Kirkland Lake Gold: Is This Miner The Real Deal Or What?

Summary

• Kirkland Lake Gold has reported its Q2 production results.
• The company reported record gold production of 160,156 ounces. This really blew me away.
• A dividend is coming soon and will reward patient, long-term shareholders, as well as new investors.
• I discuss the quarterly results, recent drill results and more.

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This is an update of my previous top overall gold stock pick for 2017, Kirkland Lake Gold (OTCQB:KLGDF). I'm still quite surprised by the lack of coverage on this gold mining stock. Look at the performance of the stock price below.

(Credit: Yahoo Finance)

Kirkland Lake Gold's stock continues to outperform the market and with the company exceeding my production expectations for the second quarter, shares may continue to rise, even if gold prices remain rangebound between $1,200 - $1,250 an ounce. The stock has done well: year-to-date, the stock is up close to 70% compared to a measly 4.21% gain in the VanEck gold miners index (GDX) and a 3.51% gain in gold (GLD). Even with gold prices falling close to $1,200 an ounce lately, the stock keeps chugging along.

When I last covered the stock and the company back in May, it traded at $7.17 per share; I said investors should consider buying shares despite a large run-up in the stock price over the past year. The company has just reported strong first quarter earnings, with 130,425 ounces of gold produced at $873 AISC leading to free cash flow of $37.2 million, or $.18 per share; operating cash flow surged 118% to $68.6 million or $.34 per share.

The balance sheet looked really strong at the time and with a price/2017 cashflow ratio of 5.6X, management felt shares were undervalued, initiating a share buyback program. So, how's the company doing now?

Q2 Production and Balance Sheet Updates: Key Takeaways

• Kirkland Lake produced 160,156 ounces of gold in Q2; that is up almost 30,000 ounces from Q1 and a new quarterly record.
• Fosterville produced 77,069 ounces of gold at 17.2 g/t grades and recoveries of 94.7%.
• Macassa produced 45,669 ounces of gold at grades of 13.9 g/t and recoveries of 97%.
• First half production came in at 290,583 ounces; the company is on-track to achieve full-year guidance of 530,000 - 570,000.
• Cash and gold bullion totaled $270 million as of June 30, 2017, compared to $279 million last quarter, however, this is because the company repaid $58.5 million in 6% unsecured convertible debentures.
• The company says it is well on-track to achieve its revised full-year 2017 production guidance, which it increased to 530,000 - 570,000 ounces in May 2017 following its strong first quarter production.
• Kirkland Lake has also introduced its first quarterly dividend of $.01 per share, which will be paid on July 14, 2017 to shareholders on record as of June 30, 2017.
• Kirkland Lake also bought back 2 million of its common shares in the quarter.

My thoughts: Kirkland Lake continues to impress. Fosterville is an amazing asset, with a more than doubling of production from last year, mainly due to significant improvements in mill grades (17.2 g/t gold versus 7.5 g/t gold the prior year!). Kirkland Lake's acquisition of Newmarket Gold for its Fosterville asset is proving to be one of the best deals I've seen in quite some time in this sector. The company's stock is up significantly since that deal has closed (Disclosure: I previously owned Newmarket Gold, in addition to Kirkland Lake).

Side note: This is also really, really excellent news for shareholders of Aurico Metals (OTCPK:ARCTF), a royalty company which owns a 2% net smelter returns royalty on Fosterville. Insiders were buying shares of Aurico back in May, which I reported in this article (I think this royalty is extremely valuable and could make Aurico a takeover target for a larger royalty/streaming company, although that is an article for another day).

Here's a photo that summarizes the past exploration success at Fosterville, which you'll see includes ultra-high grades of 1,429 g/t gold over 4.97 meters in one drill. All intercepts are estimated true widths.

Macassa's results are a bit overshadowed by Fosterville's, but it keeps producing pretty solid results as well, with a 17% increase in production from last year, with strong grades and very high recoveries of 97.3%. Cash costs continue to fall at this mine, averaging $782 AISC in Q1; I think costs will likely fall to $750 AISC in Q2 based on the higher grades and recoveries.

The Holt, Taylor and Cosmo mines also did well this quarter, but I think these mines are far less important to the success of the company than Fosterville and Macassa, so I don't think they are worth discussing here (for example, these three mines contributed about 27,000 gold ounces in Q2 compared to 77,069 ounces at Fosterville).

Finally, according to the company's most recent presentation, director and well-respected gold and silver investor Eric Sprott owns 10% of the company which I think is a positive for the stock. According to SEDAR filings, Sprott last purchased 300,000 shares of the company at C$10.07 on June 1 (on its Canadian listing, KL).

Second-quarter financial results for Kirkland Lake Gold will be released on Wednesday, Aug. 2. Of course, I will be covering these results in full detail. I'm excited at the possibility of another strong earnings report from the company and what it could mean for the share price.

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Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long KLGDF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.