Kirkland Lake Gold’s high-grade reserve and resource base shows promise for future decades
Kirkland Lake Gold (TSX: KGI) is an operating and exploration gold company in Kirkland Lake, Ontario which is located in the Lower Abitibi Greenstone belt in northeastern Ontario. Kirkland Lake Gold owns the five former high-grade mines that produced 22 million ounces of gold with an average grade of 15.1 grams per tonne. The future of the Kirkland Lake camp brightened significantly some six years ago when there was a new high-grade geologic discovery, called the South Mine Complex (SMC), found on its ground. In its recently completed fiscal year, Kirkland Lake Gold produced 100,275 ounces of gold—in part from the SMC—and with its expansion plans, the company has its sights on producing 180,000 ounces this year and ratcheting up 250,000 ounces next year. With close to 1,000 direct employees, Kirkland Lake Gold has become an important part of the Kirkland Lake area regional economy.
In 2005, the Kirkland Lake Gold exploration team positioned drills underground, targeting earlier exploration holes in a new zone to the south, and in a different geologic setting than the quartz vein hosted Main/’04 Break which produced the 22 million ounces of gold; gold in association with sulphides. Discovered with a hole that intersected 90 feet of 2.3 ounces of gold, this became the exploration focus for Kirkland Lake Gold for the next several years. The SMC has now grown to (as at December 31, 2011) 273,000 tons containing 816,000 ounces in the P+P category grading 21.9 grams per tonne or 0.64 ounces per ton, 1,242,000 tons containing 780,000 ounces in the M+I category grading 21.6 grams per tonne or 0.63 ounces per ton, with another one million tons containing 662,000 ounces in the inferred category grading 22.6 grams per tonne or 0.66 ounces per ton.
That is not to say that there is no gold left in the Main/’04 Break. KGI has been mining that ore since 2005 and continues to do so today. Kirkland Lake Gold’s total reserves and resources (including the SMC) are 2,884,000 tons containing 1,473,000 ounces in the P+P category grading 17.5 grams per tonne or 0.51 ounces per ton, 3,433,000 tons containing 1,623,000 ounces grading 16.1 grams per tonne or 0.47 ounces per ton, with an additional 1,970,000 tons containing 1,003,000 ounces in the inferred category grading 17.5 grams per tonne or 0.51 ounces per ton.
On top of this reserve and resource base, in March 2012, the company entered into an agreement to acquire joint venture partner Queenston Mining’s 50 per cent interest in the seven JV properties the two companies own in the Kirkland Lake camp, for a cost of $60 million. The agreement is expected to close on August 30, 2012. The South Claims former JV property hosts the extension of the South Mine Complex, where gold grades have been very rich, in excess of 45 grams per tonne. Drilling on these new claims has commenced, with two underground drills and two surface drills. Results are expected in the fall, along with results from Kirkland Lake Gold’s surface drill program where three drills are turning.
In 2008, Kirkland Lake’s high-grade asset profile, compelling exploration potential, and opportunity for organic growth at low capital cost attracted the attention of former Goldcorp underground mine manager Mark Tessier. Tessier spent seven years overseeing the expansion of the newly discovered high-grade zone at Goldcorp’s historic Red Lake mine, resulting in 2.8 million ounces of production over six years. Tessier brought his production vision to Kirkland Lake Gold, designed a low-capital, four-year expansion plan, and in January 2009 initiated projects aimed at increasing gold production to 250,000 – 300,000 ounces per year starting in May 2013, the start of Kirkland Lake Gold’s 2014 fiscal year.
Kirkland Lake Gold was founded by mining industry veterans Harry Dobson and Brian Hinchcliffe, who began their search for a gold camp in 2001, during a time of depressed gold prices and uncertainty in gold mining in Canada. Hinchcliffe was familiar with the Macassa mine from his work in the late 1970s and early 1980s as a metals trader with J. Aron Goldman. Dobson and Hinchcliffe have a strategy whereby they study commodities cycles and determine when the market considers a metal out of favour, but the supply/demand fundamentals indicate spot prices have bottomed and are positioned for a rally, therefore enabling them to purchase assets at a discounted price.
Having successfully done this before twice, building both nickel and zinc companies (the latter of which was sold to Breakwater Resources in 1990 and is still in production today), in 2001 they began the search for a large gold asset with the criteria of having to be located in a politically safe country, have a large exploration potential, and be located close to existing infrastructure that could be rehabilitated rather than built from the bottom up in the event that production was re-established. Hinchcliffe and Dobson have founded mining companies with a focus of delivering high investment returns on capital deployed and internal rate of returns. These criteria, coupled with the upside exploration potential in an established mining camp and strategy of purchasing assets when commodities are at or near the bottom of a cycle, propelled the two to purchase the entire camp from Kinross Gold for $5 million and $15 million in royalty payments. Kirkland Lake Gold completed royalty payments in 2011.
The company is now less than one year from increasing production 600 per cent from levels just four years ago. With Kirkland Lake’s high-grade reserve and resource base, low capital-cost expansion capabilities, strong returns on capital deployed, growing yearly production and declining cash costs, and location in a politically safe country, this company has significant upside and the mine potential to be in operation for decades.