Yukon Gold

It was in 1896 when prospectors stumbled across large quantities of gold in one of the tributaries of the Yukon’s Klondike River.  Word of this discovery spread like wildfire.  And in no time at all prospectors from far and wide set course to get a piece of the action.  The aptly named Klondike Gold Rush ended up being one of legend!

Provocatively this legend was not entirely one of smashing success and untold riches though.  Yes, there were some who cashed in, but it was ultimately one of endless frustration and failure.  Gold fever ended up blinding folks to the reality of the Yukon’s harsh climate and challenging geography.  And most of those who journeyed there were ill-equipped to deal with it.

Amazingly of the 100k+ prospectors who set course to score Klondike gold, less than 40k even made it to the promised land.  Navigating the steep mountainous terrain and dealing with the intense cold and snow proved just too much.  Many died, and many turned back.  And sadly most of those who did make it struggled mightily to find gold in the Klondike’s hard-to-dig permafrost.

It was no surprise then that there was a mass exodus when gold was discovered in nearby Nome, Alaska in 1899 where the environment was much milder and it was easier to extract.  The Klondike Gold Rush had ended nearly just as soon as it had begun.  And by the turn of the century the boom towns had gone bust.

This swift departure was followed by a century or so where the Yukon experienced very little gold exploration and development relative to the rest of Canada.  And this is reflected by the fact that this territory only produces about 2% of the country’s gold, less than 100k ounces per year.

The 21st-century gold bull market has however relit a fire under the Yukon’s gold allure.  Considering the amount of gold the prospectors of yore were finding in streams and outcrops, clearly there’s vast potential to discover the deeper source deposits.  And since the modern mining companies are obviously not as vulnerable to the Yukon’s logistical challenges, they’ve gotten busy working this underexplored region targeting major discoveries.  And perhaps none is better than the one contained within Kaminak Gold’s Coffee project.

Coffee is located about 130km south of historic mining town Dawson City.  And though access is limited to air and barge, a physiography that includes gently rounded hills that are only partially covered in trees makes Coffee’s terrain comparatively mild to the rest of the territory.  This area did see a small amount of placer activity around the time of the Klondike Gold Rush, but it didn’t see its first meaningful hard-rock exploration until about a century later.

Kaminak Gold got its hands on the project in 2009.  And it set out to follow up on some recent promising early-stage exploration work that showed great gold potential.  In its first pass Kaminak identified several gold-in-soil anomalies.  And its maiden drilling program the following year resulted in some awesome high-grade discoveries.

The Supremo, Double Double, and Latte zones really stood out.  And further exploration showed them to be fantastic near-surface gold deposits amenable to bulk-tonnage mining.  Kaminak thus released the drilling hounds in order to prove up and expand the resources.  And each subsequent drilling season has stoked more and more excitement for Coffee’s future.

Interestingly drilling seasons in the Yukon run from early spring to late autumn, which differs from most other Canadian gold districts.  Out east where it’s flatter winter can actually be a good time to drill, when the mud and lakes are frozen over.  But in the Yukon where the mountains are steep, the snow is plentiful, and all-weather roads are few and far between, winter is when surface operations are typically shut down.

By the end of the 2014 season Kaminak’s geological baristas had drilled over 200k meters in 1000+ holes.  And this has fed a series of resource estimates, the latest showing Coffee to contain a whopping 4.2m ounces of gold.  And most exciting about this resource is that a core section (2.6m ounces) is classified as oxide mineralization, which makes for much cheaper mine development and extraction.

With Kaminak gaining more confidence in Coffee’s resources, it ran a preliminary economic assessment to give it an idea of its economic potential.  And the results, which were announced in June 2014, were staggering.

Coffee was drawn up as a conventional open-pit heap-leach operation.  The ore, of which about three quarters would come from the flagship Supremo deposit, would be thrice-crushed and processed at an onsite Adsorption-Desorption-Recovery carbon plant at a rate of nearly 14k metric tons per day.  With the core resource grading an average of 1.2 g/t and gold recovery averaging 88%, Coffee would produce 167k ounces per year over an 11-year mine life.

The PEA estimated Coffee’s preproduction capex at only $305m.  Not only does this include onsite infrastructure such as the processing plant and mining equipment, it includes support infrastructure like a 250km all-season access road to the Klondike Highway.

Most attractive about this prospective mine though is its projected operating costs.  Over the life of the mine, all-in sustaining costs are estimated at only $688/ounce.  This is easily in the lower quartile of industry average.  And at $1250 gold it will allow for a payback period of only two years along with an impressive after-tax internal rate of return of 26%.

Even given the recent lower prices, it really was a no-brainer to move forward with advancing Coffee towards development.  And Kaminak is full steam ahead as it performs comprehensive environmental baseline studies and infill drilling.  The environmental studies will feed the ever-critical Environmental Impact Statement in advance of permitting.  And the drilling will feed a feasibility study that will prove up Coffee’s gold to the reserve categories.

Despite the crummy market conditions, Kaminak Gold didn’t have any problem raising capital to fund Coffee’s advancement.  Within a month of announcing the PEA results, it succeeded in raising C$25m via the sales of shares.  And interestingly a big chunk of this was strategic investments from industry magnate Ross Beaty and a trust endowed by the Lundin family.  It’s always a good sign when the power players take notice!

Kaminak is expected to resume drilling and related field programs in February.  And in addition to infill drilling it will perform condemnation, geotechnical, and hydrological drilling.  KAM’s aggressive 2015 program is expected to provide all the data necessary to complete the feasibility study.  And it is targeting the end of 2015 or early 2016 to announce the results.

If the results are in line with the PEA, this project ought to quickly transition to the development stage.  And assuming the successful procurement of permitting and financing, the Yukon will soon have its newest and largest gold mine.  This transition will make for an exciting next couple years.  And investors can really get in for cheap given KAM’s deeply discounted stock-price levels.

This chart shows the daily price action of gold and KAM since 2011.  And as you can see, it’s been quite a rough stretch since their respective Q3 2011 all-time highs.  To its 2013 low KAM was off a staggering 90% from its high.  And sadly this brutal downside leverage to gold’s own 40% decline was pandemic of the entire sector.

There aren’t many positives to take out of a chart like this.  But one thing that is important to observe is how a stock responds to gold when it shows signs of life.  When gold moves higher, gold stocks ought to leverage to the upside.  And the junior elites should offer some of this sector’s best positive leverage.

Over the course of gold’s cyclical bear market it’s been able to muster five meaningful uplegs.  And as would be expected, or else it wouldn’t be worth owning, KAM positively leveraged each.

In the first two uplegs in 2012 KAM positively leveraged gold an average of 3.1x, gaining an average of nearly 50% to gold’s 15%.  This is excellent leverage that will definitely keep investors coming back!  But the same can’t be said for upleg #3 in 2013.  KAM still outperformed gold, but only to the tune of 2.0x.  This is unacceptable leverage for a junior elite, the type of action that can send investors elsewhere.

Thankfully KAM more than made up for 2013’s anomaly with stellar performance in the latest two uplegs rounding the corners of 2014 and 2015.  In upleg #4 it soared an impressive 92% to gold’s 16% (5.7x leverage).  And in ongoing upleg #5 it’s so far rocketed an even more impressive 111% to gold’s 14% (7.8x leverage).

So as you can see, KAM is a stock that investors will pile into when gold runs higher.  Its amazing project has incredible potential even in a low-gold-price environment.  And when the metal does finally run higher, this project’s value will skyrocket.  Kaminak Gold is a company that both investors and major mining companies will keep a close eye on as it advances through the feasibility stage.

Kaminak is not the only junior that will thrive upon gold’s recovery though.  While the pickings are slim following years of carnage, there’s an elite group that are poised to lead the next generation of gold exploration and development.  And at Zeal we believe we’ve identified those with the highest probability for success.

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Our exhaustive research in the universe of junior golds trading in both the US and Canada showed us that there are still small gold stocks alive and kicking.  We thus narrowed the field down to our favorite 24, Kaminak Gold being among this exciting group.  And each is fundamentally profiled in our two latest research reports.  Buy yours today!

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The bottom line is the Yukon is currently experiencing its second major gold rush.  But rather than pick-and-shovel death-defying treks that characterized the first go around, the modern commercial-scale miners are successfully discovering major source deposits.  And none is better than the Coffee project owned by Kaminak Gold.

Coffee is host to one of the finest undeveloped gold deposits not only in the Yukon, but in all of North America.  And according to the maiden economic assessment, its core resource is amenable to a highly-profitable mining operation.  Kaminak is now aggressively pushing forward towards development.  And if there are no surprises along the way, its stock ought to continue to positively leverage its underlying metal.

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