TORONTO (miningweekly.com) – Ontario-focused miner Kirkland Lake Gold this week announced that it was seeing improved operating results as a cost-cutting programme was gaining traction, and it was implementing a new mine plan that would see the company mine higher-grade ore, but fewer tonnes, which could lower production costs.

Kirkland Lake, which operates its flagship Macassa gold mine in the historic Kirkland Lake Gold Camp, said annualised savings from its cost-cutting measures totalled about $23-million a year. The company had also completed a $95-million expansion.

Kirkland Lake on Tuesday said it had cut its workforce by 144 employees, and had removed all contractors from the site, saving the company about $15-million a year. It had also saved $6-million by cutting non-essential capital spending, $2-million by ending the travel allowance paid to employees and retiring older inefficient equipment.

“I am very pleased with operational improvements and the impact which these, together with some cost reductions will have on the financial performance of the company. Work is ongoing but the full extent of these changes will be observed by all shareholders in the current quarter ending April 30, 2014,” Kirkland Lake chairperson Harry Dobson said.

In November, Kirkland Lake had raised its cutoff grade to 0.22 oz/t from 0.18 oz/t, resulting in a head grade in January of 0.45 oz/t, a 45% increase in the year-to-date average.

In January, the company produced 13 483 oz of gold and the total gold output for the company's fiscal third quarter 2014, which ended on January 31, was 31 022 oz.

On January 29, the company poured 4 706.65 troy ounces of gold at 85% fineness totalling 4 000 fine ounces of gold, which was Kirkland Lake’s largest gold pour in one week. On January 19, the company hoisted a record 3 118 t in a 24-hour period. This consisted of 1 738 t of ore and 1 390 t of waste.

“The new mine plan focuses on raising head grades, requiring less tons and lowering cash costs per ounce produced. These changes began to reflect themselves in January's results; however material improvements in production and cost performance should be fully reflected in the fourth quarter and beyond. The company is planning for a head grade of 0.38 oz/t throughout the fourth quarter of 2014,” president and CEO George Ogilvie said.

Meanwhile, Kirkland Lake had started dry commissioning of the new ball mill, which was expected to be complete in February.

The miner said it would focus on increasing mining ratios from high-grade workplaces on the 5 400 and 5 600 levels of the South Mine complex over the next 12 months, while significantly less stope development would take place in the '04/Main Break.

As a result of the new six-month mine-plan, Kirkland Lake had lowered its expected gold output for the full year ending April 30, to between 120 000 oz and 125 000 oz, which nevertheless represented a 30% to 36% increase from the company's 2013 financial year output.

“The migration away from a tonnage-focused strategy to a plan focused on mining at historic reserve grades, together with the completion of all expansion projects, results in a business model focused on a more sustainable and realistic increase in gold production at lower costs, which is going to return the company to profitability and free cash-flow in the near future,” Kirkland Lake CFO John Thomson said.

POTENTIAL DOWNSIDE

Analysts at Desjardins Capital Markets Research said in a note to clients on Wednesday that they were not surprised by the reduction in the full-year output guidance given that they had expected Kirkland Lake to struggle to achieve its target. However, the analysts still viewed a downward revision negatively, as it implied flat-to-weaker quarter-over-quarter production, with a negative impact on the company’s tight balance sheet.

“This view is somewhat mitigated by the fact that the company achieved higher grades in the last month of the quarter (January); however, it is currently unclear whether this trend is sustainable. We highlight that the orebody at Macassa has showed variability in month-to-month grade.

“Longer term, we note that operational uncertainty remains and we expect a new mine plan, emphasising a smaller-scale, high-grade operation, to be released,” the analysts said, noting that Kirkland Lake remained a highly levered name to both the price of gold and the Canadian/US dollar exchange rate.

“We see significant potential downside risk for the name should the price of gold weaken and/or the Canadian dollar strengthen and are maintaining our cautious ‘hold–speculative’ rating, with a C$3.50 target price (up from C$2.50),” Desjardins said.