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SWOT Analysis: A Note on Klondex Mines

Commentaries & Views

Strengths

  • The best performing precious metal for the week was silver, up 2.61 percent, as investors keep pushing money into commodities in search of investments that keep up with faster inflation. Gold rose nearly 9 percent this quarter, its best performance in a year. Gold has risen on the perceived inability of President Donald Trump to advance his economic agenda after the failed health care reform plan. Traders and analysts are divided on the outlook for gold, given the uncertainty around interest rates.

  • Japan’s continuing sales of U.S. debt highlight the uncertainty around fiscal and monetary policies in the U.S., making way for gold to shine. Japan holds $1.1 trillion of U.S. Treasuries, making it the largest holder of U.S. debt, surpassing China. Japanese were net sellers for three months straight through January, the longest stretch since 2013.

  • Bloomberg Intelligence published a note saying that precious metals may have the most favorable reward versus risk as they appear to have bottomed following a multiyear slump.  In past rate hiking cycles metals have been among the top performers.

Weaknesses

  • The worst performing precious metal for the week was almost a tie between platinum and palladium, down 1.41 percent and 1.44 percent, respectively.  The rand fell precipitously earlier in the week  as South African president Jacob Zuma fired another cabinet member, this time finance minister Pravin Gordhan. With the fall in the rand, this reduces the costs of the South African producers to produce these metals, thus there is some worry output will increase. The country’s chamber of mines commented that this decision is “bizarre and difficult to understand.” The statement went on to say that, “The mining industry believes the changes will lead to instability and reduce investor confidence.”

  • More interest rate hikes may be on the way. Boston Fed president Eric Rosengren argued that four rate increases may be needed this year, and San Francisco’s John Williams said he “would not rule out more than three increases total for this year.” Rosengren warned that the faster rate increases may be needed to balance unemployment and inflation targets.

  • Gold reserves are declining in North America. TD Securities published a brief stating that reserves declined for five straight years through 2016, and large cap total reserve life is at a 10-year low. Meanwhile, a huge deposit has been reported discovered in China’s Shandong province, with reserves estimated between 382 tons and 550 tons.

Opportunities

  • Klondex Mines (KDX CN, KLDX US) on a trailing year basis is still up 47 percent relative to the NYSE Arca Gold Miners Index which is up almost 16 percent after two events that have transpired over the past two weeks.   On March 17, the Market Vectors Junior Gold Miners ETF (GDXJ) was anticipated to sell roughly three of its largest holdings as they no longer met the criteria for the benchmark index.  The proceeds generated from the expected sales were thought to be redeployed into most of the existing holdings, meaning potentially 11.5 million shares of new demand for Klondex by the GDXJ ETF.  This led many index arbitragers to start accumulating shares in Klondex in anticipation they could sell the shares at a higher price into the index rebalance.  However, when the index rebalance date arrived on March 17, the managers of the GDXJ ETF did not sell their largest names as expected, thus the arbitragers were left with no easy money exit from their accumulated positions.  This weighed on Klondex’s share price performance as the arbitrage buyers chose to exit their positions to move on to other trades.  Over the last couple of years, the share registry of U.S. holders of Klondex Mines has grown significantly, thus requiring the company to transition from IFRS accounting to U.S. GAAP reporting.  Therefore, on March 24, when Klondex reported earnings for yearend 2016, analyst estimates were based on IFRS rules but the earning reported by Klondex were based on GAAP which requires more costs to be expensed.  Klondex Mines has been making capital improvements to rehabilitate the True North Mine purchased out of receivership last year, but because there are no proven and probable reserves associated with the asset yet, all the capital invested in bringing the operation up to production readiness had to be expensed. In summary, Klondex has had its share price driven down by an index rebalance that did not happen and an earnings miss from a change in accounting standards, that was exacerbated by trading algorithms that immediately started selling the stock. This unusual set of events may provide investors an exceptional opportunity to establish positions in a high quality set of assets operated by strong team of operators.

  • Klondex Mines Outpaces gold Miners

  • Rye Patch Gold (RPM CN) received regulatory approval to start irrigation on the new South Heap Leach Pad at Florida Canyon. The project’s first gold production may come as early as April this year. Macquarie Research published positive outlook on Rye Patch Gold, putting its price target up 132 percent.  President and CEO William Howald said, "It's with a great sense of accomplishment and pride that the Florida Canyon team has completed the re-start of the mine. This accomplishment launches Rye Patch as a tenacious Au producer with a bright future with its pipeline of existing resource assets and exploration upside along the Oreana trend."

  • Gold price forecasts are looking up as anticipation over Trump’s tax cuts wane and investors confront continued negative real interest rates. Jeffrey Christian of CPM Group sees the price rising to $1,300 per ounce, Metals Focus Ltd. argues the case for $1,400 gold, and Incrementum AG anticipates $1,500 prices.

  • will gold reach $1,400 - $1,500 this year

Threats

  • Uncertainty lingers over potential Federal Reserve appointments during the Trump administration. Two spots on the Board of Governors have been unoccupied for nearly three years. A third spot will open up when Governor Daniel Tarullo steps down. Among the chairs, Janet Yellen’s term will end in 2018, as will vice chair Stanley Fischer’s. It remains to be seen who Trump could tap for these positions and what political agenda they might have.

  • Lawmakers in El Salvador dealt a blow to the metals mining industry when they voted earlier this week to enact a nationwide ban on metal mining. The law does not apply to other mining activity, such as coal or salt.

  • Residents of the Cajamarca municipality in Colombia voted against allowing mining activity in their area. The popular, regional vote may lead to a trend of additional popular efforts to restrict mining projects within Colombia. The vote is a blow to AngloGold Ashanti’s La Colosa gold project, located in the region.
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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