Kirkland Lake Gold Is Simply Amazing

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About: Kirkland Lake Gold Ltd. (KL)
by: Fun Trading
Summary

Kirkland Lake Gold posted record revenues of $304.91 million for the first quarter of 2019, compared to year-ago revenues of $198.24 million. AISC for 1Q'19 of $560 per Oz.

Cash at March 31, 2019, totaled $416.1 million, an increase of $83.9 million or 25% during Q1 2019, with new record free cash flow.

The company announced on May 7, 2019, that the Q2 2019 dividend payment will total $0.04.

KL is a real long-term investment, which should be accumulated on any weakness. The stock is acting as a perfect proxy for gold, which ought to be used as portfolio insurance.

Source: Fosterville Mine from Kirkland Lake Gold.

Investment Thesis

The Toronto-based Kirkland Lake Gold (KL) is perhaps the most compelling mid-tier gold miners that we can find in the gold industry. After covering so many gold miners, I am rarely impressed with the financials and production numbers, but this gold miner is an exception.

The business model could not be more appealing with two high-grade, low-cost operations which support the unprecedented long-term success of the company:

  • Macassa mine located in Northeastern Ontario, Canada, with a grade of 29.6 G/ton.
  • Fosterville mine located in the State of Victoria, Australia.

Also, Kirkland Lake Gold owns Taylor mine and Holt mine, both located in Northeastern Ontario, often characterized as the Holt Complex.

Finally, on February 21, 2019, the company announced plans to resume operations at the Holloway mine placed on care and maintenance. Production at Holloway mine in Northeastern Ontario is expected to slowly ramp up during 2019 to a total of approximately 20k Oz this year. Below is indicated the gold production per mine for 1Q'19.

Note: Kirkland placed on care and maintenance its two operations located in Australia Northern Territory (e.g., the Cosmo mine and Union Reefs mill).

The investment thesis has not changed with Kirkland Lake Gold. I see it as a real long-term investment which should be accumulated on any weakness. The stock is acting as a perfect proxy for gold, which is used as portfolio insurance.

While the US economy is excellent, and the US dollar is robust as we speak, the risk of a turnaround is still a growing potentiality. Economists predict a downturn in 2019 and a likely recession in 2020, and gold is the perfect hedge of this scenario with a weakening dollar.

Kirkland Lake Gold qualifies as a unique candidate with its excellent balance sheet, tremendous growth, no net debt, and its high-quality asset base, with ultra-low AISC, including two great mines in Canada and Australia which are considered located in regions found as "safe jurisdiction" for the mining industry.

Furthermore, Kirkland Lake Gold is also investing in Novo Resources (OTCQX:NSRPF) and Osisko Mining (OTCPK:OBNNF).

  1. The company owned a total of 29.8 million shares of Novo, representing 18.2% of issued and outstanding common shares as of December 31, 2018.
  2. The company acquired 32.6 million shares of Osisko Mining for $47.8 million, representing approximately 13.6% of currently issued and outstanding common shares.

Source: KL Presentation

Tony Makuch, the CEO, said in the production press release:

Both Fosterville and Macassa achieved record production in Q1 2019, largely reflecting strong grade performance, as well as higher levels of mill throughput at Fosterville.

Kirkland Lake Gold: Financials And Production In 1Q 2019

Kirkland Lake Gold 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19
Total Revenues in $ Million 176.71 212.36 198.24 214.65 222.70 280.32 304.91
Net Income in $ Million 43.74 40.98 50.04 61.49 55.88 106.54 110.15
EBITDA (Company) $ Million 99.34 93.63 105.62 123.11 119.23 186.95 201.31
Profit margin % (0 if loss) 24.8% 19.3% 25.2% 28.6% 25.1% 38.0% 36.1%
EPS diluted in $/share 0.20 0.19 0.25 0.29 0.26 0.50 0.52
Cash from operating activities in $ Million 66.83 96.20 89.64 120.91 128.38 204.14 174.36
Capital Expenditure in $ Million 35.30 40.95 39.43 51.36 71.92 112.50 79.24
Free Cash Flow (Company) in $ Million 31.53 55.25 50.20 60.70 52.20 91.64 95.12
Total Cash $ Million 210.48 231.60 275.34 318.36 257.20 332.23 416.11
Current and non-current LTD and capital lease in $ Million 19.15 22.22 22.24 16.20 13.19 9.76 9.59
Shares outstanding (diluted) in Million 214.51 209.16 212.24 213.00 212.70 211.59 211.97
Dividend per share $ 0.016 0.016 0.023 0.023 0.03 0.03 0.03
Production Au Oz 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19
Total Production gold 139,091 166,579 147,644 164,685 180,155 231,217 231,879
AISC (co-product) from continuing operations 845 816 833 757 645 567 560
Gold Price 1,282 1,278 1,333 1,301 1,204 1,237 1,306

Source: Company filings and Morningstar/Ycharts

One traditional way to confirm that Kirkland Lake Gold is qualifying as a long-term investment candidate is to analyze the financials in detail and look at historical financial performance.

It is what I generally do in Seeking Alpha when I present and analyze a gold or an oil company.

Trends And Charts: Revenues, Earnings Details, Free Cash Flow, Debt, And Production Details

1 - Revenues and trend. Impressive $304.91 million for the first quarter of 2019. Kirkland Lake Gold posted record revenues of $304.91 million for the first quarter of 2019, compared to year-ago revenues of $198.24 million. The company declared net earnings of $110.146 million or $0.52 per diluted share or adjusted net earnings of $112.1 million or $0.53/share. The increase since 2016 is very impressive as the graph above demonstrates it.

David Soares, the CFO, said in the conference call:

Q1 2019 record net earnings holds the quarter at $110 million and $0.52 a share that's a 120% increase from Q1 2018, and an increase as well from Q4 2018. In terms of adjusted net earnings, we saw similar growth of 114% from Q1 2018. And we closed the quarter in 2019 at a $112 -- $112 million, and $0.53 a share.

2 - Free cash flow

For Kirkland Lake Gold, the first quarter of 2019 indicates another record in FCF with $95.12 million and free cash flow yearly of $299.66 million. FCF is showing the strength of the company, which was able to achieve:

  1. Invest in public entities that totaled 66.1 million (e.g., Novo, Osisko Mining).
  2. Realize a buyback of 30.8 million common shares.
  3. And, pay a dividend of $16.3 million during the year 2018.

Tom Makuch said in the conference call:

[W]e have industry-leading earnings and earnings per share as outlined previously. We had strong free cash flow during the quarter. And then had substantial growth in our cash, and the company continues to be focused on rewarding shareholders. We did increase our dividend by 30%, 34% in the quarter, and now equating it in $0.04 per share in U.S. dollars.

3 - Available capital, no net debt, and ample liquidity The best is yet to come for Kirkland Lake Gold. According to the company's projected cash balance, Kirkland Lake is expected to reach well over $1 billion in cash by 2021.

Projected balance is expected to reach about $1.2 billion by 2021.

Source: KL Presentation

4 - Production in gold equivalent ounce and details

Gold production is quickly rising to a new record high, and the last quarter was again very impressive. A quick look back in time is supporting such aggressive growth which is about to continue until 2021, with a production expected at above 1+ M Oz.

The two following graphs are quite interesting because, if you look at both of them, you can get a good idea of what makes Kirkland Lake Gold so particularly fit and places the company ahead of the pack.

All-in sustaining costs, or AISC in short, are impressive with $560 per ounce this quarter. AISC was now down $117 from the same quarter a year ago.

As we can see below, Macassa and Fosterville mines are the two leading gold producers and represent 86.8% of the total output for 1Q'19. Kirkland Lake Gold had record gold production results in both Fosterville and Macassa in 1Q'19.

Fosterville mine is a "cash cow" with an exceptional grade and potential of growth staggering with more exploration coming.

Source: KL Presentation

5 - Guidance 2019 and beyond is impressive

The recent forecast shows an increase in production of 34.8% (using current guidance) in 2019 compared to 2018.

Source: KL Presentation (Montage) - Recent presentation indicates 950K as of May 7, 2019.

The company announced on February 22, 2019, new and improved production goals:

  • 2019: Improved to 950k–1 M ounces from 740k–800k ounces initially.
  • 2020: Improved to 930k–1.01 M ounces from 850k–910k ounces.
  • 2021: Improved to 995k–1.055 M ounces from 970k–1.005 M ounces.

Conclusion And Technical Analysis

We cannot ignore Kirkland Lake Gold's success. The company owns two outstanding mines that guarantee a steady cash flow at least for the next three years.

When we look at Fosterville and Macassa mines, we can see that these assets are quite exceptional and will deliver no matter what. Moreover, the management led by Tony Makuch is "down to earth" and will not spoil the party.

However, the price of gold is an essential component which should always be evaluated in correlation with your KL investment. Also, while it is unlikely, technical hiccups can ever happen in mining, and Kirkland is not exempt. Mining is not an easy-walk-in-the-park type of business, and we must always be aware of a potential hiccup.

If it happens, it could offer an excellent opportunity to accumulate, assuming that the issue is temporary and doesn't affect the business model profoundly.

We know by now that we should accumulate such a good miner for the long term, but it is imperative, in my opinion, to trade the short-term fluctuation as well. The precedent quarter I recommended selling part of your portfolio because the stock was reaching an overbought situation and was ready to retrace. It did from $36+ to $30+ now. Let's see what to do next.

Technical Analysis

KL showed clearly a negative breakout a few days ago. The original pattern was a channel pattern with line resistance around $37 and line support at $32.30.

The new pattern that I see is an ascending channel with line resistance at $38.20 (which could be a 2019 target depending on the price of gold) and line support (parallel from the low in November 2018) at around $28.10 (I recommend adding at this level).

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in KL over the next 72 hours. 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.