Concerned Shareholders of Klondex Mines Limited

June 20, 2011 11:56 ET

Klondex Concerned Shareholders Respond to Board's Commentary and Urge Shareholders to Support Change by Voting Their YELLOW Proxy

TORONTO, ONTARIO--(Marketwire - June 20, 2011) - The Concerned Shareholders of Klondex Mines Ltd. ("Klondex" or the "Company"), The K2 Principal Fund L.P., address comments and misstatements made by Klondex's current board regarding the Concerned Shareholder proxy circular dated June 13, 2011, with respect to the annual and special meeting to be held on June 30, 2011 at 4:00 p.m. (Toronto time).

Highlights:

  • Corporate Governance: Klondex's current board is not committed to corporate governance.
  • Independent Board is NOT a Takeover: Concerned Shareholder alternative director slate is an opportunity to have a much stronger, independent board and is not a takeover.
  • In-House Expertise: A stronger board will bring much needed mine development and operations experience to Klondex and will more effectively oversee management and external contractors.
  • Future Plans: A description of the forward work plan and path to feasibility study is described herein.
  • Current Board Has Not Created Value: Klondex's share price is still where it was 5 years ago and the company is significantly undervalued. To illustrate this, a peer analysis is included below.
  • NI 43-101 Issues: Klondex's pending NI 43-101 resource update is being prepared by TTM Resources Inc. The Technical Director of Klondex sits on the board of TTM, raising potential conflict of interest issues.

Corporate Governance

The incumbent Klondex board has excused its serious corporate governance shortfalls by stating that board attention in 2010 was devoted to other corporate matters. Aside from the fact that these corporate governance shortfalls have existed since at least 2006, it is important to note that only three board meetings were held in all of 2010, and yet the board still found time to grant themselves healthy salary increases and stock option packages. As previously discussed, some of the options granted appear to have exceeded the limits of the Company's already very generous stock option plan. The Concerned Shareholders believe this is a situation that has persisted for far too long.

The new board will implement sound corporate governance practices under the guidance of Warren Moysey, a veteran of the financial industry who has a deep and broad history of board service. If elected, Mr. Moysey will review existing practices within the Company, including uses of Company expense accounts and other benefits, and the Company's excessive share option plan, and report to the board with his recommendations going forward. A full review of all related party transactions will also be completed.

Alternative Director Slate Proposed by Concerned Shareholders is NOT a Takeover

It is important for shareholders to recognize that the alternate director slate proposed in the Concerned Shareholder proxy circular is NOT a takeover as implied by the current board.

Malcolm Shaw, Vice President of K2 & Associates Investment Management stated, "We have the resources and commitment to propose a new board for the benefit of all shareholders that will address the serious corporate governance failures and lack of mine development and operations experience on the current board. Our goal is to provide shareholders, all shareholders, with the opportunity to strengthen their company through the democratic election of a new, highly experienced, and independent board that is committed to generating long-term value. We put a lot of effort into finding individuals who we believe have the abilities and vision to take Klondex to the next level and we would like to thank our fellow shareholders for their consideration and support. This is not 'K2's board' – this is a group of independent professionals of proven character and ability standing for election by Klondex's shareholders. It is essential that all shareholders collectively select the board of their Company. We are simply providing an alternative that we believe is far superior to the incumbent board."

Strengthen the Board and Maintain Operations

The Concerned Shareholders would like to reiterate that their primary concern is seeing change at the board level. It is not their intention to be disruptive to the existing operations of Klondex or the Company's management team, but rather to provide management with the guidance and mentorship that will result in a stronger Company overall. Klondex's incumbent board and management are relying heavily on external contractors and consultants at Fire Creek whose interests are not necessarily aligned with those of shareholders. Without strong in-house mine development and operations experience, Klondex has a limited ability to effectively oversee and direct the development of Fire Creek. The Concerned Shareholders are of the opinion that the selection of SMD as the contractor responsible for driving the ramp currently in progress at Fire Creek is a good one, but that Klondex could generate increased value though a more balanced technical relationship.

The Forward Plan: Advance Fire Creek to Feasibility and Production

The Concerned Shareholder's board nominees have provided details with respect to the forward plan at Fire Creek in the event that they are elected. The program will concentrate on completing a preliminary economic assessment and feasibility study on an expedited basis while focusing on aggressively drilling the deposit and ensuring that the bulk sample program does not compromise the integrity of the deposit for future full development. Specifically, it will include:

  1. Assessment of current status – In conjunction with ongoing work, the Fire Creek project will be fully evaluated, and work programs for addressing outstanding technical questions such as deposit continuity, metallurgy, engineering, and ground conditions will be implemented.
  2. Completion of the underground ramp in progress – The ramp being driven at Fire Creek will be useful for an underground delineation program, and it should be completed. The ramp can also be used for early production, provided that such production has positive economics and would not impair the future development potential of the deposit.
  3. Infill drilling and upgrading of the resource classifications – An aggressive, multi-rig, underground drilling program will be designed to better understand the geometry, thickness, and distribution of mineralized veins. The infill-drilling program will be carried out from the underground ramp.
  4. Metallurgical test work will be a top priority – Characterization of mineralization from samples from the Fire Creek deposit will be a top priority, as understanding the metallurgy will be a critical input to any economic assessment.
  5. Geotechnical drilling to define ground conditions – Drill holes, both current and historical, will be logged for geotechnical data, to define fracture patterns and any potentially troublesome ground conditions that could impact safety or production performance in future development. Additional drilling will be completed if required. This data will be invaluable for mine development planning.
  6. Geologic and resource modeling – A credible geologic and resource model will be developed for the Fire Creek deposit, which will involve relogging and resampling historic drill holes, integration of surface mapping and ramp mapping/sampling, and geological interpretation. This model will be the foundation for economic evaluations and mine planning.
  7. Initiation and completion of independent preliminary economic assessment, pre-feasibility and feasibility studies – Fully integrated, independent, NI 43-101 compliant economic assessments of the potential value of Fire Creek will be prepared on an expedited basis. Mine design, production schedules, and infrastructure options will be optimized to ensure maximum value capture.

Current board is not Creating Value

The Klondex board has made references to the Company's share price performance, over arbitrary periods, relative to industry indexes and various companies with which the nominee directors are involved. It is worth noting that the share price that the Klondex board is citing as its performance indicator is approximately the same price level to which Klondex shares collapsed after the failed proposed Silvercorp Metals Inc. and Paramount Gold and Silver Corp. transactions in 2009.

Despite active work on the property since 2004 and the huge rise in gold prices since then, Klondex shares are still trading at the same level that they were 5 years ago. To illustrate the incumbent board's lack of value creation relative to a legitimate peer group, the Concerned Shareholders present the following comparative valuation table to highlight Klondex's depressed valuation. The peer group chosen consists of a blend of companies that are not in production and have a concentrated high grade asset base and/or have their primary asset in Nevada. Three of these companies have been acquired within the last year (AuEx, Fronteer, and Ventana) and are included to further illustrate the substantial discount that Klondex currently trades at:

Table 1: Total Enterprise Value (TEV) per Ounce of Gold Resource Comparison
Company nameTEVGlobal resource (mn oz)TEV/oz
AuEx Ventures$2850.8$378
Fronteer Gold1,9895.9337
Premier Gold4782.5189
Queenston Mining4982.9170
Romarco Minerals8474.2202
Rubicon Minerals7993.6222
Ventana Gold1,4143.5404
Klondex$832.1$38
Notes:
Share prices as of June 17, 2011 close
For companies which were acquired, last trading price before being de-listed was chosen for share price
All information sourced from most recently available public data
All resource amounts are 43-101 compliant
Basic shares outstanding used for trading multiples, F.D. shares used for acquisition multiples
Source: Sedar, company filings, Equity research

Potential for Conflict of Interest with Respect to Pending NI 43-101 Resource Estimate

Klondex has stated that the Company's updated NI 43-101 resource study is being completed by TTM Resources Inc., a TSX Venture Exchange listed issuer that has a large low-grade Molybdenum project in British Columbia. Klondex's Technical Director, Robert Sibthorpe, is a director on the board of TTM Resources Inc., giving rise to the possible appearance of a conflict of interest, given that the NI 43-101 report should be prepared by an independent party. This is yet another example of the lack of experience, adherence to best practices, and poor corporate governance prevalent within the Company.

Mr. Shaw concludes, "We were reluctant to take this course of action, but we trust that other shareholders recognize the need for change and will seize this opportunity to elect a board that will steward Klondex for the benefit of all shareholders. For the next stage of Klondex's evolution, we need an independent and highly experienced board. The time for that change is now."

It is important that shareholders vote their YELLOWproxy before the proxy deadline at 11:00 a.m. (Toronto time) on June 28, 2011. Shareholders who require assistance voting their YELLOWproxy should contact Kingsdale Shareholder Services Inc. at 1-866-879-7649 or email contactus@kingsdaleshareholder.com.

Certain statements contained in this press release, constitute forward-looking statements. The words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect" and similar expressions as they relate to the Concerned Shareholders, the Company or its future management, are intended to identify forward-looking statements. Such statements reflect the Concerned Shareholders' current views and intentions with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause the Company's actual results, performance or achievements that may be expressed or implied by such forward-looking statements to vary from those described herein should one or more of these risks or uncertainties materialize. Such factors include, but are not limited to, economic, business, technological, competitive and regulatory factors. Any such forward-looking statements are expressly qualified in their entirety by this cautionary statement. Moreover, the Concerned Shareholders do not assume responsibility for the accuracy or completeness of such forward-looking statements.

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