Fireside chat with Kirkland Lake Gold's Tony Makuch

By Posted Northern Miner Staff / November 04, 2019 / www.northernminer.com / Article Link

The Northern Miner hosted its third annual Progressive Mine Forum in October. During the event, Tony Makuch, president and CEO of Kirkland Lake Gold (TSX: KL; NYSE: KL), sat down with Northern Miner publisher Anthony Vaccaro for an in-depth fireside chat in front of an audience at the MaRS Discovery District in downtown Toronto. The following is an edited transcript of the discussion. The following is an edited transcript of the discussion, to watch it on video, click here.

Anthony Vaccaro: Kirkland Lake Gold's Macassa mine has a fully electric fleet and was first to use electric 40-tonne underground haul trucks. Can you take us back to when you decided to take the company down this road?

Tony Makuch: Macassa was operated with battery-powered equipment, battery-powered locomotives and air-operated machines for the first 65 years of mining. Now, I had worked at Macassa before, but coming back to the mine in 2016, it already had electric battery-powered trucks before I got there. We had some smaller, 20-tonne, 12-tonne capacity trucks and some smaller load-haul-dump (LHD) machines running in the mine. They were the first generation of the battery-powered equipment.

So going into Macassa, recognizing that its history had been as a track and a pneumatic mine - a battery-powered and pneumatic mine - you didn't quite have the ventilation systems to support a large diesel fleet. If we needed to grow production at the mine from 70,000 to 100,000 oz. a year - over 240,000 oz. produced last year and over the next few years growing to over 400,000 oz. gold a year - definitely we had to go to a more productive fleet of equipment. Because of the depth of the mine and the infrastructure there, it was easy to focus on battery-powered equipment.

The issue was then, how do you get productive, battery-powered equipment? The industry wasn't quite ready for us. In 2016 I had discussions with mining equipment providers and you got a sense things were going to take a few years before they would be ready to really commercialize the equipment. So we partnered with Artisan, down in California, which is now owned by Sandvik, to build equipment. We got the concept of the first 40-tonne truck, built it, and operated it at Macassa. And now we're onto the fourth one. We have had 300,000 effective hours of battery-powered equipment run at Macassa in the last five or six years. And 85% of our production equipment is battery-powered equipment: trucks and the LHDs, or scooptrams.

The Northern Miner publisher Anthony Vaccaro (left) in conversation with Kirkland Lake Gold president and CEO Tony Makuch at the Progressive Mine Forum in October 2019. Photo by George Matthew Photography.

AV: Being ahead of the curve in 2016, did you encounter any difficulties?

TM: First off, developing batteries and equipment, there's a cost challenge. And then we have to do a whole bunch of rock work to create charging stations to charge the batteries.

We looked at all the issues and worked with Artisan basically developing new-generation batteries, tried to have it where they cool a lot faster. Even the chemistry of the battery was something we had to look at. And it was led by Artisan, the lithium iron phosphate battery as opposed to the other sources. It doesn't necessarily have as much density of power in the battery, but from an underground mining perspective, it's a lot more stable. You don't have the opportunity for it to catch fire.

With the new 40-tonne truck we just said, "It's going to be an electric truck," so instead of having axles and drivetrains and transmissions, it has one electric motor on each wheel, and then you have got a battery in there. In the earlier electric trucks the battery was changed like the old battery locomotives where you had to pick it up with a crane, put it over here, put it on charge and pick the next one up and put it in. The new ones were designed where you eject the battery, like you would reject a garbage bin, right? And then the truck can go over and pick up another battery. So it was a lot quicker.

We had to address charging batteries, changing batteries and getting better use and availability of the equipment. We're not there yet. The goal would be, say, 95% availability and 85% use of the trucks, right now we're getting probably 60% to 65% availability on the equipment.

AV: How does your electrification experience at Macassa affect your development plans for other assets in your pipeline?

TM: We were just talking about this yesterday. Five years from now, I would like to think that the majority of our production equipment at all of our mines will be battery-powered and a mobile fleet. So we're looking at continuing to develop and even change out some of the equipment at Macassa to be more productive in terms of battery-powered equipment. We want to at least introduce battery-powered LHDs at our mine in Fosterville, at the deep part of the mine. It would definitely help us. We need to continue working on developing trucks for long-haul up ramps. And we're open to developing the other equipment, jumbos, etc. That kind of stuff is easy, I think.

We would like to have all our mines with 85% plus of our production fleet to be battery-powered or electric vehicles. It's definitely the way to go. It's quieter. You're not generating as much heat. There are productivity benefits, and the fact that the equipment comes right off the bat with computers built in helps with automation and allows for real-time monitoring. And they can be semiautonomous.

AV: Have you seen benefits on the people side of things? Mining needs young people. Has it been easier to recruit people to Macassa than another mine without an electric fleet?

TM: The working conditions in the mine are much better with the electric fleet than with the diesel fleet. So, if we had a diesel fleet, we would probably have a harder time attracting people. And definitely heat and ventilation would be a concern underground at Macassa. When I first got to Macassa, we had about 200,000 cubic feet per minute of air. Currently, we're trying to run somewhere around 300,000. If today's fleet was all-diesel at Macassa, we would probably have well close to double that in terms of air in the mine. So we wouldn't be able to operate and produce the amount of gold that we have.

And as we develop the battery-powered equipment, we're removing a lot of parts that were in the diesel equipment. And so if you're a maintenance person or you're a young person wanting to get into the maintenance side of the business, you're going to need to be intelligent in electronics and understand a little bit of programming, too. So from an attraction point of view, it could be a much more interesting job in the future, right?

AV: What do you see as the mine of the future? Is other mineral processing ripe for the same innovation we have seen with the mining fleet?

TM: Definitely. Taking more advantage of AI and being able to automate a lot more of the processes that are happening in the mine should help improve working conditions and improve safety.

But there are a lot of other things that we are working on. How do you log core more effectively? How do you get a quick or an accurate view of core, from a grade perspective? We're doing some of that workdown in Australia. How do you better understand what the orebody is, and how to separate ore and waste. There are a lot of areas to be improved.

We need to work at better ways to understand where people are in our mines. We still send a lot of people off to work in the morning, and unless the supervisor sees them, you don't quite know where they are. In real time, we should be able to understand where people and equipment are. I can see that happening.

Artisan Vehicles' Z40 electric 40-tonne haul truck. Four such trucks operate at Kirkland Lake Gold's Macassa gold mine in Ontario. Credit: Sandvik.

AV: Kirkland Lake has two of the highest-grade, producing mines in the world, one in Canada, Macassa, and one in Australia, Fosterville. You have gone from 155,000 oz. to 600,000 oz. of production, and expect to reach 1 million within five to six years. In two years, Kirkland Lake Gold's stock price has increased 250% - a sensational story. And part of that story has been mergers and acquisitions, as Fosterville was an acquisition. Can you reflect a little bit about how M&A played a role in your strategy and success?

TM: In 2016 we merged three small junior companies: Kirkland Lake Gold Inc., St Andrew Goldfields that operated the Holt, Holloway and Taylor mines, and then the Newmarket operation, which had three operating mines in Australia. By putting the three junior companies together, our biggest part of the synergy was capital market synergies. We were able to take a different perspective when looking at our operations. We closed three mines with 120,000 oz. production. With St Andrews, that was the whole company back in 2015. It gave us that ability to do that, to take a different approach. And it allowed us to invest a lot of money with diamond drilling and exploration.

We had significant discoveries at Fosterville and a lot of progress there, and we grew our reserves at Macassa. We started drilling, and we spent more money in the last quarter of 2016 and 2017 at Fosterville than had been spent there in the previous 10 or 15 years. So, it gave us that ability to explore.

When you're running Lake Shore as a single-asset company, even though things are going well, there are always rumours of something happening in the market that could affect you. A dropping gold price can affect your share price more than others. Or you can have a forest fire in the region that's a few kilometres away, but you could lose 10% or 20% of your share price. Merging gave us the ability to focus on our operations. How do we grow value for the shareholders and how do we finance internally? It let us look at it from a business perspective more than having to try to chase the share price all the time.

AV: What gave you the confidence to invest in drilling at Fosterville? Were there things that you noticed that previous operators and other potential acquirers couldn't see?

TM: The previous operator saw a change in mineralization, and that the grade had improved from 4.5 to 5 grams to all of a sudden 7 grams in 2016. They saw the principal gold and a change in mineralization. You could see that things were definitely improving at depth. There were a few drill holes that were pretty interesting. We didn't expect it to be 30, 40 or 50 grams, but we did think that things were going to get better. And if things got better or even stayed as good as what they were starting to forecast, at 7 to 9 grams, then we would have a very successful acquisition.

In this business, you can't be scared to get involved in the details and look at the little things. I was lucky I had a gentleman like Quinton Hennigh with me and he was talking about the difference in the mineralization, saying: "This is a significant thing that's going on."

AV: Going back to the M&A, because your example is such a positive one. Earlier in the year, there was some trepidation about the recent M&A activity. Regarding the Barrick situation, Pierre Lassonde was on record with some critiques in terms of a possible hollowing out of headquarters in Canada. Kirkland Lake is now becoming an important Canadian gold producer. Where do you stand on this issue? Do you think it's important for headquarters to remain in Canada? Does M&A threaten that?

TM: Canada is definitely the centre of where you can finance, especially out of the TSX, and continues to be the place where companies come to get money to invest and discover new operations. I don't think that's going to change.

Definitely, with some of these mergers, you have had some of the big head offices move out of Canada. But that happened to us back in the days when Noranda, Inco and Falconbridge left Canada. Those things happen. But new companies come and emerge like Kirkland Lake, and there are a lot of companies like Agnico Eagle, etc., which will come to the forefront. Some of it is natural evolution. I don't think we should be worried. We should look at it head-on as being a good thing. If people want to come and buy Canadian mining companies, then we must be doing a lot good things, right?

AV: Do you aspire to create the next Barrick Gold? Do you see Kirkland Lake Gold becoming the world's biggest gold producer?

TM: Let me put it this way: we would like to be seen as the world's, or one of the world's, most profitable gold mining companies. Our goal within Kirkland Lake is to build a company that is profitable, that leads earnings, cash-flow generation and value generation for its shareholders. We just happen to be a gold miner doing that, right? And so, it's not about producing 4 million or 5 million ounces. It's about producing the top earnings or the top cash flow per share. That is important.

The other part, and without sounding too aloof, is that we compete for the investor. So we're not trying to get the investor that just wants to invest in a gold mine or a gold business, we have to compete for investors. And we would like to believe that we can then compete for the investor who says: "I want to buy Apple stock, and I might want to buy Microsoft or Walmart." That's the type of company we really want to be.

AV: You're the son of Polish immigrants. Your dad was a miner in Timmins, where you grew up. What were your early impressions of what it was to be a miner?

TM: I always liked working with my hands. I always liked getting dirty and doing stuff. My father didn't want me to get into mining. He wanted me to do something else, be a dentist or something. And I just always went towards doing this kind of work. And it's a good kind of work. In the mining industry, people get paid very well. We treat people well. We train people well. You get to work fairly autonomously. It's not a factory. People get to go out and do things individually within the mine or as a small team. It's good work. I was always interested in doing that. And then you just fall in love with understanding all the things about it. Whether it's geology - and geology is really cool - and metallurgy, and even what you have to do to mine the rock.

Some people might feel comfortable going into a room and looking at banking ledgers, and some of us feel more comfortable looking at rocks.

AV: You have experience working in almost every capacity in a mine, how does that experience help you run a company?

TM: As you get older, you get to reflect back and sometimes you have got to try to be a coach or try to ask people the right uestions. You get a sense of knowing what needs to be done or what can be done, what people are doing or what they're trying to do. And most people try to do things really, really good. None of us are perfect. We make a lot of mistakes. The problem is if we make a mistake and we don't learn from it or we make a mistake on purpose. So you're able to understand the process and what's going on - what people are doing and work towards trying to help them succeed.

The main aspect of our success at Kirkland Lake Gold is that it's 2,500 people working together and building success. And it's all of us as a group, everybody trying to help each other.

The Northern Miner publisher Anthony Vaccaro (left) in conversation with Kirkland Lake Gold president and CEO Tony Makuch at the Progressive Mine Forum in October 2019. Credit: George Matthew Photography.

AV: Of all the jobs that you have done coming up through the ranks, leaving aside C-suite, what was the job that you enjoyed doing the most?

TM: I liked doing a lot of the jobs I did. I enjoyed working in engineering. I started as a rock mechanics engineer and I got to do a lot of really neat stuff. And I got to run computer programs. I got to build computers from scratch. Back in the early days, you had plotters and you digitized it, but didn't have any program. You had to program it yourself. That was interesting.

One of the toughest jobs with the most learning I ever did was as a general foreman, or a mine captain. That was definitely a job that builds your character. You could never have a good week because there was always something you had to deal with. You have 100 people working for you. You have four or five direct supervisors between you and the hourly workers. And then you have the whole engineering staff and the management above you coming down and asking you for stuff. So, you have a lot of responsibility, but also a lot of ability to get things done with the people. The biggest part of it was the fun of working with all the people and getting them motivated and seeing what we can do. You could tell at the end of the day the person who had a hard day's work and worked hard underground - they came up and they had a big smile on their face. They might be dirty, they might be tired, but they were smiling, and there was a deep smiling. I enjoyed that.

AV: Have those experiences fed into the corporate culture at Kirkland Lake Gold?

TM: I like to believe so. As a mining company we have to produce gold most effectively, responsibly and safely as possible, recognizing that it's the people who are doing work. None of us in the company think we're any better than anybody else. We just have different jobs, but we're all focused on the same thing ... the most important people in the company are the people right now who are doing the work.

AV: There's much talk as well about millennials and how they bring in their own perspective and thoughts on what makes a great work environment, and even the generation coming up behind the millennials. What is your experience with millennials in the workforce?

TM: We were the baby boomers, right? And you had rock and roll coming out when we were young and everybody thought we were lazy and we listened to crazy music and we didn't want to work. And, you know, we all came in and we did all right. I look at the millennials or the new kids coming in and I think the kids are alright. The kids today, with their access to technology and learning, they learn more probably by the time they're five years old than we maybe got to learn till the time we were 10. And so, you think about the wisdom that we might get when we're 60 or 70 years old, well, maybe this generation will have that wisdom when they're 50, right? So things are going to move a lot quicker.

The work ethic is there, the ability to question and the willingness to sound off a little bit is a lot more open with this generation of kids, which is good. The worst thing that happens is when we go down a path where everybody says: "This is the way to go." You need people that are asking questions and looking for different and new ways. I see a lot of energy in the new millennials.

And talking about the mine of the future, I'll go back again to when I took this job as a mine captain. I remember I was pretty young, but I go to a drift heading and after about three or four days, one of the miners says to me, "You know, you're not as smart as old Curly Alexander." I said, "Why?" "Well, he would tell us, we've got to go 100 feet and we're going to hit ore. You can't tell us that." What I figured out, it took me about a couple weeks to figure it out, but he was the one who kept all the prints to himself. He didn't share the information, right?

So now, take this step to the future. The workforce of the future is going to be more and more in tune to what's going on. You don't have to tell them what to do. They're going to tell you what they're doing and what's going on. That's really where the success lies. So you have got more and more access to technology, more access to information, and information in a workplace is everything.

AV: What is your opinion on gold? Why do we really need gold as a currency? Do you see a future where cryptocurrencies undermine gold?

TM: How about if I take a step back and I go back to 1996? Gold was $330 per oz. and I was a manager for Kinross at Macassa. We had our budget meetings in Toronto, and we had somebody come and present to us. He said he expects over the next few years gold going down to under $250 an ounce. And he said gold is going to stay there until 2005 or 2006, and then he said it's going to come back. And we all would ask the question, "How did you see that?" Well, this guy was somebody who studied demographics. And he talked about how we were all baby boomers, we were all going through this period of time. We didn't need gold, and we were looking at other things. But he said, "As we all age and we all start thinking like our mothers and our fathers did again, then we're gonna get back into buying gold as an investment."

So when you talk about cryptocurrencies, in the end, how much cash do you keep in your wallet? We're really using cryptocurrencies today. It's your credit card. And you're buying stuff. I can see the governments at some point in time not wanting you to have some new currency that they can't control.

We almost have a paperless currency as we speak. But a good thing about gold is that it's physical, you can look at it and it holds its value. And it does still hold its value even after, you know, the doomsdays from 1996 till 2003-2004 with gold, where you thought it was going down to nowhere. I'm not somebody who believes gold is going to be $5,000 or $10,000 an ounce, but I think gold will always maintain its support. It might have some dips and it could be the younger generation that has different perspectives in terms of what they value, but at some point in time, we all get to the same place when you say, "I need to have some tangible assets." And one tangible asset is gold, the other tangible asset is your home, and your land where you live. That will always be relevant.