek - We milled 30,911 ore tons from Fire Creek in the third quarter at an average milled head grade of 0.79 GEO per ton, producing 21,983 GEOs.


•	Midas - From Midas, we milled 39,300 ore tons in the third quarter at an average milled head grade of 0.28 GEO per ton, producing 9,351 GEOs. Midas continues to introduce additional cut and fill mining, which is anticipated to reduce dilution resulting in higher ore grades delivered to the mill and expected improvements in fourth quarter performance.

•

Hollister mine development - At Hollister, we mined 23,513 ore tons in the third quarter at an average mined head grade of 0.31 GEOs per ton for a total of 7,286 GEOs. The majority of these ounces were stockpiled at the end of the third quarter. Production of Hollister ore was impacted by a delay in the delivery of the new carbon screens which were needed for the mill modifications. Stockpiled ore began to be processed toward the end of the third quarter and is expected to be processed at the Midas mill in the fourth quarter. We anticipate a stockpile to be remaining at year end as higher grade ore from Fire Creek will be processed through the mill ahead of Hollister ore.


•	Midas Mill - During the third quarter, we began to process Hollister ore at the Midas mill. Commissioning of the new CIL ("Carbon in Leach") circuit is in process while we test ore blends from the Nevada mines to yield the most favorable results. It is anticipated that the new processing circuit will be optimized during the fourth quarter.

•

True North performance - At True North in Canada, we milled 62,480 ore tons in the third quarter from the True North Mine at an average milled head grade of 0.11 gold ounces per ton (3.4 grams per tonne), producing a total of 6,145 gold ounces. The Company also milled 48,110 tons from the True North Tailings at an average milled head grade of 0.04 gold ounces per ton (1.6 grams per tonne) producing an additional 1,881 gold ounces.


•	Ounces sold and financial results - We sold 38,012 GEOs, consisting of 35,477 gold ounces and 189,904 silver ounces. Revenue was $48.9 million from average realized selling prices per gold and silver ounce of $1,285 and $17.16 , respectively. Net loss was $13.4 million or ( $0.08 per share - basic).


•	Cash flows and liquidity - Our ending cash balance was $20.6 million after $0.6 million of operating cash outflows, $20.4 million used in investing activities, and $0.1 million used in financing activities. Ending working capital was $17.4 million and total liquidity was $40.4 million when including the $23.0 million of Revolver availability.


•	Spending - Capital, exploration, and development spending totaled $9.1 million at Fire Creek, $4.2 million at Midas, $8.3 million at Hollister, $1.0 million at Aurora, $4.3 million at True North, and nil at corporate for total capital, exploration and development spending of $26.8 million .

•

Acquisition - On October 19, 2017, the Company completed its previously announced arrangement with Bison Gold Resources Inc. ("Bison"), pursuant to which the Company acquired all of the common shares of Bison. Under the terms of the Arrangement, each former Bison shareholder received 0.1242 of a common share of Klondex for each Bison common share held prior to the Arrangement. The Company issued a total of 1,956,126 shares.

2017 full year outlook

The following statements are based on our current expectations for fiscal year 2017 results. The statements are forward-looking and actual results may differ materially.

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We continue to expect to produce between 213,000 and 230,000 GEOs during 2017 at an expected production cash cost per GEO sold of $675 to $700 . This represents an increase in GEOs sold of approximately 40% from the prior year as we expect to benefit from production at Hollister in Nevada as well as higher production from True North in Canada as ramp-up continues. Fire Creek and Midas’ 2017 production is expected to be in line or slightly higher than the prior year as we benefit from higher than expected mined head grades. At True North in Canada, due to a longer than expected ramp-up in the first half of the year, we expect our cash cost per gold equivalent ounce sold to be $1,000 to $1,050 for the year, up from $900 to $950. The Company is widening its annual production guidance range for Canadian operations by 6,000 ounces to 35,000 - 45,000 GEOs. Although the Company is expanding the production guidance for Canada, the Company expects to reach the total production guidance. The Company now expects all-in costs per gold ounce sold of $1,150 - $1,200 for 2017, an increase from the previous forecast of $1,070 to $1,130.

We expect our 2017 capital expenditures to be between $63 - $71 million with an additional $7 - $9 million to be spent on district and near mine exploration. The majority of capital is expected to be spent at Fire Creek as we continue underground expansion in the form of primary access development and advancement of a second portal.

During the third quarter, the Company commissioned a new CIL circuit at the Midas mill principally to process Hollister ore. The Company tested ore blends of Hollister ore and Midas low grade ore to yield the most favorable results. Ore feed from the Nevada operations to the Midas mill will depend on the optimal blend of ore type and grade. As such, the annual production guidance for the Fire Creek and Hollister mines is being adjusted. The Company now expects an increase in annual production from Fire Creek to 109,000 to 110,000 gold equivalent ounces and a decrease in annual production from Hollister to 21,000 to 25,000 gold equivalent ounces as lower grade ore is displaced with higher grade ore from Fire Creek. The Company continues to expect to mine 30,000 to 35,000 gold equivalent ounces at Hollister. Guidance for total annual production for Nevada operations now consists of 178,000 to 185,000 gold equivalent ounces.

Full-year general and administrative costs are now expected to be in the range of $20 to $22 million, an increase from the previous guidance range of $17 to $18 million. The increase is due to expenses associated with Company growth, including salaries and professional service fees.

We now expect total annual development and project costs for Hollister to be between $10 and $11 million, up from the previous forecast amount of $9 million. The year-to-date development and project costs for Hollister of $10.6 million are above the high end of the originally expected range primarily due to additional development at the Hollister mine in preparation for initial production.

Below are tables summarizing key 2017 operating guidance.



	Gold Equivalent Ounces Produced ⁽¹⁾				Production Cash Costs per Gold Equivalent Ounce Sold ⁽¹⁾				Capital Expenditures (thousands)
2017 full year outlook	Low		High		Low		High		Low		High
Midas	48,000		50,000		$	800	$	850	$	9,000	$	10,000
Midas Mill	—		—		—		—		6,000		8,000
Fire Creek	109,000		110,000		425		450		27,000		29,000
Hollister	21,000		25,000		935		960		6,000		8,000
Nevada Total	178,000		185,000		625		650		48,000		55,000
True North ⁽²⁾	35,000		45,000		1,000		1,050		15,000		16,000
	213,000		230,000		$	675	$	700	$	63,000	$	71,000

	Low		High
Corporate general and administrative (thousands)	$	20,000	$	22,000
Hollister development and project costs (thousands)	$	10,000	$	11,000
All-in sustaining costs per gold ounce sold ⁽¹⁾	$	950	$	1,000
Regional exploration (thousands)	$	7,000	$	9,000
All-in costs per gold ounce sold ⁽¹⁾	$	1,150	$	1,200
⁽¹⁾ This is a non-GAAP measure; refer to the Non-GAAP Performance Measures section of the MD&A for additional detail.
⁽²⁾ Based on an estimated CDN:US dollar exchange rate of 0.75:1.

We have not reconciled forward-looking 2017 full year non-GAAP performance measures contained in this Quarterly Report on Form 10-Q to their most directly comparable GAAP measures, as permitted by Item 10(e)(1)(i)(B) of Regulation S-K. Such reconciliations would require unreasonable efforts at this time to estimate and quantify, with a reasonable degree of certainty, various necessary GAAP components, including for example those related to future production costs, realized sales prices and the timing of such sales, timing and amounts of capital expenditures, metal recoveries, and corporate general and administrative amounts and timing, or others that

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may arise during the year. These components and other factors could materially impact the amount of the future directly comparable GAAP measures, which may differ significantly from their non-GAAP counterparts.

Critical accounting estimates

This MD&A is based on our Condensed Consolidated Financial Statements , which have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The preparation of these statements requires us to make assumptions, estimates, and judgments that affect the amounts of assets, liabilities, revenues, and expenses. For information on our most critical accounting estimates, see the Critical accounting estimates section included in Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016 .

Results of operations



	Three months ended September 30,							Nine months ended September 30,
Revenues	2017		2016		Change			2017		2016		Change
Gold revenue
Fire Creek	$	29,411	$	36,112	$	(6,701	)	$	108,415	$	91,472	$	16,943
Midas	8,398		11,120		(2,722		)	33,638		29,880		3,758
Hollister	606		—		606			606				606
True North	7,179		1,336		5,843			21,025		1,336		19,689
	45,594		48,568		(2,974		)	163,684		122,688		40,996

Silver revenue
Fire Creek	315		350		(35		)	1,012		1,254		(242		)
Midas	2,847		6,723		(3,876		)	12,544		18,133		(5,589		)
Hollister	73		—		73			73		—		73
True North	24		—		24			42		—		42
	3,259		7,073		(3,814		)	13,671		19,387		(5,716		)
	$	48,853	$	55,641	$	(6,788	)	$	177,355	$	142,075	$	35,280

Revenues decreased in the third quarter of 2017 compared to the third quarter of 2016 due to lower ounces sold and a lower price per ounce of gold. Revenues increased year-to-date in 2017 as compared to the same period in 2016 due to higher ounces sold as a result of higher grades from Fire Creek and Midas along with the addition of production at True North. Consolidated ore tons milled year-to-date 2017 and 2016 were 440,436 and 261,753 , respectively. See the Mining operations review section of this MD&A for additional discussion on our operating results at each mine.

Gold revenue - The table below summarizes changes in gold revenue, ounces sold, and average realized prices (in thousands, except ounces sold and per ounce amounts):



	Three months ended September 30,					Nine months ended September 30,
	2017			2016		2017			2016
Total gold revenue (thousands)	$	45,594		$	48,568	$	163,684		$	122,688
Gold ounces sold	35,477			36,647		130,329			96,110
Average realized price (per ounce)	$	1,285		$	1,325	$	1,256		$	1,277

The change in gold revenue was attributable to:	Change					Change
Change in ounces sold	$	(1,555	)			$	43,733
Change in average realized price	(1,466		)			(2,018		)
Effect of average realized price change on ounces sold increase	47					(719		)
	$	(2,974	)			$	40,996

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Silver revenue - The table below summarizes changes in silver revenue, ounces sold, and average realized prices (in thousands, except ounces sold and per ounce amounts):



	Three months ended September 30,					Nine months ended September 30,
	2017			2016		2017			2016
Total silver revenue (thousands)	$	3,259		$	7,073	$	13,671		$	19,387
Silver ounces sold	189,904			362,500		784,803			1,096,090
Average realized price (per ounce)	$	17.16		$	19.51	$	17.42		$	17.69

The change in silver revenue was attributable to:	Change					Change
Change in ounces sold	$	(3,368	)			$	(5,504	)
Change in average realized price	(852		)			(296		)
Effect of average realized price change on ounces sold increase	406					84
	$	(3,814	)			$	(5,716	)



	Three months ended September 30,							Nine months ended September 30,
Cost of sales	2017		2016		Change			2017		2016		Change
Production costs	$	26,108	$	27,774	$	(1,666	)	$	94,035	$	70,681	$	23,354
Depreciation and depletion	10,673		6,885		3,788			33,273		19,114		14,159
Write-down of production inventories	6,394		—		6,394			12,309		—		12,309
	$	43,175	$	34,659	$	8,516		$	139,617	$	89,795	$	49,822
Cost of sales by mine
Fire Creek	$	16,856	$	16,903	$	(47	)	$	53,573	$	41,400	$	12,173
Midas	14,705		16,929		(2,224		)	52,297		47,568		4,729
Hollister	749		—		$	749		749		—		749
True North	10,865		827		10,038			32,998		827		32,171
	$	43,175	$	34,659	$	8,516		$	139,617	$	89,795	$	49,822

Production costs - Increases in production costs during the nine months ended September 30, 2017 , as compared to the same period in 2016 was driven by the start of operations at Hollister and True North, which are ramping up in 2017, as well as higher depreciation and depletion expense. See the Mining operations review section of this MD&A for a discussion of production costs at each mine.

Depreciation and depletion - Depreciation and depletion increased during the three and nine months ended September 30, 2017 , as compared to the same periods in 2016 primarily due to changes in volume of GEOs sold at Fire Creek, Midas, and True North.

Write-down of production inventories - Increases in production costs and depletion and depreciation led to write-downs of ending inventory balances at Midas and True North in the three and nine months ended September 30, 2017 . See Note 3. Inventories to the Notes to Consolidated Financial Statements for additional detail.



	Three months ended September 30,						Nine months ended September 30,
	2017		2016		Change		2017		2016		Change
General and administrative	$	5,738	$	4,837	$	901	$	15,953	$	11,435	$	4,518

The increase during the three and nine months ended September 30, 2017 as compared to the same periods in 2016 is due to higher compensation and benefit costs from increased staff levels at the corporate office and professional fees, both of which are due to our growth.



	Three months ended September 30,						Nine months ended September 30,
	2017		2016		Change		2017		2016		Change
Exploration	$	3,667	$	3,421	$	246	$	5,093	$	8,263	$	(3,170	)

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Exploration remained flat for the three months ended September 30, 2017 as compared to the same period of the prior year. Exploration for the nine months ended September 30, 2017 was affected by inclement weather conditions earlier in the year, impeding surface exploration activities.



	Three months ended September 30,						Nine months ended September 30,
	2017		2016		Change		2017		2016		Change
Development and projects costs	$	2,288	$	—	$	2,288	$	11,674	$	5,530	$	6,144

Development and project costs during the three and nine months ended September 30, 2017 were $1.8 million and $10.6 million , respectively, at Hollister. These costs were generally for rehabilitating drifts, and ramps which enable us to physically access the underground stopes and working faces, drilling, engineering, metallurgical, and other related costs to delineate or expand mineralization, all of which occurred in the Main and Gloria zones. From January 1 to May 31, 2017, these costs were expensed as Hollister did not have a reserve. We issued a reserve for the Main and Gloria zones with an effective date of May 31, 2017, and as such, certain costs for these zones incurred beginning June 1, 2017 were capitalized.



	Three months ended September 30,						Nine months ended September 30,
	2017		2016		Change		2017		2016		Change
Asset retirement and accretion	$	382	$	256	$	126	$	1,143	$	755	$	388

These amounts relate to the accretion expense from existing asset retirement obligations and asset retirement increases at our mining and exploration properties. Asset retirement and accretion expense has increased over the last three years as the number of properties and disturbances at such properties have increased. See Note 7. Asset retirement obligations to the Notes to Consolidated Financial Statements for additional detail.



	Three months ended September 30,							Three months ended September 30,
	2017		2016		Change			2017		2016		Change
Business acquisition costs	$	—	$	818	$	(818	)	$	—	$	1,870	$	(1,870	)

These amounts relate to costs and expenses associated with the acquisitions of True North (January 2016), and Hollister and Aurora (October 2016).



	Three months ended September 30,								Nine months ended September 30,
	2017			2016			Change		2017			2016			Change
(Loss) on derivatives, net	$	(219	)	$	(1,297	)	$	1,078	$	(699	)	$	(15,578	)	$	14,879

Amounts recorded for derivatives are attributable to changes in the fair value of derivative instruments and gains or losses on derivative settlements and transactions, both of which are generally impacted by changes in gold and silver prices. See Note 9. Derivatives to the Notes to Consolidated Financial Statements for additional detail.



	Three months ended September 30,								Nine months ended September 30,
	2017			2016			Change		2017			2016			Change
Interest (expense), net	$	(1,028	)	$	(1,218	)	$	190	$	(3,285	)	$	(3,949	)	$	664

The largest component of total interest expense was for the February 2014 gold purchase agreement with a subsidiary of Franco-Nevada Corporation (the "Gold Purchase Agreement"), which represented 61% and 79% , of recorded interest expense during the three months ended September 30, 2017 and 2016 , respectively. See Note 6. Debt to the Notes to Consolidated Financial Statements for additional detail.



	Three months ended September 30,								Nine months ended September 30,
	2017			2016		Change			2017			2016			Change
Foreign currency (loss) gain, net	$	(4,652	)	$	328	$	(4,980	)	$	(8,756	)	$	(2,222	)	$	(6,534	)

Amounts recorded for foreign currency losses primarily relate to unrealized amounts on intercompany loan balances which we expect to settle in the foreseeable future which were partially offset by gains on U.S. dollar debt held in our Canadian companies.

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	Three months ended September 30,								Nine months ended September 30,
	2017			2016			Change		2017			2016			Change
Income tax (expense)	$	(830	)	$	(2,141	)	$	1,311	$	(6,759	)	$	(4,254	)	$	(2,505	)

See Note 13. Income taxes to the Notes to Consolidated Financial Statements for a reconciliation of taxes.



	Three months ended September 30,								Nine months ended September 30,
	2017			2016		Change			2017			2016			Change
Net income (loss)	$	(13,392	)	$	7,269	$	(20,661	)	$	(15,927	)	$	(3,878	)	$	(12,049	)

For the reasons discussed above and elsewhere in this MD&A, we reported the above amounts for Net income (loss) for the three and nine months ended September 30, 2017 and 2016 .

Exploration

Hollister - Nevada

During the third quarter the Company announced an initial mineral reserve estimate at Hollister. Total Hollister proven and probable Mineral Reserve at September 30, 2017, was 116,100 gold equivalent ounces at a grade of 0.582 gold equivalent ounces per ton with 51,500 ounces coming from the Hollister Main zone and another 64,600 ounces coming from the Gloria zone.

The Hollister proven and probable Mineral Reserve estimate does not include any drill results from Hatter Graben. Drilling on the Hatter Graben commenced on June 17, 2017 and will include approximate 20,000 feet of drilling. The objective of this drilling is to infill the widely spaced high grade vein intercepts that were originally drilled in 2008 with the intent to develop an inferred resource on the Hatter Graben vein system.

Hatter Graben is located approximately 2,500 ft. east of the Hollister Main zone. Hatter Graben is a vein system comprised of multiple high grade veins of minable widths and with historical grades exceeding 1.0 Au opt.

A description of the data verification methods, quality assurance program and quality control measures applied can be found in the technical report titled "Technical Report and Pre-Feasibility Study for the Hollister Underground Mine", as amended on August 9, 2017 with an effective date of May 31, 2017.

The table below summarizes the most recent mineral reserve estimate for Hollister:



Category	Tons (k)	Au opt	Au g/t	Ag opt	Ag g/t	AuEq opt	Au Eq g/t	Au koz	Ag koz	AuEq koz
Proven	50.8	0.553	19.0	2.90	99.6	0.580	19.9	28.1	147.5	29.5
Probable	148.8	0.552	18.9	3.20	109.7	0.582	20.0	82.2	476.2	86.6
Total P&P	199.5	0.553	18.9	3.13	107.2	0.582	19.9	110.3	623.7	116.1

True North - Canada

During the third quarter the Company received assay results for 104 underground drill holes totaling 64,227 ft (19,576 m). These holes targeted the up dip extension of the 710 zone from the 6350 level and the down dip extension of the 710 and 710 footwall lens at the 32 Level. These results further extend the known mineralization up and down dip from the highly prospective 710 zones to approximately 1,500 ft vertically.

During the second quarter of 2017, the Company filed a technical report for the True North mine, located in Bissett, Manitoba, Canada updating the mineral reserve estimate. Total mineral reserve increased 25% to 147,000 gold ounces. The underground mineral reserve at September 30, 2017, was 104,700 gold ounces at a grade of 0.24 ounces per ton (8.3 grams per tonne).

The table below summarizes the most recent underground mineral reserve estimate for True North:



Category	Tons (k)	Au opt	Au g/t	Au koz
Proven	128	0.218	7.47	27.9
Probable	306	0.251	8.61	76.9
Total P&P	434	0.242	8.30	104.7

A description of the data verification methods, quality assurance program and quality control measures applied can be found in the technical report titled “Technical Report for the True North Mine, Bissett, Manitoba, Canada”, dated May 12, 2017 and with an effective date of March 31, 2017.

Mining operations review

Actual vs. modeled resource grades

Our average gold and gold equivalent mill head grades, on both a consolidated and individual mine site basis, can vary from the average grades of the mineral reserve estimates for each site. During our mining activities, we may encounter mineralization not included in the mineral reserve estimate that, in the opinion of management, can be processed economically. Often-times, rather than leaving such mineralized ore for future extraction, we mine the area when encountered so as not to potentially sterilize or incur additional costs to re-access and mine the ore at a later date. In other instances, additional design work, rehabilitation, and/or underground development may be required to enable access to mineralization included in the mineral resource estimate. Due to the above, actual mined gold and gold equivalent grades can differ from those which are stated in the current mineral reserve estimate.

Consolidated

The following table provides a summary of consolidated operating results for our producing properties which include our Nevada operations, Fire Creek, Midas, and Hollister (which began mining activities during the end of the first quarter of 2017) and our Canadian asset, True North, which was placed into production during the end of the third quarter of 2016.

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	Three months ended September 30,														Nine months ended September 30,
	2017											2016			2017											2016
Mine operations - consolidated	Nevada Total			True North					Total			Total ⁽¹⁾			Nevada Total			True North					Total			Total ⁽¹⁾
Ore tons mined	92,333			120,864					213,197			98,059			261,078			219,637					480,715			266,011
Average gold equivalent mined head grade (oz/ton) ⁽²⁾	0.48			0.08					0.25			0.41			0.55			0.10					0.35			0.44
Gold equivalent mined (oz) ⁽²⁾	44,266			9,906					54,172			40,642			144,895			21,409					166,304			117,248
Gold mined (oz)	40,934			9,906					50,840			35,230			131,707			21,409					153,116			100,669
Silver mined (oz)	249,133			—					249,133			367,444			951,997			—					951,997			1,197,018
Ore tons milled	78,035			110,590					188,625			101,804			231,234			209,202					440,436			261,753
Average gold equivalent mill head grade (oz/ton) ⁽²⁾	0.48			0.08					0.25			0.40			0.58			0.10					0.36			0.45
Average gold mill head grade (oz/ton)	0.44			0.08					0.23			0.348			0.53			0.10					0.33			0.39
Average silver mill head grade (oz/ton)	2.80			—			⁽⁴	⁾	1.16			3.44			3.81			—			⁽⁴	⁾	2.00			4.59
Average gold recovery rate (%)	89.1		%	92.0		%			90.0		%	93.1		%	91.6		%	93.0		%			91.8		%	93.6		%
Average silver recovery rate (%)	81.1		%	—		%	⁽⁴	⁾	81.7		%	87.3		%	83.1		%	—		%	⁽⁴	⁾	83.4		%	87.7		%
Gold equivalent produced (oz) ⁽²⁾	32,793			8,026					40,819			37,436			123,103			18,752					141,855			109,290
Gold produced (oz)	30,424			8,007					38,431			32,929			112,970			18,718					131,688			94,712
Silver produced (oz)	177,356			1,424					178,780			306,054			731,579			2,424					734,003			1,052,536
Gold equivalent sold (oz) ⁽²⁾⁽³⁾	32,402			5,610					38,012			41,986			124,342			16,857					141,199			111,291
Gold sold (oz)	29,886			5,591					35,477			36,647			113,506			16,823					130,329			96,110
Silver sold (oz)	188,480			1,424					189,904			362,500			782,379			2,424					784,803			1,096,090
Revenues and realized prices
Gold revenue (000s)	$	38,415		$	7,179				$	45,594		$	48,568		$	142,659		$	21,025				$	163,684		$	122,688
Silver revenue (000s)	3,235			24					3,259			7,073			13,629			42					13,671			19,387
Total revenues (000s)	$	41,650		$	7,203				$	48,853		$	55,641		$	156,288		$	21,067				$	177,355		$	142,075
Average realized gold price ($/oz)	$	1,285		$	1,284				$	1,285		$	1,325		$	1,257		$	1,250				$	1,256		$	1,276
Average realized silver price ($/oz)	$	17.16		$	16.85				$	17.16		$	19.51		$	17.42		$	17.33				$	17.42		$	17.69
Non-GAAP Measures
Production cash costs per GEO sold ⁽²⁾⁽³⁾	$	696		$	1,461				$	809		$	662		$	616		$	1,544				$	727		$	635
⁽¹⁾ Total for 2016 includes production from True North which started in the third quarter of 2016.
⁽²⁾ Gold equivalent measures are the gold measure plus the silver measure divided by a GEO ratio. GEO ratios are computed by dividing the average realized gold price per ounce by the average realized silver price per ounce received by us in the respective period and match the ratios used to determine the production cash costs per GEO sold. Refer to the Non-GAAP Performance Measures section of this MD&A for additional detail. Mined ounces are calculated using tons hauled to surface multiplied by the assays from production sampling.
⁽³⁾ This is a non-GAAP measure; refer to the Non-GAAP Performance Measures section of this MD&A for additional detail.
⁽⁴⁾ The Company does not track this silver statistic at True North due to silver being immaterial to that operation.

Nevada operations

The Company's Nevada operations milled 78,035 ore tons at an average milled head grade of 0.48 GEOs per ton during the third quarter of 2017. Operations at Fire Creek continue to perform ahead of management expectations. In addition to the positive Q3 production results, mine development at Fire Creek will continue to ramp-up in the fourth quarter of 2017 for 2018 mining. We began processing Hollister ore at the Midas mill towards the end of the third quarter. The commissioning of the new CIL circuit was in process while we tested ore blends from the Nevada mines to yield the most favorable overall recovery results. Initially, we processed 100% Hollister

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ore in the Midas mill at approximately 40 tons per hour. Subsequent to incurring normal commissioning activities, modifications were made to the feed blend adding approximately 30% low grade Midas ore to dilute the organic carbon. Metallurgical test work is on-going and throughout this process recoveries have steadily improved and are expected to be between 85% and 90% for the Hollister ore going forward. Additionally, silver recoveries have also improved and are expected to increase to be approximately 70%, approximately 10% higher than predicted. Production from Hollister was also impacted by a delay in the delivery of the new carbon screens which were needed for the mill modifications. It is anticipated that the new processing circuit will be optimized during the fourth quarter. Hollister is well positioned to achieve significant production improvements during the fourth quarter as we plan to mine higher-grade stopes already developed.

Canadian operations

At True North, we milled 62,480 ore tons at an average milled head grade of 0.11 gold ounces per ton, producing 6,145 gold equivalent ounces. We also processed 48,110 tons from the True North Tailings at an average grade of 0.04 gold ounces per ton, producing an additional 1,881 gold ounces. Third quarter production was negatively impacted by sequencing of underground stopes. Waste development is now in place to deliver higher grade stopes in the fourth quarter. Additionally, during the third quarter of 2017, staffing changes were successfully implemented including management additions and we continue to make progress transitioning operations to Klondex employees from third-party contractors.

The third quarter ended with significant momentum in several areas. Over 60% of the gold equivalent ounces mined during the third quarter were mined during the month of September. Also, for the month of September, ore development advance rates achieved were more than double the year-to-date average. In addition, approximately 70% of planned stoping fronts have been developed for fourth quarter production.

All in sustaining costs

Total Company all in sustaining costs for the three and nine months ended September 30, 2017 were $1,315 and $1,151 per gold ounce sold, respectively. The Company expects to have all in sustaining costs for the year of $950 to $1,000 per gold ounce sold. (These are non-GAAP measures; refer to the Non-GAAP Performance Measures section of the MD&A for additional detail).

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Fire Creek (Nevada Operations)

Fire Creek is 100% owned, fully-permitted, and was acquired by Klondex in 1975. Production began in 2014 under the bulk sample permit. 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 is a high-grade, epithermal vein deposit, and the land package covers approximately 18,714 acres (~28.8 square miles). Ore mined from Fire Creek is trucked to Midas for processing in the milling facility. The following table provides a summary of Fire Creek operating results and period-over-period changes.



	Three months ended September 30,									Nine months ended September 30,
Mine Operations - Fire Creek	2017			2016			Change			2017			2016			Change
Ore tons mined	29,933			24,065			5,868			95,592			88,198			7,394
Average gold equivalent mined head grade (oz/ton) ⁽¹⁾	0.87			0.90			(0.03		)	0.94			0.83			0.11
Gold equivalent mined (oz) ⁽¹⁾	25,918			21,713			4,205			89,834			73,627			16,207
Gold mined (oz)	25,716			21,501			4,215			88,883			72,779			16,104
Silver mined (oz)	15,088			14,512			576			69,169			63,246			5,923
Ore tons milled	30,911			26,122			4,789			101,630			92,832			8,798
Average gold equivalent mill head grade (oz/ton) ⁽¹⁾	0.79			0.98			(0.19		)	0.93			0.86			0.07
Average gold mill head grade (oz/ton)	0.78			0.97			(0.19		)	0.92			0.85			0.07
Average silver mill head grade (oz/ton) ⁽²⁾	0.52			0.66			(0.14		)	0.70			0.76			(0.06		)
Average gold recovery rate (%)	90.5		%	93.4		%	(2.9		%)	92.1		%	93.6		%	(1.5		%)
Average silver recovery rate (%) ⁽²⁾	83.1		%	87.2		%	(4.1		%)	84.4		%	87.4		%	(3.0		%)
Gold equivalent produced (oz) ⁽¹⁾	21,983			23,873			(1,890		)	86,948			74,502			12,446
Gold produced (oz)	21,805			23,654			(1,849		)	86,127			73,673			12,454
Silver produced (oz)	13,292			15,023			(1,731		)	59,717			61,864			(2,147		)
Gold equivalent sold (oz) ⁽¹⁾	23,128			27,518			(4,390		)	87,035			72,671			14,364
Gold sold (oz)	22,883			27,254			(4,371		)	86,230			71,688			14,542
Silver sold (oz)	18,332			18,100			232			58,529			73,351			(14,822		)
Revenues and realized prices
Gold revenue (000s)	$	29,411		$	36,112		$	(6,701	)	$	108,415		$	91,472		$	16,943
Silver revenue (000s)	315			350			(35		)	1,012			1,254			(242		)
Total revenues (000s)	$	29,726		$	36,462		$	(6,736	)	$	109,427		$	92,726		$	16,701
Average realized gold price ($/oz)	$	1,285		$	1,325		$	(40	)	$	1,257		$	1,276		$	(19	)
Average realized silver price ($/oz)	$	17.18		$	19.34		$	(2.16	)	$	17.29		$	17.10		$	0.19
Non-GAAP Measures
Production cash costs per GEO sold ⁽¹⁾⁽²⁾	$	509		$	498		$	11		$	454		$	458		$	(4	)
⁽¹⁾ Gold equivalent measures are the gold measure plus the silver measure divided by a GEO ratio. GEO ratios are computed by dividing the average realized gold price per ounce by the average realized silver price per ounce received by us in the respective period and match the ratios used to determine the production cash costs per GEO sold. Refer to the Non-GAAP Performance Measure s section of this MD&A for additional detail. Mined ounces are calculated using tons hauled to surface multiplied by the assays from production sampling.
⁽²⁾ This is a non-GAAP measure; refer to the Non-GAAP Performance Measures section of this MD&A for additional detail.

Operations and costs - At Fire Creek, the Company milled 30,911 ore tons in the third quarter at an average milled head grade of 0.79 gold equivalent ounces per ton, producing 21,983 gold equivalent ounces. Year to date, Fire Creek has produced 86,948 gold equivalent ounces, approximately 81% of its increased annual production guidance.

Spending - During the nine months ended September 30, 2017 , capital expenditures totaled $22.2 million . For details of capital expenditures refer to the Investing cash flows part of the Financial position, liquidity, and capital resources section of this MD&A.

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Midas Mine (Nevada Operations)

Midas is 100% owned, fully-permitted, and was acquired by Klondex in February 2014. Midas is located in north-central Nevada in Elko County approximately 58 miles east of a major highway (Interstate-80) near other large gold deposits and mines which are owned and operated by major mining companies. Midas is a low-sulphidation, epithermal vein deposit, and the land package covers approximately 30,000 acres (~47.0 square miles). The following table provides a summary of Midas operating results and period-over-period changes.



	Three months ended September 30,									Nine months ended September 30,
Mine Operations - Midas	2017			2016			Change			2017			2016			Change
Ore tons mined	38,887			45,311			(6,424		)	119,473			136,452			(16,979		)
Average gold equivalent mined head grade (oz/ton) ⁽¹⁾	0.28			0.28			—			0.32			0.26			0.06
Gold equivalent mined (oz) ⁽¹⁾	11,062			13,352			(2,290		)	38,570			36,004			2,566
Gold mined (oz)	8,511			8,154			357			27,632			20,257			7,375
Silver mined (oz)	191,065			352,932			(161,867		)	787,541			1,133,772			(346,231		)
Ore tons milled	39,300			43,934			(4,634		)	121,780			137,173			(15,393		)
Average gold equivalent mill head grade (oz/ton) ⁽¹⁾	0.28			0.29			(0.01		)	0.32			0.26			0.06
Average gold mill head grade (oz/ton)	0.21			0.18			0.03			0.23			0.15			0.08
Average silver mill head grade (oz/ton) ⁽²⁾	4.77			7.59			(2.82		)	6.52			8.24			(1.72		)
Average gold recovery rate (%)	88.7		%	93.4		%	(4.7		)%	91.2		%	94.1		%	(2.9		)%
Average silver recovery rate (%) ⁽²⁾	82.4		%	87.2		%	(4.8		)%	83.4		%	87.7		%	(4.3		)%
Gold equivalent produced (oz) ⁽¹⁾	9,351			11,809			(2,458		)	34,711			33,046			1,665
Gold produced (oz)	7,288			7,523			(235		)	25,512			19,287			6,225
Silver produced (oz)	154,536			291,031			(136,495		)	662,334			990,672			(328,338		)
Gold equivalent sold (oz) ⁽¹⁾	8,746			13,465			(4,719		)	36,799			37,627			(828		)
Gold sold (oz)	6,531			8,393			(1,862		)	26,804			23,422			3,382
Silver sold (oz)	165,930			344,400			(178,470		)	719,632			1,022,739			(303,107		)
Revenues and realized prices
Gold revenue (000s)	$	8,398		$	11,120		$	(2,722	)	$	33,638		$	29,880		$	3,758
Silver revenue (000s)	2,847			6,723			(3,876		)	12,544			18,133			(5,589		)
Total revenues (000s)	$	11,245		$	17,843		$	(6,598	)	$	46,182		$	48,013		$	(1,831	)
Average realized gold price ($/oz)	$	1,286		$	1,325		$	(39	)	$	1,255		$	1,276		$	(21	)
Average realized silver price ($/oz)	$	17.16		$	19.52		$	(2.36	)	$	17.43		$	17.73		$	(0.30	)
Non-GAAP Measures
Production cash costs per GEO sold ⁽¹⁾⁽²⁾	$	1,160		$	999		$	161		$	990		$	978		$	12
⁽¹⁾ Gold equivalent measures are the gold measure plus the silver measure divided by a GEO ratio. GEO ratios are computed by dividing the average realized gold price per ounce by the average realized silver price per ounce received by us in the respective period and match the ratios used to determine the production cash costs per GEO sold. Refer to the Non-GAAP Performance Measure s section of this MD&A for additional detail. Mined ounces are calculated using tons hauled to surface multiplied by the assays from production sampling.
⁽²⁾ This is a non-GAAP measure; refer to the Non-GAAP Performance Measures section of this MD&A for additional detail.

Operations and costs - At Midas, the Company milled 39,300 ore tons in the third quarter at an average milled head grade of 0.28 gold equivalent ounces per ton, producing 9,351 gold equivalent ounces. Year to date, Midas has produced 34,711 gold equivalent ounces, approximately 77% of its annual production guidance. Midas continues to introduce additional cut and fill mining, which is anticipated to reduce dilution resulting in higher ore mining grades.

Spending - During the nine months ended September 30, 2017 total capital spending was $14.4 million . For details of capital expenditures refer to the Investing cash flows part of the Financial position, liquidity, and capital resources section of this MD&A.

Midas Mill (Nevada Operations)

Ore from Fire Creek, Midas and Hollister 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 1/2" 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. During the third quarter the Company began to process Hollister ore at the Midas mill. The company converted four of the mill's leach tanks to CIL to allow Hollister ore to be

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processed. The commissioning of the new CIL circuit is in process while the Company tests ore blends from the Nevada mines to yield the most favorable results. The Company is in a favorable position to now have three mines in Northern Nevada feeding one central mill, providing significant operating flexibility to optimize profitability.

The Company also added a tails thickener to the Midas mill. The addition of the thickener will extend the life of the mill tailings facilities and reduce future capital expenditures.

Hollister (Nevada Operations)

The Hollister mine is a fully-permitted past producing underground and open pit operation, located in north-central Nevada in Elko County. Hollister does not have milling or processing facilities but is located approximately 17 miles from the Midas mill, which currently has capacity to process additional tons. Hollister is an important asset to us since we believe there are significant synergies and cost savings with our Nevada operations through low transportation costs, reduced per ton milling costs, and shared general and administrative costs. Further, certain of our executives and management previously operated the historical underground operations and exploration programs at Hollister and believe that exploration targets with significant potential exist within the property boundary. We believe Hollister provides us with an opportunity to strategically and responsibly grow our business in Nevada, a mining friendly jurisdiction, while leveraging our technical expertise in narrow-vein underground mining and past experience with the project.



	Three months ended September 30,			Nine months ended September 30,
Mine Operations - Hollister	2017			2017
Tons mined	23,513			46,013
Average gold equivalent mined head grade (oz/ton) ⁽¹⁾	0.31			0.36
Gold equivalent mined (oz) ⁽¹⁾	7,286			16,476
Gold mined (oz)	6,707			15,192
Silver mined (oz)	42,980			95,287
Ore tons milled	7,824			7,824
Average gold equivalent mill head grade (oz/ton) ⁽¹⁾	0.26			0.26
Average gold mill head grade (oz/ton)	0.23			0.23
Average silver mill head grade (oz/ton)	1.94			1.94
Average gold recovery rate (%)	72.8		%	72.8		%
Average silver recovery rate (%)	62.8		%	62.8		%
Gold equivalent produced (oz) ⁽²⁾	1,459			1,459
Gold produced (oz)	1,331			1,331
Silver produced (oz)	9,528			9,528
Gold equivalent sold (oz) ⁽²⁾	529			529
Gold sold (oz)	472			472
Silver sold (oz)	4,218			4,218
Revenues and realized prices
Gold revenue (000s)	$	606		$	606
Silver revenue (000s)	73			73
Total revenues (000s)	$	679		$	679
Average realized gold price ($/oz)	$	1,284		$	1,284
Average realized silver price ($/oz)	$	17.31		$	17.31
Non-GAAP Measures
Production cash costs per GEO sold ⁽²⁾⁽³⁾	$	1,197		$	1,197
⁽¹⁾ Gold equivalent measures are the gold measure plus the silver measure divided by a GEO ratio. GEO ratios are computed by dividing the average realized gold price per ounce by the average realized silver price per ounce received by us in the respective period and match the ratios used to determine the production cash costs per GEO sold. Refer to the Non-GAAP Performance Measure s section of this MD&A for additional detail. Mined ounces are calculated using tons hauled to surface multiplied by the assays from production sampling.
⁽²⁾ This is a non-GAAP measure; refer to the Non-GAAP Performance Measures section of this MD&A for additional detail.

Operations and costs - At Hollister, the Company began to process ore at the Midas mill during the quarter. Commissioning of the new CIL circuit is in process while the Company tests ore blends from the Nevada mines to yield the most favorable results. Initially, the Company processed 100% Hollister ore in the Midas mill at approximately 40 tons per hour. Subsequent to incurring normal commissioning issues, modifications were made to the feed blend adding approximately 30% low grade Midas ore to dilute the organic

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carbon. Metallurgical test work is on-going. Recoveries have steadily improved and are expected to be between 85% and 90% for the Hollister ore going forward. Additionally, silver recoveries have also improved and are expected to increase to be approximately 70%, approximately 10% higher than predicted. Production at Hollister was also impacted by a delay in the delivery of the new carbon screens which were needed for the mill modifications. It is anticipated that the new processing circuit will be optimized during the fourth quarter. Hollister is well positioned to achieve significant production improvements during the fourth quarter as we plan to mine higher-grade stopes already developed.

Spending - During the nine months ended September 30, 2017 total capital spending was $5.9 million . For details of capital expenditures refer to the Investing cash flows part of the Financial position, liquidity, and capital resources section of this MD&A.

Community - On August 17, 2017, the Company completed the donation of the Rock Creek lands, (more than 3,200 acres of lands), to the Battle Mountain Band of Western Shoshone Indians of Nevada.

Aurora updates

Aurora project overview

The Aurora project is a fully-permitted past producing underground and open pit operation, located in west-central Nevada in Mineral County. Aurora has a 350 ton per day milling and processing facility, which we believe may provide us an opportunity to consider toll milling services. Further, certain of our executives and management previously operated Aurora and believe that exploration targets with significant potential exist within the property boundary. We believe Aurora provides us with an opportunity to strategically and responsibly grow our business in Nevada.

During the fourth quarter of 2016 and the first three quarters of 2017, we performed rehab work on the carbon stripping circuit, carbon regeneration circuit and mill. During the second quarter of 2017, we identified an opportunity to process ore contained within the existing tailings facilities at the project. Processing of this material is expected to begin in the fourth quarter of 2017. We continue to assess the economic feasibility of toll milling services for third parties.

True North (Manitoba, Canada)

True North (formerly Rice Lake), located in Manitoba, Canada, is 100% owned, fully-permitted, and was acquired on January 22, 2016. True North is a past producing underground gold mining operation consisting of three underground deposits with a modern, fully-permitted mill. Under previous ownership, mining took place at True North continuously from 2007 until May 2015, when the operation was placed on care and maintenance. True North was placed into production towards the end of the third quarter of 2016 following the release of an updated mineral reserve and resource estimate.

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	Three months ended September 30,															Nine months ended September 30,
Mine Operations - True North	2017									2016			Change			2017									2016			Change
	True North Mine			True North Tailings			True North Total			True North Total						True North Mine			True North Tailings			True North Total			True North Total
Ore tons mined	72,754			48,110			120,864			28,683			92,181			146,336			73,301			219,637			41,361			178,276
Average gold equivalent mined head grade (oz/ton) ⁽¹⁾	0.11			0.04			0.08			0.19			(0.11		)	0.12			0.05			0.10			0.18			(0.08		)
Gold equivalent mined (oz) ⁽¹⁾	7,839			2,067			9,906			5,575			4,331			18,088			3,321			21,409			7,633			13,776
Gold mined (oz)	7,839			2,067			9,906			5,575			4,331			18,088			3,321			21,409			7,633			13,776
Silver mined (oz)	—			—			—			—			—			—			—			—			—			—
Ore tons milled	62,480			48,110			110,590			31,748			78,842			135,901			73,301			209,202			31,748			177,454
Average gold equivalent mill head grade (oz/ton) ⁽¹⁾	0.11			0.04			0.08			0.06			0.02			0.12			0.05			0.10			0.06			0.04
Average gold mill head grade (oz/ton)	0.11			0.04			0.08			0.06			0.02			0.12			0.05			0.10			0.06			0.04
Average silver mill head grade (oz/ton) ⁽²⁾⁽³⁾	—			—			—			—			—			—			—			—			—			—
Average gold recovery rate (%)	92.0		%	91.0		%	92.0		%	88.7		%	3.3		%	93.0		%	91.0		%	93.0		%	88.7		%	0.043
Average silver recovery rate (%) ⁽²⁾⁽³⁾	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%	—		%
Gold equivalent produced (oz) ⁽¹⁾	6,145			1,881			8,026			1,752			6,274			15,730			3,022			18,752			1,752			17,000
Gold produced (oz)	6,126			1,881			8,007			1,752			6,255			15,696			3,022			18,718			1,752			16,966
Silver produced (oz)	1,424			—			1,424			—			1,424			2,424			—			2,424			—			2,424
Gold equivalent sold (oz) ⁽¹⁾	3,729			1,881			5,610			1,000			4,610			13,876			2,981			16,857			1,000			15,857
Gold sold (oz)	3,710			1,881			5,591			1,000			4,591			13,842			2,981			16,823			1,000			15,823
Silver sold (oz)	1,424			—			1,424			—			1,424			2,424			—			2,424			—			2,424
Revenues and realized prices
Gold revenue (000s)	n/a			n/a			$	7,179		$	1,336		$	5,843		n/a			n/a			$	21,025		$	1,336		$	19,689
Silver revenue (000s)	n/a			n/a			24			—			$	24		n/a			n/a			42			—			$	42
Total revenues (000s)	$	—		$	—		$	7,203		$	1,336		$	5,867		$	—		$	—		$	21,067		$	1,336		$	19,731
Average realized gold price ($/oz)	n/a			n/a			$	1,284		$	1,336		$	(52	)	n/a			n/a			$1,250			$	1,336		$	(86	)
Average realized silver price ($/oz)	n/a			n/a			$	16.85		$	19.51		$	(2.66	)	n/a			n/a			$17.33			$	17.42		$	(0.09	)
Non-GAAP Measures
Production cash costs per GEO sold ⁽¹⁾⁽²⁾	n/a			n/a			$	1,461		$	612		$	849		n/a			n/a			$	1,544		$	612		$	932
⁽¹⁾ Gold equivalent measures are the gold measure plus the silver measure divided by a GEO ratio. GEO ratios are computed by dividing the average realized gold price per ounce by the average realized silver price per ounce received by us in the respective period and match the ratios used to determine the production cash costs per GEO sold. Refer to the Non-GAAP Performance Measure s section of this MD&A for additional detail. Mined ounces are calculated using tons hauled to surface multiplied by the assays from production sampling.
⁽²⁾ This is a non-GAAP measure; refer to the Non-GAAP Performance Measures section of this MD&A for additional detail.
⁽³⁾ The Company does not track this silver statistic at True North due to silver being immaterial to that operation.

Operations and costs - The mine continues to ramp up towards full production from underground. At True North, the Company milled 62,480 ore tons at an average milled head grade of 0.11 gold ounces per ton, producing 6,145 gold equivalent ounces. The Company also processed 48,110 tons from the True North Tailings at an average grade of 0.04 gold ounces per ton, producing and additional 1,881 gold equivalent ounces. Third quarter production was negatively impacted by sequencing of underground stopes. Waste

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development is now in place to deliver higher grade stopes in the fourth quarter. Additionally, staffing changes have been successfully implemented including management additions and the Company continues to make progress transitioning to Klondex employees from third-party contractors.

As we continue to ramp up production, which entails processing tailings, we recognized write-downs to production inventories of $9.4 million for the nine months ended September 30, 2017 (see Note 3. Inventories to the Notes to Consolidated Financial Statements for additional detail).

Spending - For the first nine months of 2017, spending was $11.7 million for capital, development and project costs. For details of capital expenditures refer to the Investing cash flows part of the Financial position, liquidity, and capital resources section of this MD&A.

Financial position, liquidity, and capital resources

General strategy

To maintain sufficient liquid assets and access to capital resources, we regularly perform short and long-term cash flow forecasts using current assumptions of future gold and silver prices, foreign exchange rates, production volumes, and operating and capital costs. Our liquidity and capital resources management strategy entails a disciplined approach by monitoring the timing and amount of any investment in our mines, projects, or exploration properties, while continually remaining in a position which we believe will allow us to respond to changes in our business environment, such as a decrease in metal prices, or other factors beyond our control.

Our capital structure consists of a mixture of debt and shareholders' equity. We regularly review our capital structure and evaluate various financing options and strategies that: (1) may improve our current liquidity and financial condition, (2) are attainable on favorable and reasonable terms, and (3) are permissible under our existing debt arrangements and other obligations. Such financing options may include, but are not limited to, additional or increases in revolving borrowing facilities, equipment financing, term loan facilities, refinancing existing obligations, and/or the issuance of equity securities, warrants, or other instruments.

Risk management contracts

In order to increase the certainty of expected future cash flows, from time to time we may enter into financial instruments for a portion of our forecast gold and silver sales over the next one to twelve months. During the three and nine months ended September 30, 2017 , we entered into forward trades which covered 78,976 and 169,826 gold ounces, respectively, at average prices of $1,285 and $1,268 , respectively. We also entered into forward trades which covered 343,983 and 937,882 silver ounces, respectively, at average prices of $17.10 and $17.39 per ounce, respectively. Additionally, during the second and third quarters of 2017, we entered into short-term zero cost gold collars. The collars total 40,503 gold ounces from October 1, 2017 through September 30, 2018 with a floor ranging from $1,200 to $1,300 per ounce to a ceiling ranging from $1,277 to $1,385 per ounce (see Note 9. Derivatives to the Notes to Consolidated Financial Statements for additional detail). Other than the aforementioned, we have not entered into any other significant contracts to hedge or manage market risks arising from changes in metal prices, diesel and propane costs, and currency and interest rates. We will continually and actively monitor applicable markets and quotes and may consider entering into additional hedging agreements and contracts if determined to be advantageous by management and the board of directors, and if such transactions are permissible under our existing debt agreements.

Liquidity and capital resources

As discussed below in the Sources and uses of cash section, at September 30, 2017 , our Cash and cash equivalents balance totaled $20.6 million , decreasing $27.0 million from the December 31, 2016 balance of $47.6 million largely due to investing cash outflows of $55.9 million related to capital expenditures, which were partially offset by cash provided by operating activities of $25.5 million and cash provided by financing activities of $2.6 million .

Due to the nature of our operations and the composition of our balance sheet assets, as of September 30, 2017 , our current assets, which included Cash and cash equivalents of $20.6 million and Inventories of $43.1 million , represented substantially all of our liquid assets on hand. We have access to additional liquidity under our $35.0 million Revolver, of which $23.0 million was available as of September 30, 2017 . As of September 30, 2017 , we had working capital of $17.4 million . The following chart provides a summary of our working capital, Revolver availability, and estimated liquidity as of the end of each of the last three years and September 30, 2017 (in thousands):

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Our working capital decreased by $15.8 million (approximately 48% ) from December 31, 2016 to September 30, 2017 , and our working capital ratio decreased to 1.33 . The following table summarizes working capital (in thousands, except working capital ratio):



	September 30, 2017		December 31, 2016		Change
Total current assets	$	69,774	$	74,871	$	(5,097	)
Total current liabilities	52,415		41,692		10,723
Working capital	$	17,359	$	33,179	$	(15,820	)
Working capital ratio ⁽¹⁾	1.33		1.80
⁽¹⁾ Current assets divided by current liabilities.

Working capital changes related to the decrease in total current assets were primarily attributable to a $27.0 million decrease in Cash and cash equivalents (discussed below in the Sources and uses of cash section), offset by a $21.8 million increase in inventory primarily as a result of Hollister operations stockpiling ore during its ramp up throughout the nine months ended September 30, 2017 . Working capital changes related to an increase in total current liabilities were primarily attributable to an increase in accounts payable of $8.3 million .

Included in working capital are Inventories , which include production-related inventories that can provide us with additional cash liquidity in excess of their September 30, 2017 carrying value of $34.1 million due to a cash margin we expect to realize at the time of sale. The following table summarizes the estimated recoverable gold and silver ounces contained in our Inventories and the underlying amount of revenue which may be generated from their sale using September 30, 2017 period-end prices, which would be further reduced for any remaining processing and refining costs (in thousands, except ounces and period-end prices):



	September 30, 2017
	Gold		Silver		Total
Estimated ounces in Inventories	30,914		135,808
Period-end prices	$	1,287	$	16.86
	$	39,786	$	2,290	$	42,076

Our September 30, 2017 working capital, available sources of liquidity, and future operating cash flows will be used, in part, to fund recurring operating and production costs, deliver gold ounces under the Gold Purchase Agreement (8,000 ounces over the next 12 months), make principal and interest payments on debt, and to fund capital expenditures and exploration and development costs at our mines and projects. At current gold and silver price levels, and when using our estimates of future production and costs, we believe our cash flows from operating activities together with our working capital and Revolver, will be sufficient to fund our business for at least the next 12 months. See the Contractual obligations section for additional detail on the timing and amounts of our future cash requirements.

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Sources and uses of cash



	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Net income (loss)	$	(13,392	)	$	7,269		$	(15,927	)	$	(3,878	)
Net non-cash adjustments	18,626			3,768			46,805			27,959
Net change in non-cash working capital	(5,789		)	(252		)	(5,428		)	3,769
Net cash (used) provided by operating activities	(555		)	10,785			25,450			27,850
Net cash used in investing activities	(20,390		)	(17,275		)	(55,406		)	(60,872		)
Net cash (used) provided by financing activities	(142		)	100,764			2,600			104,447
Effect of foreign exchange on cash balances	146			(10		)	327			619
Net increase (decrease) in cash	(20,941		)	94,264			(27,029		)	72,044
Cash, beginning of period	41,548			36,877			47,636			59,097
Cash, end of period	$	20,607		$	131,141		$	20,607		$	131,141

Operating Cash Flows - Our cash flows from operations are largely impacted by the number of ounces sold, average realized prices, and production costs. As shown in the table below, during the three and nine months ended September 30, 2017 and 2016 , operating cash flows were positively impacted by GEO's sold (in thousands, except ounces).



	Three months ended September 30,						Nine months ended September 30,
Cash revenue from operations ⁽¹⁾	2017			2016			2017			2016
Consolidated gold equivalent ounces sold ⁽¹⁾	38,012			41,986			141,214			111,291
Less: ounces delivered under Gold Purchase Agreement ⁽²⁾	(2,000		)	(2,000		)	(6,000		)	(6,000		)
	36,012			39,986			135,214			105,291
Average realized gold price ($/oz)	$	1,285		$	1,325		$	1,256		$	1,277
	$	46,275		$	52,981		$	169,829		$	134,457
Cash production costs from operations ⁽¹⁾
Production costs	$	26,108		$	27,774		$	94,035		$	70,681
Add: Write-down of production inventories (cash portion) (see Note 3 - Inventories )	4,635			—			8,560			—
	$	30,743		$	27,774		$	102,595		$	70,681

Cash margin from operations ⁽¹⁾	$	15,532		25,207			67,234			63,776
⁽¹⁾ This is a non-GAAP measure; refer to the Non-GAAP Performance Measures section of this MD&A for additional detail.
⁽²⁾ Ounces delivered under the Gold Purchase Agreement do not result in cash revenue.

Investing cash flows - During the three months ended September 30, 2017 , net cash used in investing activities increased by $3.1 million as a result of larger capital expenditures as compared to the same period of the prior year. During the nine months ended September 30, 2017 , net cash used in investing activities decreased by $5.5 million as compared to the nine months ended September 30, 2016 , as the True North acquisition resulted in a $20 million cash payment during the first half of 2016. This decrease was partially offset by higher 2017 capital expenditures. During the nine months ended September 30, 2017 and 2016 , we funded capital expenditures for mineral properties, plant and equipment. The following tables summarize our capital expenditures for the three and nine months ended September 30, 2017 (in thousands):

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	Three months ended September 30, 2017
Capital expenditures	Fire Creek		Midas ⁽¹⁾		Hollister		Aurora		True North		Corporate and other		Total
Mineral properties	$	375	$	—	$	—	$	—	$	—	$	—	$	375
Land	25		—		—		—		—		—		25
Facilities and equipment	244		2,253		189		541		—		36		3,263
Mine development	7,050		1,919		4,119		—		4,139		—		17,227
	$	7,694	$	4,172	$	4,308	$	541	$	4,139	$	36	$	20,890
⁽¹⁾ Midas includes $1.8 million for the milling facility.



	Nine months ended September 30, 2017
Capital expenditures	Fire Creek		Midas ⁽¹⁾		Hollister		Aurora		True North		Corporate and other		Total
Mineral properties	$	456	$	—	$	162	$	—	$	—	$	—	$	618
Land	39		—		—		—		—		—		39
Facilities and equipment	1,571		8,768		430		1,311		1,658		383		14,121
Mine development	20,112		5,664		5,337		—		10,015		—		41,128
	$	22,178	$	14,432	$	5,929	$	1,311	$	11,673	$	383	$	55,906
⁽¹⁾ Midas includes $7.4 million for the milling facility.

Financing Cash Flows - During the three and nine months ended September 30, 2017 , net cash provided by financing activities decreased by $100.9 million and $101.8 million , respectively, as a result of cash proceeds received for the issuance of common shares in connection with the Hollister acquisition in the third quarter of 2016.

Foreign Currency Effect on Cash - A portion of our Cash and cash equivalents is held in bank accounts denominated in Canadian dollars. Generally speaking, when the US dollar strengthens against the Canadian dollar, we experience negative foreign currency translation adjustments on our Canadian dollar cash balances (the opposite is true when the Canadian dollar strengthens against the U.S. dollar). Changes in exchange rates resulted in increases to our cash balances of $0.1 million and $0.3 million , respectively, during the three and nine months ended September 30, 2017 .

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Contractual obligations

The following table provides a listing of our significant contractual obligations as of September 30, 2017 (in thousands):



	Payments due by period
	Less than 1 year		1-3 years		3-5 years		More than 5 years		Total
Long-term debt obligations
Gold Purchase Agreement ⁽¹⁾	$	9,412	$	2,686	$	—	$	—	$	12,098
Interest on Gold Purchase Agreement ⁽¹⁾	1,875		286		—		—		2,161
Revolver ⁽²⁾	—		12,000		—		—		12,000
Interest on Revolver ⁽²⁾	552		689		—		—		1,241
	11,839		15,661		—		—		27,500
Capital lease obligations
Capital lease obligations ⁽³⁾	748		970		—		—		1,718
Interest on capital lease obligations ⁽³⁾	52		48		—		—		100
	800		1,018		—		—		1,818
Other long-term liabilities
Asset retirement obligations ⁽⁴⁾	—		—		—		43,212		43,212
Total	$	12,639	$	16,679	$	—	$	43,212	$	72,530
⁽¹⁾ The Gold Purchase Agreement requires the physical delivery of gold ounces to satisfy principal and interest due, amounts are based on an amortization schedule established on the transaction date. See Note 6 - Debt for additional detail .
⁽²⁾ Amounts reflect the repayment of principal drawn and related cash interest on the Revolver through its current maturity date of December 31, 2019. See Note 6 - Debt for additional detail.
⁽³⁾ Represents cash principal and interest. See Note 6 - Debt for additional detail.
⁽⁴⁾ Asset retirement obligations are related to our mining operations, projects, and exploration activities. Classification of such amounts is based on our current estimates of when reclamation work will be performed. Amounts represent undiscounted estimates and are not reflective of inflation or third-party profits which may be incurred if reclamation work is performed externally. See Note 7 - Asset retirement obligations for additional detail.

As of September 30, 2017 , we did not have any material operating lease obligations or firm purchase obligations. In addition to the above, our mines and projects are subject to certain royalty commitments as disclosed in Note 17. Commitments and contingencies .

Debt covenants

Our debt agreements contain certain representations and warranties, restrictions, events of default, and covenants, customary for agreements of these types. Additionally, the Revolver contains financial covenants which require us to maintain a Tangible Net Worth not less than $100.0 million, a Gearing Ratio (a measure of debt to EBITDA) not greater than 4.00:1, a Cash Balance not less than $10.0 million, and a Current Ratio not less than 1.10:1 (as such terms are defined in the Revolver). The Company was in compliance with all debt covenants as of September 30, 2017 .

Outstanding share capital

As of November 6, 2017 , there were 179,608,280 common shares, 4,107,583 options, 10,001,242 warrants, 1,485,866 RSUs, 507,633 PSUs outstanding, and 195,710,604 common shares outstanding on a fully diluted basis.

Off-Balance Sheet Arrangements

As of September 30, 2017 , there were no material off-balance sheet arrangements.

Non-GAAP performance measures

We have included the non-GAAP measures " Cash revenue from operations ", " Cash production costs from operations ", " Cash margin from operations ", " Production cash costs per gold equivalent ounce sold ", " All-in sustaining costs per gold ounce sold " and " All-in costs per gold ounce sold " in this MD&A (collectively, the "Non-GAAP Measures"). These Non-GAAP Measures are used internally to assess our operating and economic performance and to provide key performance information to management. We believe that these Non-GAAP Measures, in addition to conventional measures prepared in accordance with GAAP, provide investors with an improved ability to evaluate our performance and ability to generate cash flows required to fund and sustain our business. These Non-GAAP Measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. These Non-GAAP Measures do not have any standardized meaning prescribed under GAAP, and therefore may not be comparable to or consistent with measures used by other issuers or with amounts presented in our financial statements.

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Our primary business is gold production and our current and future operations, development, exploration, and life-of-mine plans primarily focus on maximizing returns from such gold production. As a result, our Non-GAAP Measures are calculated and disclosed on a per gold or gold equivalent ounce basis.

Production cash costs per gold equivalent ounce sold

Production cash costs per gold equivalent ounce sold presents our cash costs associated with the production of gold equivalent ounces and, as such, non-cash depreciation and depletion charges are excluded. Production cash costs per gold equivalent ounce sold is calculated on a per gold equivalent ounce sold basis, and includes all direct and indirect operating costs related to the physical activities of producing gold, including mining, processing, third-party refining expenses, on-site administrative and support costs, royalties, and cash portions of net realizable value write-downs on production-related inventories (State of Nevada net proceeds and other such taxes are excluded). We believe that converting the benefits from selling silver ounces into gold ounces is helpful to analysts and investors as it best represents the way we operate, which is to maximize returns from gold production. Gold equivalent ounces are computed using the number of silver ounces required to generate the revenue derived from the sale of one gold ounce, using average realized selling prices (in thousands, except ounces sold and per ounce amounts):



	Three months ended September 30,
	2017								2016
Consolidated	Nevada Total ⁽¹⁾		True North			Total			Nevada Total ⁽¹⁾			True North			Total
Average realized price per gold ounce sold	$	1,285	$	1,284		$	1,285		$	1,325		$	1,336		$	1,325
Average realized price per silver ounce sold	$	17.16	$	16.85		$	17.16		$	19.51		$	19.51		$	19.51
Silver ounces equivalent to revenue from one gold ounce	74.9		76.2			74.9			67.9			68.5			67.9
Silver ounces sold	188,480		1,424			189,904			362,500			—			362,500
GEOs from silver ounces sold	2,516		19			2,535			5,339			—			5,339
Gold ounces sold	29,886		5,591			35,477			35,647			1,000			36,647
Gold equivalent ounces	32,402		5,610		38,012			40,986			1,000			41,986
Production costs	$	21,543	$	4,565		$	26,108		$	27,162		$	612		$	27,774
Add: Write-down of production inventories (cash portion) (see Note 3 - Inventories )	1,005		3,630			4,635			—			—			—
	$	22,548	$	8,195		$	30,743		$	27,162		$	612		$	27,774
Production cash costs per GEO sold	$	696	$	1,461		$	809		$	663		$	612		$	662
⁽¹⁾ During 2017, production was from Fire Creek, Midas, and Hollister. During 2016, production was only from Fire Creek and Midas.



	Nine months ended September 30,
	2017						2016
Consolidated	Nevada Total ⁽¹⁾		True North		Total		Nevada Total ⁽¹⁾		True North		Total
Average realized price per gold ounce sold	$	1,257	$	1,250	$	1,256	$	1,276	$	1,336	$	1,277
Average realized price per silver ounce sold	$	17.42	$	17.33	$	17.42	$	17.69	$	17.69	$	17.69
Silver ounces equivalent to revenue from one gold ounce	72.2		72.1		72.1		72.1		75.5		72.2
Silver ounces sold	782,379		2,424		784,803		1,096,090		—		1,096,090
GEOs from silver ounces sold	10,836		34		10,885		15,202		—		15,181
Gold ounces sold	113,506		16,823		130,329		95,110		1,000		96,110
Gold equivalent ounces	124,342		16,857		141,214		110,312		1,000		111,291
Production costs	$	75,306	$	18,729	$	94,035	$	70,069	$	612	$	70,681
Add: Write-down of production inventories (cash portion) (see Note 3 - Inventories )	1,254		7,306		8,560		—		—		—
	$	76,560	$	26,035	$	102,595	$	70,069	$	612	$	70,681
Production cash costs per GEO sold	$	616	$	1,544	$	727	$	635	$	612	$	635
⁽¹⁾ During 2017, production was from Fire Creek, Midas, and Hollister. During 2016, production was only from Fire Creek and Midas.

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The following tables present a reconciliation of Fire Creek, Midas, and Hollister to the "Nevada Total" for the three and nine months ended September 30, 2017 and a reconciliation of Fire Creek and Midas for the three and nine months ended September 30, 2016 (in thousands, except ounces sold and per ounce amounts):



	Three months ended September 30,								Three months ended September 30,
	2017								2016
Nevada Total	Fire Creek		Midas		Hollister		Nevada Total ⁽¹⁾		Fire Creek		Midas		Nevada Total ⁽¹⁾
Average realized price per gold ounce sold	$	1,285	$	1,286	$	1,284	$	1,285	$	1,325	$	1,325	$	1,325
Average realized price per silver ounce sold	$	17.18	$	17.16	$	17.31	$	17.16	$	19.34	$	19.52	$	19.51
Silver ounces equivalent to revenue from one gold ounce	74.8		74.9		74.2		74.9		68.5		67.9		67.9
Silver ounces sold	18,332		165,930		4,218		188,480		18,100		344,400		362,500
GEOs from silver ounces sold	245		2,215		57		2,516		264		5,072		5,339
Gold ounces sold	22,883		6,531		472		29,886		27,254		8,393		35,647
Gold equivalent ounces	23,128		8,746		529		32,402		27,518		13,465		40,986
Production costs	$	11,768	$	9,142	$	633	$	21,543	$	13,716	$	13,446	$	27,162
Add: Write-down of production inventories (cash portion) (see Note 3 - Inventories )	—		1,005		—		1,005		—		—		—
	$	11,768	$	10,147	$	633	$	22,548	$	13,716	$	13,446	$	27,162
Production cash costs per GEO sold	$	509	$	1,160	$	1,197	$	696	$	498	$	999	$	663
⁽¹⁾ During 2017, production was from Fire Creek, Midas, and Hollister. During 2016, production was only from Fire Creek and Midas.



	Nine months ended September 30,								Nine months ended September 30,
	2017								2016
Nevada Total	Fire Creek		Midas		Hollister		Nevada Total ⁽¹⁾		Fire Creek		Midas		Nevada Total ⁽¹⁾
Average realized price per gold ounce sold	$	1,257	$	1,255	$	1,284	$	1,257	$	1,276	$	1,276	$	1,276
Average realized price per silver ounce sold	$	17.29	$	17.43	$	17.31	$	17.42	$	17.10	$	17.73	$	17.69
Silver ounces equivalent to revenue from one gold ounce	72.7		72.0		74.2		72.2		74.6		72.0		72.1
Silver ounces sold	58,529		719,632		4,218		782,379		73,351		1,022,739		1,096,090
GEOs from silver ounces sold	805		9,995		57		10,836		983		14,205		15,202
Gold ounces sold	86,230		26,804		472		113,506		71,688		23,422		95,110
Gold equivalent ounces	87,035		36,799		529		124,342		72,671		37,627		110,312
Production costs	$	39,495	$	35,178	$	633	$	75,306	$	33,285	$	36,784	$	70,069
Add: Write-down of production inventories (cash portion) (see Note 3 - Inventories )	—		1,254		—		$	1,254	—		—		—
	$	39,495	$	36,432	$	633	$	76,560	$	33,285	$	36,784	$	70,069
Production cash costs per GEO sold	$	454	$	990	$	1,197	$	616	$	458	$	978	$	635
⁽¹⁾ During 2017, production was from Fire Creek, Midas, and Hollister. During 2016, production was only from Fire Creek and Midas.

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All-in sustaining costs per gold ounce sold

All-in sustaining cost ("AISC") amounts are intended to provide additional information only and do not have any standardized meaning prescribed by GAAP and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The measures are not necessarily indicative of operating profit or cash flow from operations as determined under GAAP.

Our calculation of AISC per gold ounce sold is consistent with the June 2013 guidance released by the World Gold Council, a non-regulatory, non-profit market development organization for the gold industry. AISC per gold ounce sold reflects the varying costs of producing gold over the life-cycle of a mine or project, including costs required to discover and develop new sources of production; therefore, capital amounts related to expansion and growth projects are included.

AISC per gold ounce includes all: (1) direct and indirect operating cash costs related to the physical activities of producing gold, including mining, processing, third-party refining expenses, on-site administrative and support costs, royalties, and cash portions of net realizable value write-downs on production-related inventories (2) general and administrative expenses, (3) asset retirement and accretion expenses, and (4) sustaining capital expenditures, the total of which is reduced for revenues earned from silver sales. Certain cash expenditures, including State of Nevada net proceeds and other related taxes, federal tax payments, and financing costs are excluded.

All-in costs per gold ounce sold

All-in costs per gold ounce sold includes additional costs which reflect the varying costs of producing gold over the life-cycle of a mine or project. We calculate our all-in costs per gold ounce sold by beginning with the AISC total and adding non-sustaining (growth) capital expenditures and exploration and development expenditures.

AISC per gold ounce sold and all-in costs per gold ounce sold are presented in the tables below (in thousands, except ounces sold and per ounce amounts):



	Three months ended September 30,
	2017											2016
	Nevada Total ⁽¹⁾			True North			Corporate		Total			Nevada Total ⁽¹⁾			True North		Corporate		Total
Production costs	$	21,543		$	4,565		$	—	$	26,108		$	27,162		$	612	$	—	$	27,774
Add: Write-down of production inventories (cash portion)	1,005			3,630			—		4,635			—			—		—		—
	22,548			8,195			—		30,743			27,162			612		—		27,774
General and administrative	1,115			354			4,269		5,738			568			—		4,269		4,837
Asset retirement cost assets and accretion	350			32			—		382			225			31		—		256
Sustaining capital expenditures	9,065			3,953			27		13,045			12,938			—		—		12,938
Less: silver revenue	(3,235		)	(24		)	—		(3,259		)	(7,073		)	—		—		(7,073		)
All-in sustaining costs	29,843			12,510			4,296		46,649			33,820			643		4,269		38,732

Gold ounces sold	29,886			5,591			—		35,477			35,647			1,000		—		36,647

All-in sustaining costs per gold ounce sold	$	999		$	2,238		$	—	$	1,315		$	949		$	643	$	—	$	1,057

All-in sustaining costs	29,843			12,510			4,296		46,649			33,820			643		4,269		38,732
Non-sustaining capital expenditures	7,650			186			9		7,845			660			3,677		—		4,337
Exploration	3,541			126			—		3,667			3,421			—		—		3,421
Development and projects costs	2,288			—			—		2,288			—			—		—		—
All-in costs	$	43,322		$	12,822		$	4,305	$	60,449		$	37,901		$	4,320	$	4,269	$	46,490

Gold ounces sold	29,886			5,591			—		35,477			35,647			1,000		—		36,647

All-in costs per gold ounce sold	$	1,450		$	2,293		$	—	$	1,704		$	1,063		$	4,320	$	—	$	1,269
⁽¹⁾ The Nevada Total includes Fire Creek, Midas, Hollister, and Aurora.

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	Nine months ended September 30,
	2017											2016
	Nevada Total ⁽¹⁾			True North			Corporate		Total			Nevada Total ⁽¹⁾			True North		Corporate		Total
Production costs	$	75,306		$	18,729		$	—	$	94,035		$	70,069		$	612	$	—	$	70,681
Add: Write-down of production inventories (cash portion)	$	1,254		7,306			—		8,560			—			—		—		—
	76,560			26,035			—		102,595			70,069			612		—		70,681
General and administrative	2,091			782			13,080		15,953			1,244			—		10,191		11,435
Asset retirement cost assets and accretion	1,052			91			—		1,143			663			92		—		755
Capital expenditures	32,590			11,187			183		43,960			35,239			—		360		35,599
Less: silver revenue	(13,629		)	(42		)	—		(13,671		)	(19,387		)	—		—		(19,387		)
All-in sustaining costs	98,664			38,053			13,263		149,980			87,828			704		10,551		99,083

Gold ounces sold	113,506			16,823			—		130,329			95,110			1,000		—		96,110

All-in sustaining costs per gold ounce sold	$	869		$	2,262		$	—	$	1,151		$	923		$	704	$	—	$	1,031

All-in sustaining costs	98,664			38,053			13,263		149,980			87,828			704		10,551		99,083
Non-sustaining capital expenditures	11,260			486			200		11,946			1,613			5,758		—		7,371
Exploration	4,967			126			—		5,093			8,263			—		—		8,263
Development and projects costs	11,674			—			—		11,674			—			5,530		—		5,530
All-in costs	$	126,565		$	38,665		$	13,463	$	178,693		$	97,704		$	11,992	$	10,551	$	120,247

Gold ounces sold	113,506			16,823			—		130,329			95,110			1,000		—		96,110

All-in costs per gold ounce sold	$	1,115		$	2,298		$	—	$	1,371		$	1,027		$	11,992	$	—	$	1,251
⁽¹⁾ The Nevada Total includes Fire Creek, Midas, Hollister, and Aurora.

For a listing of our total capital expenditures see the Investing cash flows part of the Financial position, liquidity, and capital resources section.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Metal price risk

During the three and nine months ended September 30, 2017 , 100% of our revenues were from the sale of gold and silver. Our financial results can vary significantly as a result of fluctuations in gold and silver prices. The prices of gold and silver are volatile and are affected by many factors beyond our control, such as interest rates, inflation rates and expectations, speculation, currency values, central bank activities, governmental decisions regarding the disposal of precious metals stockpiles, global and regional demand and production, political and economic conditions, and other factors. See the Financial position, liquidity, and capital resources section of our Management's Discussion and Analysis of Financial Condition and Results of Operations for additional detail. In order to increase the certainty of expected future cash flows, from time to time we may enter into financial instruments for a portion of our forecast gold and silver sales over the next one to twelve months. See the discussion under the sub-heading " Risk management contracts" for more details.

As discussed in Note 6. Debt to the Notes to Consolidated Financial Statements, our Gold Purchase Agreement repayments are based on forward gold prices that existed at its transaction date (ranging from $1,290 to $1,388). Historically, we have not entered into any financial instruments to manage differences in gold spot prices for physically delivered metal to the counterparty and, therefore, have been affected by changes in spot gold prices relative to the transaction date forward gold prices encompassed in the Gold Purchase Agreement.

With the exception of the above, there have been no material changes in our market risks during the nine months ended September 30, 2017 , from what was disclosed in Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk of our Annual Report on Form 10-K for the year ended December 31, 2016 .

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted by the Company under U.S. and Canadian securities legislation is recorded, processed, summarized and reported within the time periods specified in those rules, including providing reasonable assurance that material information is gathered and reported to senior management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to permit timely decisions regarding public disclosure. Management, including the CEO and CFO, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) and15d-15(e) of the Exchange Act and the rules of the Canadian Securities Administrators, as at September 30, 2017 . Based on this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures were not effective 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 more detail under “Changes in Internal Control over Financial Reporting” below, and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 under the heading “Internal Control over Financial Reporting”. The Company has currently engaged additional internal and external personnel with technical accounting expertise, to ensure that accounting personnel with adequate experience, skills and knowledge relating to complex transactions are directly involved in the review and accounting evaluation of our complex transactions. These remediation activities began in the first quarter and are ongoing. The Company believes that remediation will be completed in the fourth quarter.

Changes in Internal Control over Financial Reporting

As described in our Annual Report on Form 10-K for the year ended December 31, 2016 , we did not maintain effective controls over 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. The deferred tax assets and liabilities and associated income tax expense were properly stated in our Annual Report on Form 10-K for the year ended December 31, 2016. Previously filed financial statements were not impacted. During the nine months ended September 30, 2017 , the Company reviewed its staffing relating to complex accounting issues and has currently engaged additional internal and external personnel with technical accounting expertise, to ensure that accounting personnel with adequate experience, skills and knowledge relating to complex transactions are directly involved in the review and accounting evaluation of our complex transactions. These remediation activities began in the first quarter and are ongoing.

Inherent Limitations on Effectiveness of Controls

Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we are involved in legal actions related to our business; however, management does not believe, based on currently available information, that contingencies related to any pending or threatened legal matter will have a material adverse effect on the Company’s financial position, although a contingency could be material to the Company’s results of operations or cash flows for a particular period depending on the results of operations and cash flows for such period. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense costs, diversion of management resources, and other factors. Refer to Note 17. Commitments and contingencies to the Notes to Consolidated Financial Statements for additional detail.

Item 1A. Risk Factors

There have been no material changes to our risk factors discussed in Part I - Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016 .

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

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Item 3. Defaults Upon Senior Securities and Use of Proceeds

None.

Item 4. Mine Safety Disclosures

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Quarterly Report on Form 10-Q.

Item 5. Other Information

None

Item 6. Exhibits

The information required by this Item is set forth in the Exhibit Index that follows the signature page of this Quarterly Report on Form 10-Q.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		KLONDEX MINES LTD.
		Registrant
Date:	November 9, 2017	By:	/s/ Paul Andre Huet
			Paul Andre Huet
			Chief Executive Officer
			(Duly Authorized Officer)





Date:	November 9, 2017	/s/ Barry Dahl
		Barry Dahl
		Chief Financial Officer
		(Principal Financial Officer and Chief Accounting Officer)

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EXHIBIT INDEX



Exhibit		Filed with this			Incorporated by Reference
Number	Exhibit Title	Form 10-Q	Form	File No.		Exhibit	Date Filed
23.1	Consent of Brian Morris	X
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)	X
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)	X
32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350	X
95.1	Mine Safety Disclosure	X
101.INS	XBRL Instance Document**	X
101.SCH	XBRL Taxonomy Extension Schema**	X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase**	X
101.DEF	XBRL Taxonomy Extension Definition Linkbase**	X
101.LAB	XBRL Taxonomy Extension Label Linkbase**	X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase**	X
**The following financial information from Klondex Mines Ltd.'s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017, formatted in XBRL (Extensible Business Reporting Language): Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of (Loss) Income, Condensed Consolidated Statements of Comprehensive (Loss) Income, Condensed Consolidated Statements of Cash Flows, and Condensed Consolidated Statements of Shareholders' Equity.