KLONDEX MINES LTD.
MANAGEMENT DISCUSSION & ANALYSIS
For the Nine Months Ended September 30, 2010
Directors and Officers as at November 12, 2010:
Directors: William J. Solloway
Blane Wilson
Brendan Donohoe
Richard Kern
Ronald Shorr
Officers:
Chief Executive Officer – William J. Solloway
President and Chief Operating Officer– Blane Wilson
Chief Financial Officer – Jorge Avelino
Secretary – Fred Baker
Contact Name: Jorge Avelino
Telephone: (604) 662-3902
Fax: (604) 662-3904
Toronto Stock Exchange Symbol: KDX
Form 51-102-F1
KLONDEX MINES LTD.
MANAGEMENT DISCUSSION & ANALYSIS
For the Nine Months Ended September 30, 2010
1.1 Date of This Report
November 12, 2010
This MD&A includes certain statements that may be deemed “forward-looking statements”.
All statements in this discussion, other than statements of historical facts, that address
exploration drilling, exploitation activities and events or developments that the Company
expects, are forward-looking statements. Although the Company believes the expectations
expressed in such forward-looking statements are based on reasonable assumptions, such
statements are not guarantees of future performance and actual results or developments may
differ materially from those in the forward-looking statements. Factors that could cause
actual results to differ materially from those in forward-looking statements include market
prices, exploitation and exploration successes, continued availability of capital and financing
and general economic, market or business conditions. Investors are cautioned that any such
statements are not guarantees of future performance and actual results or developments may
differ materially from those projected in the forward-looking statements.
1.2 Overall Performance
Description of Business
Klondex Mines Ltd. (“Klondex” or the “Company”) was founded in 1974 and is listed on the
Toronto Stock Exchange under the symbol 'KDX'. Klondex Mines is engaged in acquiring,
exploring and developing gold and silver properties in Nevada.
Klondex holds mineral interests in the prime area of northern Nevada's mining industry. The
Company’s principal property is the 100% owned Fire Creek Property. The Fire Creek Property
comprises leasehold land and fee land along the Northern Nevada Rift in North Central Nevada.
It is strategically located in the Crescent Valley area of the Battle Mountain gold belt between
the past producing Mule Canyon Mine to the north and the world-class Pipeline and Cortez gold
deposits to the south.
- 2 -
1.3 Selected Annual Information
The highlights of financial data for the Company for the three most recently completed financial
years are as follows:
December 31,
2009
December 31,
2008
December 31,
2007
(a) Total revenue Nil Nil Nil
(b) Loss before extraordinary items
(i) Total loss $2,412,555 $1,154,138 $1,252,259
(ii) Loss per share - basic
.09
.05
.06
(iii) Loss per share - diluted
.09
.05
.06
(c) Net loss
(i) Total loss $2,412,555 $1,154,138 $1,252,259
(ii) Loss per share - basic
.09
.05
.06
(iii) Loss per share - diluted
.09
.05
.06
(d) Total assets $27,306,474 $23,430,737 $20,366,135
(e) Total long-term liabilities $838 $4,113 $7,388
(f) Cash dividends declared per-share N/A N/A N/A
1.4 Results of Operations
Discussion of Acquisitions, Operations and Financial Condition
The following should be read in conjunction with the financial statements of the Company and
notes attached hereto.
NEVADA MINERAL PROPERTIES
Acquisition and Exploration expenditures:
Nevada Properties September 30, 2010 December 31, 2009
Balance, beginning of the period $ 23,466,593 $ 21,282,764
Acquisition of land 125,156 53,610
Advance - Drilling 104,366 -
Assays and core costs 149,537 158,064
Consulting - geological 291,384 363,641
Drilling 570,561 1,104,710
Environmental consulting & permitting 390,336 56,557
Field supplies and equipment 80,621 76,492
Geophysics 4,953 118,478
Lease payments, taxes and royalties 24,715 22,517
Legal 856 2,135
Maintenance fees 154,031 102,688
Mapping and sampling 4,109 7,504
Miscellaneous 36,693 49,359
Pond 16,741 44,062
Site reclamation 122,839 -
Site visits 6,926 24,012
Current expenditures for the period 2,083,824 2,183,829
Balance, end of period $ 25,550,417 $ 23,466,593
- 3 -
1.4 Results of Operations (continued)
Fire Creek Gold Properties, Lander County, Nevada
The Company has a 100% ownership interest in this land block which was expanded during
fiscal 2003 by 2,720 acres to a total of 4,875 acres. During fiscal 2004, the Company acquired
four additional blocks of land (80 acres) in the area for Cdn$69,567 (US$52,983). During fiscal
2006, the Company acquired additional blocks of land, which totaled 130 acres for Cdn$119,030
(US$97,009). These acquisitions were necessary to ensure logistical access to the main
mineralized zones and to acquire areas which represent the strike extensions of these zones.
During the year ended December 31, 2007, the Company acquired an additional 50 acres for
$70,433 (US$66,490).
During the year ended December 31, 2008, the Company acquired an additional 400 acres for
$184,504 (US$182,475). In late 2009, the Company acquired an additional 70 acres for $20,600
(US$20.000). The Company includes the Woodtick and Corral Canyon claims in the greater Fire
Creek Project area. The total unpatented claims within the project area now total 484 claims, or
9,680 acres and fee lands now total 1,527.7 acres.
Corral Canyon, Lander County, Nevada
The Company has a 100% ownership interest in 42 claims (840 acres) in Corral Canyon, Lander
County, Nevada. The claims are in good standing and were renewed on September 1, 2010.
These claims were added to the Fire Creek project in fiscal 2007 and are included in the Fire
Creek discussion.
Woodtick claims, Lander County, Nevada
The Company has a 100% ownership interest in these 26 claims (520 acres). They lie directly
north-east of Fire Creek along the Mule Canyon-Fire Creek-Buckhorn volcanic trend. These
claims provide access to the northern Fire Creek block from the powerline road. The claims are
in good standing and were renewed on September 1, 2010. These claims were added to the Fire
Creek project in fiscal 2007 and are included in the Fire Creek discussion.
Exploration Results and Future Plans & Developments
On January 20, 2010, the Company announced the final results from its 2009 drilling campaign.
The 2009 program included RC drilling of two IP anomalies, one of which yielded the discovery
of two new veins. The IP anomaly targets were developed in a geophysical survey also
conducted in 2009. KDX completed 15 holes totaling 20,221 feet (6,163 meters) within the Fire
Creek project in 2009.
On March 10, 2010, the Company announced an update on permitting for its underground
development program focused on bulk sampling and exploration drilling.
The Company has posted non-interest reclamation bearing bonds totalling $1,626,134 (U.S.
$1,533,221) required pursuant to the Company’s U.S. Bureau of Land Management permits
(BLM) issued in late December 2009. To fund the bond without issuing common stock at
current levels, the Company secured a loan facility bearing interest at 6% per year, which
matures on May 16, 2011. The Company has also executed a contract with Western Cultural
Resource Management (WCRM) to perform archeological site work also required pursuant to
BLM permits.
- 4 -
1.4 Results of Operations (continued)
Fire Creek Gold Properties, Lander County, Nevada (continued)
Exploration Results and Future Plans & Developments (continued)
On June 22, 2010, the Company announced the details of the summer drill program totalling
US$1,794,100. Drilling commenced shortly after the first rig arrived on site on June 28, 2010.
The program will focus on step-out drilling through the use of RC and Core and will enable the
Company to begin the process of including the southern extension in the underground
development plans and also work towards adding gold ounces to the already impressive 1.6
million indicated ounces and 0.5 million inferred ounces. In an effort to complement the
underground plans, the Company also plans to initiate some strategic infill drilling. This will
show vein continuity and generate further metallurgical testing as the Company prepares for
underground mine development later this year and initial bulk sampling in 2011.
The program includes 29,500 feet of RC and 10,000 feet of core drilling in 29 holes (19RC and
10 core holes) and will take 6 months to complete. The IP drilling plan will at least partially test
seven anomalies. Any significant gold anomalies found in the RC drilling of these anomalies will
need follow-up with a core rig. The budget allows 19 of the proposed 34 RC holes to be drilled.
However, 13 holes are outside the current boundary and permitting those holes will take time.
The core program will test the IP target gold found in last year’s small RC program as a high
priority. It will also test the south extension of Main with an additional hole on the most
southerly section drilled. There is only a single drill hole on this section at present. The
remainder of the core holes will fill gaps in the resource mainly on every other section line. Only
10 of the originally planned 25 core holes will be drilled under the budget.
As of the date of this report, a total of 5,558 feet of core had been drilled with 5 holes completed.
These are holes 1001, 1002B, 1004, 1005 and 1016. The RC drilling totals 10,600 fees with 5 IP
anomaly holes completed as well as numerous pre-collars for core holes. The 5 IP holes are
1006RC, 1007RC, 1010RC, 1011RC and 1012RC.
Drilling of IP anomalies to the north and south of the resource has been delayed by additional
archaeological studies required by the Bureau of Land Management (see Archaeological Report
below). Drilling of these targets is still planned for this year.
On September 30, 2010, the Company announced that the U.S. Bureau of Land Management
(BLM) has issued a Notice to Proceed for the Company’s Fire Creek high-grade gold property in
North Central Nevada. The BLM notice allows Klondex to commence surface preparation work
required for Fire Creek’s planned underground development. “Ground disturbing activity” has
been authorized in three locations, areas where the portal, ponds, pad and surface structures are
to be constructed. On October 6, 2010, the Company engaged N. A. Degerstrom as the surface
contractor and the work started immediately.
Archaeological Report
On June 1, 2010, the Company engaged Western Cultural Resource Management (WCRM) for
the Archaeological Site Study. The study is being led by Ed Stoner, who is overseeing 9
additional archaeologists.
- 5 -
1.4 Results of Operations (continued)
Archaeological Report (continued)
Subsequent to the nine months ended September 30, 2010, the work on clearing the western most
sites for early release continued. Small excavations on three of the sites were completed and one
more was started. The site just west of the mouth of the canyon was further explored with three
more excavations. Of the six excavations on this site, four have produced features that will need
further work in the updated plan.
The site of a possible prehistoric burial was discussed with the Bureau of Land Management
(BLM) and a decision to leave the site undisturbed was reached. The site will be fenced off and
no work of any kind will be performed inside this fenced area. By leaving this area undisturbed,
the Company does not have to deal with any Native American issues relating to the possible
remains.
WCRM suspended all work on July 2, 2010 and considered Phase 1 as complete. WCRM
provided the Company with the Phase II study at a budgeted cost of $600,000. On July 13, 2010,
the WCRM and the Company met with the BLM to discuss Phase II. A site visit was held with
WCRM and the BLM on July 21, 2010. The Company expects to have the WCRM crew onsite
soon to clear the remaining areas around the planned mine portal area, which will pave way for
the Company to receive the Letter to Proceed from the BLM. The Company will be unable to do
any upgrade to the access road until Phase II is completed later this year. This will not be an
impact to the Company’s timeline.
The Archaeological Site Study resumed on August 10, 2010, with the beginning of Phase 2
activities. Ed Stoner continued to lead the Archaeological Site Study efforts as WCRM project
manager, while Larry Wilson, the Company’s newly appointed Environmental Coordinator,
consulted with Mr. Stoner and monitored WCRM’s on-site activities to ensure that Company
interests were addressed.
The main goal of initial Phase 2 activities was to complete all archaeological/cultural
investigation and data recovery necessary to obtain a Notice to Proceed with soil disturbance in
the Company’s planned portal and surface support area. In order to obtain this notice, it was
necessary to complete the approved treatment plans for Loci AC, AG, and AJ, the western-most
of the seven major archaeologically sensitive zones established at Fire Creek. The completion of
all required actions in Locus AC was especially critical to Company interests due to its
immediate proximity to, and encroachment on, our planned portal and surface support area.
Accordingly, Locus AC was designated the dominant priority of archaeological team efforts.
- 6 -
1.4 Results of Operations (continued)
Archaeological Report (continued)
As work continued in Locus AC, the discovery of multiple occupation layers, several features,
and abundant artifacts delayed completion of the treatment plan significantly beyond initial
estimates. However; all archaeological/cultural investigation and data recovery was completed
for Loci AC, AG, and AJ, in accordance with their approved treatment plans, by August 30,
2010. On that date, WCRM requested a Notice to Proceed for Loci AC, AG, and AJ from the
BLM. The Notice to Proceed was granted and issued to the Company on September 29, 2010.
Receipt of this notice was of crucial importance to the Company because it authorized us to
proceed with approved ground disturbing activities within the three loci identified above, and
further allowed us to conduct approved ground disturbing activities in other areas not identified
in the Historic Properties Treatment Plan. However; we were reminded that no ground disturbing
activity could occur at the remaining loci within the archaeological district until the appropriate
cultural work has been completed and approved by the BLM cultural specialist.
The practical effect of the Notice to Proceed, when combined with our Reclamation Bond, was to
enable the Company to commence many of the approved earthwork and related activities
necessary to establish our surface support area/pad, expose the portal, and install much of the
related infrastructure. Consequently, survey and earthwork activities, performed by Small Mine
Development (our underground contractor) through their construction contractor, commenced on
October 2, 2010. To date, significant construction progress has been achieved. Grubbing and
clearing of the ancillary support, portal, waste rock dump, and pond areas, and construction of a
temporary fresh water pond, have been completed. Other approved activities continue, including:
cutting, filling, and levelling of the ancillary support area; exposure of the portal location; and
construction of the diversion structure.
Upon completion of the treatment plan for Loci AC, AG, and AJ on August 30th, Archaeological
Site Study team activity shifted to the remaining four major archaeologically sensitive zones
(Loci AR, S, V, and Y) at Fire Creek. Of these, Locus S became the main effort, and remained
our primary focus throughout the month of September. As with Locus AC, the presence of
multiple occupation layers, several features, and abundant artifacts necessitated continued
excavation activities beyond the anticipated timeframe. However; additional work was performed
in Loci AR, V and Y during the month as well. As the month closed, the treatment plan for
Locus V was nearly complete.
Locus S remained the main focus of activity during the first half of October, although excavation
of grids in Locus AR gradually assumed an increasing share of the treatment effort. By the
middle of the month, data recovery was nearly complete in Locus S. At that time, Locus AR
became the main effort of the site study. Continued surface collection, mapping, and excavation
activities in AR during the remainder of the month yielded an abundant amount of artifacts and
detected many indicators of significant occupation. It is anticipated that additional time and
effort will be required to satisfy approved treatment plan requirements for this location.
However; as October ended, data recovery was complete for Locus S, with the exception of the
surface collection of artifacts in one feature; and also complete in in Loci Y and V, with the
possible exception of additional excavation in backhoe trenches Y-1 and V-1.
- 7 -
1.4 Results of Operations (continued)
Archaeological Report (continued)
Additionally, efforts currently are underway by the Company and WCRM to develop realistic
archaeological support options for the weeks remaining before winter weather precludes such
support; and to prioritize the Company’s remaining critical tasks, such as continuation of the
drilling program and road improvement, in order to direct those archaeological support efforts in
an effective manner. For example, the Company, at present, remains unable to upgrade the site
access road, pending completion of required surface surveys and/or archaeological treatment.
However; this road situation is a nuisance rather than a hindrance to necessary activities and the
Company’s timeline.
Another, although unfortunate, matter of interest pertains to the Company’s receipt and
resolution of a Notice of Violation (ARPA). On September 23, 2010, it was discovered that,
during the month of July, Company geologists mistakenly had extended an access road and
constructed three drill pads in the Southwest Quadrant of Section 10, without the required prior
surface survey of the route and approval by the BLM. Examination of the surface area along the
route by WCRM archaeologists determined that this soil disturbance may have caused damage to
archaeologically sensitive areas. The situation properly was reported to the BLM, and resulted in
a Cease and Desist order, pertaining to all activities in the Southwest Quadrant of Section 10,
being issued to the Company on September 30, 2010. A subsequent site visit by relevant BLM
authorities on October 4, 2010, confirmed damage to an archaeological concentration, and the
Company received a Notice of Violation (ARPA) from the BLM on October 6, 2010. During and
subsequent to the above site visit, both the Company Environmental Coordinator (Larry Wilson)
and the WCRM Project Manager (Ed Stoner) had informal discussions with BLM representatives
emphasizing the Company’s strong commitment to protection of archaeological/cultural
resources and prevention of future infractions; expressing our desire to mitigate any damage we
had caused; and suggesting a possible mitigation plan.
The Notice of Violation (ARPA) provided an opportunity for the Company to meet with the
BLM and informally discuss the violation and possible resolution options prior to their drafting
of the Notice of Assessment. The Company requested and was granted this opportunity, and the
meeting was conducted on October 20, 2010. The Company effort was led by the Environmental
Coordinator (Larry Wilson), assisted by the Surface Superintendent (Doug Carter) and Chief
Geologist (James Balagna). WCRM, through the efforts of Tom Lennon (President, WCRM), Ed
Stoner (WCRM Project Manager) and other WCRM staff members present, very ably
represented Company interests related to the technical aspects of mitigation and future
operational procedures. The meeting resulted in an outcome favorable to the Company. The
representatives of the BLM Mt. Lewis Field Office indicated that our Company’s prior and
continuing supportive effort regarding our stewardship of cultural resources, and the positive,
open, and cooperative attitude demonstrated by the Company in this matter, influenced their
approach to resolution of this situation.
- 8 -
1.4 Results of Operations (continued)
Archaeological Report (continued)
The BLM offered the Company an opportunity to accept a mitigation plan very similar to that
previously suggested by Ed Stoner as the basis of an agreement to resolve the violation. Although
there were other conditions as well, the primary requirements of the mitigation plan were that the
Company would: conduct a cultural resource survey of approx. 200 acres surrounding the 3
damaged archaeological sites in the violation area, and provide a written report regarding the
results to the BLM; and that if any of the 3 damaged sites were determined eligible for inclusion
on the National Register of Historic Places (NRHP) a treatment plan would be developed in
consultation with the Nevada State Historic Preservation Officer (SHPO), and be implemented. If
the Company agreed to the conditions and requirements, there would be no civil fine assessed for
the violation. After brief consultation with the Company and WCRM representatives present,
Larry Wilson accepted the agreement on behalf of the Company. The conditions and
requirements of this agreement will be formalized as an amendment to our existing Memorandum
of Agreement. The Company, at present, is pending receipt of this amendment. WCRM currently
is developing a work plan and estimated costs for the activities necessary to satisfy the conditions
and requirements of this agreement.
Lander & Eureka Counties, Nevada
The Company has an option to acquire a 100% interest (the “Option”) in certain lands located in
Lander & Eureka Counties, Nevada (the “Property”), from Fire Creek Lands, LLC (the
“Optionor”). The Property has the potential for copper, silver, gold and other valuable mineral
deposits. In consideration of the Option, the Company must make option payments in the
aggregate amount of $380,000 over a period of five years (US$380,000 paid to date), and may
purchase the Property on or before June 17, 2010 for $2,500,000 with prior option payments
being applied as a credit towards the purchase price.
The agreement was amended August 4, 2009. The amended consideration of the Option is as
follows: the Company must make option payments in the aggregate amount of $480,000 over a
period of six years (US$380,000 paid to date), and may purchase the Property on or before
December 17, 2011 for $2,500,000 with prior option payments being applied as a credit towards
the purchase price.
In the event of an outright purchase of the Property by the Company, the Optionor will retain a
3% net smelter royalty, with the Company having a one-time option to purchase one percent of
the royalty in consideration of $1,000,000, at any time until June 17, 2015.
The Company has a 66.66% undivided interest in 48 claims (960 acres) situated in sections 8, 16
and 20 in the Maggie Creek area in Elko County, Nevada. The claims are in good standing and
were renewed on September 1, 2010. The property is subject to U.S. federal and state
environmental statutes. No future work is planned for the property at this time. The claims are
being held due to their strategic location.
Reef claims, Churchill County, Nevada
The Company has a 100% ownership interest in 8 claims (160 acres) in the Fairchild District of
Churchill County. Anomalous gold and silver were previously detected along a siliceous reef
which runs approximately a half mile in length. The claims are in good standing and were
renewed on September 1, 2010. The property is subject to U.S. federal and state environmental
statutes. No future work is planned for the property at this time.
- 9 -
1.4 Results of Operations (continued)
Hot Springs Point, Lander County, Nevada
The Company has a 100% ownership interest in 81 claims (1,620 acres) situated about 6 miles
east of the town of Crescent Valley. They are in a basalt-andersite setting. The claims are in
good standing and were renewed on September 1, 2010.
Discussion of Operations and Financial Condition
Interest income for the nine months ended September 30, 2010 was $2,303 compared to $2,248
for the nine months ended September 30, 2009. The loss for the nine months ended September
30, 2010 was $3,544,119 as compared with a loss of $1,972,323 for the nine months ended
September 30, 2009.
The increase in the loss for the nine months ended September 30, 2010 compared to the nine
months ended September 30, 2009 is related to the following:
Stock-based compensation increased by $1,292,720 during the nine months ended
September 30, 2010. The Company expensed $2,146,868 as stock-based compensation
during the current period as a result of granting 3,540,000 stock options to directors,
officers and consultants.
Consulting fees increased by $69,411. This was a result of the Company’s “Outreach
Program”. The Company engaged the services of Bryson Goodwin as Director of
Investor Relations to manage the market strategies and outreach program across Canada,
the United States, Asia, and Europe. Under the direction of Bryson Goodwin, for the
purpose of dissemination of important news and information, the Company engaged the
services of the following companies – Jay’s Watchlist, and Vantage Communication. In
addition, the Company engaged the services of David Fox Capital Consulting as a fiscal
advisor. Mr. Fox will advise and assist on corporate finance matters, including the selection
of underwriters, marketing the Company, vetting purchasers, assisting in the arranging of
road shows and in the closing of financing transactions, identify potential acquisitions, joint
ventures, and resource properties In the comparative period, the Company incurred
$70,345 in consulting fees related to the take-over bid by Silver Corp Metals.
Management fees increased by $28,108. During the period, the compensation committee
approved an increase in pay for both the Chief Financial Officer and the Treasurer.
Travel, conferences and meetings increased by $281,336. The increase is due to the
“Outreach Program” of the Company. Certain individuals travelled to Toronto, New
York, Boston, Hong Kong, London, Florida, and Denver attending investors meetings
and mining conferences.
The Company reported interest expense of $69,023 related to the loan of US$1,421,500,
which was used to post the BLM reclamation bonds.
A breakdown of the “Consulting Fees” expense is as follows:
Corporate & administration fees $ 28,750
Geological 1,281
Shareholders communication 159,173
Marketing 47,500
Financial 47,285
Total $ 283,989
- 10 -
1.4 Results of Operations (continued)
Discussion of Operations and Financial Condition (continued)
A breakdown of the “Travel, accommodation and meetings” expense is as follows:
Travel and meetings $ 187,194
Communication and conferences 168,363
Meals & entertainment 37,073
Total $ 392,630
Investor Relations Activities
In January 2007, the Company entered into a one year agreement with Jaffoni & Collins (“JCI”) to
provide investor relations services for the Company (automatically renews for successive one year
periods). Founded in 1994, JCI (www.jcir.com) is a full-service investor relations agency
exclusively focused on creating and executing communication programs for public companies. JCI
will be responsible for developing and implementing, and advising the Company with respect to
investor relations and financial policies and opportunities. JCI is based in New York, New York
and works closely with institutional investors, sell-side analysts, brokers, and private investors and
the media in Canada and the United States. JCI and its principals are at arm’s length to the
Company.
JCI’s monthly fee is US$5,000 plus expenses related to dissemination of information. JCI currently
has stock options of 25,000 at
.86 per share, 25,000 @ $1.00 per share and 100,000 @ $1.25 per
share.
During the nine months ended September 30, 2010, the Company engaged the services of a
dedicated representative to act as Director of Investor Relations with a mandate to manage the
market strategies and outreach program across Canada, the United States, Asia, and Europe. Prior to
this, the Company had been trading at approximately $1.15 with a market cap of about $37 million,
which, in management’s opinion, did not properly reflect the Company’s corporate development
and potential for growth.
Under the direction of the Director of Investor Relations, for the purpose of dissemination of
important news and information, the Company engaged the services of the following companies –
Jay’s Watchlist, Vantage Communication and Gold Investor.
The beginning of March 2010 commenced with the management team assembling in Toronto for
PDAC, where the new additions to the management team were officially introduced to the
marketplace. PDAC was very successful for the Company and the acceptance of the Company’s
new messaging and outreach efforts was soon being demonstrated in the marketplace.
From March 18 to 26, 2010, the Company was engaged in road trips, holding one on one meetings
booked in Toronto, Boston & New York. The meetings were viewed by management as successful
with many existing and new shareholders being updated and educated on the Company and the
possibilities presented at the company’s high grade Fire Creek property.
March 27 to April 5, 2010 saw the Company extending their travels to an Exhibit at the Hong Kong
Mines and Money Asia Conference. The Company was very well received and discussions with
interested parties continue.
- 11 -
1.4 Results of Operations (continued)
Investor Relations Activities (continued)
From April 19 to 30, 2010, the Company engaged in one on one meetings in Toronto, New York
and Boston. The trips’ primary focus was the introduction of the Company to new institutional
groups.
From May 14 to 21, 2010, the Company traveled to London for one on one meetings and for the
Company to be presented at the Rodman & Renshaw Investment Conference. The response to
Klondex was very positive in all aspects as we initiated exposure into the European marketplace.
From June 6 to 7, 2010, the Company assembled the entire management team in Vancouver to
answer shareholder questions, attend one on one meetings and to review the Nevada High-Grade
Gold Program at Vancouver’s Cambridge Conference.
On June 22, 2010, the Company was pleased to announce the Agreement to the Release of Claims
and Dismissal of Litigation with Paramount (see press release dated June 22, 2010.)
The month of July began with the Company’s AGM held in Toronto. During the rest of the week,
the President and Investor Relation director held one on one meetings in Toronto. As the month
progressed Institutional meetings were held in New York, Toronto and Montreal. The Company
attended the FSX conference in Fort Lauderdale, Florida and held meetings with several financial
institutions.
The months of August and September, the Company focused on investors meetings in New York,
Toronto, and Denver.
Management and Directors are very pleased to report that the efforts put into marketing the
Company have returned positive results to the Company’s shareholders. The new marketing plan
launched by the Company has generated an excellent return to shareholders. News dissemination
continues to reach a broader market and management is optimistic that the new market strategies
and outreach programs initiated by the Company will continue to generate significant returns and
create goodwill with the Company’s shareholders.
Financings, Principal Purposes & Milestones
On March 10, 2010, the Company announced that it had posted reclamation bonds totalling U.S.
$1,407,937, which was required pursuant to the Company’s U.S. Bureau of Land Management
permits (BLM) issued in late December 2009. To fund the bond without issuing common stock
at current levels, the Company secured a loan facility of US$1,421,500 bearing simple interest at
6% per year, which matures on May 16, 2011. This loan is secured by all assets of the Company
excluding the mineral properties. The Company has also executed a contract with Western
Cultural Resource Management (WCRM) to perform archeological site work also required
pursuant to BLM permits.
On July 6, 2010, the Company appointed Mr. Blane Wilson as President and Chief Operating
Officer. William Solloway continues to serve as the Company’s Chairman and CEO. In addition,
the Company announced the election of Blane Wilson and Richard Kern to the board of directors
at the AGM held on July 5, 2010. Messrs. Wilson and Kern join Mr. Solloway; Brendan
Donohoe, Treasurer; and Ronald Shorr, Chairman and CEO of Maudore Minerals Ltd., who were
re-elected to the Company’s five-member Board.
- 12 -
1.4 Results of Operations (continued)
Financings, Principal Purposes & Milestones (continued)
On July 14, 2010, the Company announced the execution of a financing Term Sheet with Hale
Capital, a New York based private investment firm whereby KDX will be entitled to draw down
on a loan, at its option, a minimum of US$ 10 million to a maximum of US$ 20 million, for use
in development of the Fire Creek property. This financing provides KDX the financial and
operational flexibility to fund the development of its high grade Fire Creek property, without
restrictions on operations. .
The funding will take the form of a gold loan and associated gold sales agreement. The loan will
be repaid through the delivery of gold at US$825 from the Company’s anticipated gold recovery
of its Underground Exploration and Bulk Sampling program. Over the 36-month term of the
loan, the Company calculates that the ounces at $825 will apply to approximately 11% of gold
recovered from the planned bulk sampling program.
Under the gold sales agreement, the investor has been granted the right to purchase the
Company’s gold production at a 3% discount to Spot Price for a period of three years after
repayment of the US $10 million gold loan.
The Company will grant the investor 1 million 4-year purchase warrants at $3.00 per share (at
US $20 million loan amount KDX will grant 2 million 4-year purchase warrants at $3.00 per
share) and pay a 1.5 % cash fee at closing. The term sheet provides the investor with a 45-day
exclusive right to provide the Company with financing of this nature. The Company’s
obligations under the gold loan and the gold sales agreement will be secured by a charge over all
of the company’s assets.
Hale Capital has selected the firm Ogilvy Renault for the legal due diligence and SRK
Consulting of Elko, Nevada for the technical due diligence. On July 27, 2010, the Company
conducted a site review for the representatives of Hale Capital and SRK Consulting. This
included a site visit of Fire Creek and a review of the cores stored in Reno.
As of the date of this report, the Company continues to negotiate certain terms of the Senior
Secured Facility Agreement with the Hale group.
On October 26, 2010, Klondex Mines Ltd. announced that it had agreed upon the terms and
pricing for a marketed private placement with a syndicate of underwriters led by NCP Northland
Capital Partners Inc. and including Mackie Research Capital Corporation and Wellington West
Capital Markets Inc. The underwriters have agreed to purchase, or find substituted purchasers
for, 4,000,000 common shares at a price of $2.25 per share for aggregate gross proceeds of $9
million.
Klondex plans to use the net proceeds from the offering for ongoing exploration and site work at
its Fire Creek property in Nevada and for general working capital purposes. The private
placement is in addition to a previously announced gold-backed debt financing that Klondex is
seeking to complete for funding of its contemplated underground program at Fire Creek.
On November 1, 2010, the Company received TSX Exchange approval on the above marketed
private placement. On November 10, 2010, the Company announced that it had completed the
private placement for net proceeds of $8,489,550.
- 13 -
1.5 Summary of Quarterly Results
The following is a summary of the Company’s financial results for the eight most recently
completed quarters:
Q3
Sep-10
Q2
Jun-10
Q1
Mar-10
Q4
Dec-09
Q3
Sep-09
Q2
Jun-09
Q1
Mar-09
Q4
Dec-08
Total loss (779,233) (643,714) (2,121,172) (440,232) (531,358) (649,424) (791,541) (480,823)
Per share (
.02) (
.02) (
.07) (
.02) (
.02) (
.02) (
.03) (
.02)
Discussion
For a detailed discussion on the nine months ended September 30, 2010, please refer to Section
1.4 - Results of Operations.
1.6 Liquidity
The Company has no revenue generating projects at this time. The Company’s historical capital
needs have been met by equity subscriptions. As at September 30, 2010, the Company had
working capital deficiency of $382,656 (December 31, 2009 – working capital of $3,032,999).
The Company currently has sufficient working capital for general and administration expenses
but will require capital to meet the exploration program for the Fire Creek property. However,
this is a forward-looking statement as it involves known and unknown risks, uncertainties and
other factors, which could affect the actual results, performance or achievements of the Company
and impact on the adequacy of working capital required for the year 2011 expressed by such
forward-looking statement. Also, the ability of the Company to continue with recommended
exploration programs on its current properties, and/or to successfully acquire and develop
additional properties in the resource sector is conditional on its ability to secure financing when
required.
The Company proposes to meet any additional financing requirements through the exercise of
outstanding stock options and warrants, or arranging other equity or loan financing, and/or
finalizing a joint venture agreement with a partner(s) who will be able to assume the costs of
recommended exploration programs. In light of the continually changing financial markets, there
is no assurance that funding by equity subscriptions or finding a joint venture partner will be
possible at the times required or desired by the Company. Please refer to Section on Financings,
Principal Purposes & Milestones - $10 - $20 Million in Gold-Backed Financing to fund the
underground program in Nevada and the $9 million marketed private placement.
Currency Risk
Currency risk is the risk to the Company's earnings that arises from fluctuations of foreign
exchange rates and the degree of volatility of these rates. The Company does not use derivative
instruments to reduce its exposure to foreign currency risk.
The Company had the following financial assets and liabilities demonstrated in US$:
30-Sep-10 31-Dec-09
Cash $ 1,022,597 $2,377,026
Marketable securities $ 199 $ 181
Reclamation bonds $ 1,533,221 $ 177,300
Accounts payable and accrued liabilities $ 697,291 $ 251,431
Due to related parties $ 59,100 $ 92,244
Loan payable $ 1,421,500 -
Asset retirement obligation $ 296,584 $ 177,300
- 14 -
1.6 Liquidity (continued)
At September 30, 2010 and 2009 US dollar amounts were converted at a rate of $1.0298
(December 31, 2009 - $1.0466) Canadian dollars to $1.00 US dollar.
Capital risk management
The Company includes cash and equity, comprising of issued common shares, contributed
surplus and deficit, in the definition of capital.
The Company’s objectives when managing capital is to maintain its ability to continue as a going
concern in order to provide returns for shareholders and benefits for other stakeholders. The
Company manages its capital structure and makes adjustments to it, based on the funds available
to the Company, in order to support the acquisition and exploration of mineral properties. The
Board of Directors does not establish quantitative return on capital criteria for management but
rather relies on the expertise of the Company’s management and consultants to sustain future
development of the business.
The Company’s properties are in the exploration state and as such the Company is dependent
upon external financings to fund activities. In order to carry out planned exploration and pay for
administrative costs, the Company will spend its existing working capital and raise the additional
funds required.
Management reviews its capital management approach on an ongoing basis and believes that this
approach is reasonable given the relative size of the Company.
There were no changes in the Company’s approach to capital management during the period
ended September 30, 2010. The Company is not subject to externally imposed capital
requirements.
1.7 Capital Resources
The only capital resources of the Company are its mineral properties with a historical cost of
$25,550,417 and its property and equipment with a net book value of $22,162.
1.8 Off Balance Sheet Arrangements
There are no off-balance sheet arrangements to which the Company is committed.
1.9 Transactions with Related Parties
The Financial Statements attached hereto provide disclosure on related party transactions for the
nine months ended September 30, 2010, with breakdown as follows:
Expense 30-Sep-10 30-Sep-09
Management salaries & fees $ 188,085 $ 159,977
Consulting fees 36,000 62,432
Accounting fees 82,326 63,641
Rent 25,570 31,402
Deferred geological fees 67,194 114,100
Total for the period $ 399,175 $ 431,552
- 15 -
1.9 Transactions with Related Parties (continued)
Amounts due to directors and officers of $131,931 (December 31, 2009 - $145,082) are non-interest
bearing, unsecured, and payable upon demand.
The Chief Executive Officer, President, Chief Financial Officer and Corporate Treasurer are under
management contracts with base annual compensation of US$150,000, US$100,000, Cdn$60,000
and US$75,000 respectively. In the event of a change of control, a termination payment is triggered
to each of these officers in the lump sum amounts of US$225,000, US$60,000, Cdn$75,000 and
US$112,500 respectively. Additionally, in the case of the Chief Executive Officer and the
President, a termination payment equivalent to 100% of the annual compensation is triggered by the
executive’s death or permanent physical or mental disability. These management contracts have a
term of 5 years with expiry dates of January 4, 2015 and February 1, 2015.
1.10 Third Quarter – 2010:
The third quarter expenditures do not differ significantly from other quarters with the exception
of the significant increase in travel, conferences, and meetings, which is a direct result of the
“Outreach Program” aimed at current shareholders and potential investors as discussed in
Section 1.4.
1.11 Proposed Transactions
Please refer to Section on Financings, Principal Purposes & Milestones regarding the $10 - $20
million in gold-backed financing to fund the underground program in Nevada and the marketed
private placement for $9 million for general working capital.
1.12 Critical Accounting Estimates
In preparing financial statements, management has to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses. Based on historical experience,
current conditions and expert advice, management makes assumptions that are believed to be
reasonable under the circumstances. These estimates and assumptions form the basis for
judgments about the carrying value of assets and liabilities and reported amounts for revenues
and expenses. Different assumptions would result in different estimates and actual results may
differ from results based on these estimates. These estimates and assumptions are also affected
by management’s application of accounting policies. Critical accounting estimates are those that
affect the consolidated financial statements materially and involve a significant level of judgment
by management. Please refer to Note 2 of the Annual Financial Statements.
1.13 Changes in Accounting Policies
IFRS Changeover Plan
The Company’s management continues to study IFRS technical issues in order to understand the
possible significant changes to the Company’s financial reporting. Management understands that
these IFRS issues will require that the interim and annual financial statements of the Company
provide more significant disclosures and different statement format presentation both during the
transition to IFRS and for the future periods after the adoption of IFRS.
- 16 -
1.13 Changes in Accounting Policies (continued)
IFRS Changeover Plan (continued)
During the year end audit committee meeting held on March 29, 2010, the committee
recommended that management meet with Company’s auditors this summer to start work on the
restatement of the financial statements for comparative purposes. The Company is currently in
the exploration stage with regard to its properties and does not believe there are complex
accounting or infrastructure issues that need to be resolved. Accordingly management believes
that this timeframe is sufficient to allow an orderly transition to IFRS. Management will ensure
that additional discussion is included in the MD&A on a going-forward basis. Please refer to
Note 2 of the Annual Financial Statements.
Subsequent to the period ended September 30, 2010, the Company engaged CrossDavis &
Company to assist the Company in the preparation of reports affected by the transition to IFRS.
Adoption of new CICA Handbook standards on January 1, 2011
The Company does not intend to early adopt the new sections of the CICA Handbook relating to
business combinations, consolidated financial statements or non-controlling interests because the
Company will be reporting under IFRS from January 1, 2011. Therefore, the Company does not
anticipate that these new sections will have an impact on the financial statements.
1.14 Financial and Other Instruments
The carrying value of cash and cash equivalents, marketable securities, accounts receivable,
reclamation bonds, accounts payable, accrued liabilities, and due from (to) related parties
approximate their fair values due to the short maturity of those instruments.
In addition, during the period, the Company secured a loan facility for US$1,421,500 bearing
simple interest at 6% per annum and maturing on May 16, 2011. This loan is secured by all
assets of the Company excluding the mineral properties. The loan was used to post the
reclamation bond required pursuant to the Bureau of Land Management permits for the
underground development program focused on bulk sampling.
As at September 30, 2010, the Company has posted an additional non-interest bearing bond in
the amount of $1,396,327 (US$1,355,921) bringing the total bonds to $1,578,911
(US$1,533,221). Fair value can not be reasonably determined and accordingly the bonds have
been recorded at historical cost, adjusted for current exchange rates.
1.15 Other
1.15.1 Share Capital
Disclosure of Outstanding Share Capital (November 12, 2010)
Number Book Value Contributed
Surplus
Common Shares 36,544,089 $47,463,918 $4,258,291
- 17 -
1.15.1 Share Capital (continued)
Summary of incentive stock options: (November 12, 2010)
Number of Shares Expiry Date Exercise Price
775,000 September 17, 2013
.86
660,000 March 2, 2014 $1.00
1,200,000 February 10, 2020 $1.25
200,000 March 18, 2012 $1.25
1,700,000 May 20, 2020 $1.35
100,000 August 1, 2014 $1.80
140,000 September 10, 2012 $2.00
4,775,000
Summary of warrants outstanding: (November 12, 2010)
Number of Shares
Expiry Date
Exercise Price
Nil - -
1.15.2 Disclosure Controls and Procedures
The Company has disclosure controls and procedures in place to provide reasonable assurance
that any information required to be disclosed by the Company under securities legislation is
recorded, processed, summarized and reported within the applicable time periods and to ensure
that required information is gathered and communicated to the Company’s management so that
decisions can be made about timely disclosure of that information. The Company’s Chief
Executive Officer and Chief Financial Officer evaluated the Company’s disclosure controls and
procedures for the nine months ended September 30, 2010. Management and the Board have
found those disclosure controls and procedures to be adequate for the above purposes.
1.15.3 Internal Controls over Financial Reporting
The Chief Executive Officer, the Chief Financial Officer and the Audit Committee of the
Company are responsible for designing a system of internal controls over financial reporting, or
causing them to be designed under their supervision, in order to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external reporting purposes in accordance with Canadian generally accepted accounting
principles. The Chief Executive Officer, the Chief Financial Officer and the Audit Committee
have designed and implemented a system of internal controls over financial reporting which they
believe is effective for the Company. During the review of the design of the Company’s control
system over financial reporting it was noted that due to the limited number of staff, there is an
inherent weakness in the system of internal controls due to our inability to achieve appropriate
segregation of duties. The limited number of staff may also result in identifying weaknesses with
respect to accounting for complex and non-routine transactions due to a lack of technical
resources, and a lack of controls governing our computer systems and applications within the
Company. While management of the Company has put in place certain procedures to mitigate
the risk of material misstatement in the Company’s financial reporting, it is not possible to
provide absolute assurance that this risk can be eliminated.
- 18 -
1.15.4 Subsequent Event
Please refer to Section 1.4 on Financings, Principal Purposes & Milestones - $10 - $20 Million in
Gold-Backed Financing and the $9 million marketed private placement.
1.15.5 Contingency
On July 20, 2009 the Company entered into a letter agreement (the “Letter Agreement”) with
Paramount Gold and Silver Corp. (“Paramount”) setting out the principal terms upon which
Paramount would acquire, pursuant to a plan of arrangement, all of the outstanding shares of the
Company on the basis of 1.45 shares of Paramount common stock for each common share of the
Company. On September 24, 2009, the Company terminated the Letter Agreement pursuant to
its terms. The Company announced the termination in a news release on September 25, 2009. In
its news release, the Company specified the reasons for the termination.
On September 30, 2009, Paramount commenced an action in the Supreme Court of British
Columbia seeking payment of a break fee in the amount of US$2.85 million, and unspecified
damages for breach of contract, malicious falsehood and defamation.
On June 22, 2010, the Company announced that the Company and Paramount had agreed to
release each other from all claims, including those pertaining to the litigation filed in the British
Columbia Supreme Court.
1.15.6 Additional information
Additional information relating to the Company is on SEDAR at www.sedar.com.