Marathon's New Hire, Roxgold Breaks Out, Kirkland Lake's Growth Doubts

Includes: KL, MGDPF, ROGFF
by: Taylor Dart

Marathon Gold has finally seen their search for a new CEO come to fruition, and has hired Matt Manson, previously CEO of Stornaway Diamonds.

Roxgold has broken out this week on significant volume, and looks like it wants to head higher long-term.

Despite the rise in the gold price, earnings estimates for Kirkland Lake Gold continue to show significant deceleration in growth from prior years.

It's been a busy week in the gold (GLD) market, with gold pushing itself above the $1,500/oz level for the first time in several years. This move has been a boon for Roxgold's (OTCPK:ROGFF) share price, as the stock has managed to blast through its downtrend line on massive volume. This typically portends higher prices ahead, especially as the stock's quarterly volume is tracking at a level that will be the highest in over a decade. Elsewhere in the sector, Marathon Gold's (OTCQX:MGDPF) search for a new CEO has finally come to fruition, with the company hiring Matt Manson earlier this month. This looks to be an exceptional hire, with Manson having a track record of development expertise when it comes to mine construction. Finally, while the majority of gold miners have seen their earnings estimates revised higher at a brisk pace, Kirkland Lake Gold's (KL) earnings estimates have barely budged. Despite a higher gold price, the company's earnings per share growth for FY-2020 is expecting to come in at a low single-digit level. While this does not mean the stock is a sell, this is a material deceleration from the company's prior high double-digit growth rates. For this reason, I do not expect the stock to be an outperformer going forward as it was in the past.

Roxgold - Big Buyers Stepping In

Roxgold is an African producer I've covered in the past, and the company operates the high-grade Yaramoko Gold Mine in Burkina Faso. The company has guided for 150,000 ounces of production for FY-2019 at an all-in sustaining cost mid-point of $780/oz. The recent move in the gold price will likely increase margins from $500/oz to $650/oz or higher, and this is certainly going to bump cash flow significantly for both FY-2019 and FY-2020. Despite this significant development, the company was seemingly sleeping for the majority of July but finally woke up in a big way this week. The stock is up 18% for the week on five times average volume and has broken through its multi-year downtrend line with a vengeance. Let's take a closer look at the charts below:

As we can see from the below yearly chart, Roxgold is building a massive decade saucer with handle pattern and looks like it wants to bust out of this handle at some point this year. This is one of the most impressive setups among the gold space currently and is a reason I jumped in the stock a few weeks ago near $1.10 CAD. The stock has a clear catalyst for a breakout with expanding margins, as well as the news this week of very positive metallurgical results out of their Seguela Gold Project. Metallurgical testing showed 94% gold recovery rates based on a straightforward gravity/CIL flowsheet. The project currently hosts a resource of just over 500,000 ounces at 2.4 grams per tonne gold and has the potential to boost Roxgold's annual production down the road assuming favorable economics from the Preliminary Economic Assessment expected in Q4. I would expect all-in sustaining costs on the project to be below $900/oz given that Seguela is close to infrastructure including grid power and transport, and is a high-grade near-surface deposit.


Moving to a quarterly chart of Roxgold, we can see that currently, the quarterly volume is at over 55 million shares with just over thirty-five trading days left in the quarter. The highest volume traded in the stock's history on a quarterly basis was 67.7 million shares last quarter, and the stock looks on track to easily eclipse that level this quarter. Based on an average daily volume of 1.0 million shares and over thirty-five trading days left, we would expect volume to finish the quarter at nearly 100 million shares. This is an extremely positive development if the stock can finish the quarter strong as it shows immense buying appetite. At an estimate of 100 million shares with a $1.20 share price, this is not retail buying, but institutional accumulation taking place.


Finally, looking at a weekly chart of the stock, we can see that Roxgold has broken out this week on a massive expansion in volatility. This is typically a good sign as it shows that the stock's character is changing. Previous tests of this downtrend line saw very lethargic price action, whereas the current move clearly has some oomph behind it. This is an excellent sign for the stock, and ultimately, I expect higher prices ahead. I am not a buyer at current levels, but I might add to my position on weakness.


Between a rising gold price, positive metallurgic results out of Seguela and an impressive new resource estimate, Roxgold finally has significant catalysts in place for a re-rating. If we can see a positive PEA out of Seguela later this year, it's not unreasonable to see Roxgold transition to a 200,000 plus ounce producer long-term. In addition, the company has solid management that has a history of executing well. The company had the foresight to repurchase 4.9 million shares at an average price of $0.84 per share in the first quarter. The company still has room for another 5 million shares under its normal course issuer bid (NCIB).

(Source: Company Website)

Marathon Gold - New CEO Appointment

In late April, Marathon Gold announced they were beginning the search for a new President and CEO, after the news that Philip Walford would be retiring. After a suspenseful three months for shareholders, this search has finally come to a close, and shareholders should be pleased with the results. The company has hired Matt Manson, former CEO of Stornoway Diamonds. Manson helped to raise $900 million to construct Quebec's first diamond mine on time and under budget, and this will be a significant asset to the Marathon team. As the company shifts from explorer to developer over the next year, it will be imperative to have someone with experience managing construction and raising significant capital at the forefront of Marathon. This also opens up significant options for Marathon Gold as no longer does the company have to put themselves up for sale. Instead, with the new experience that comes with Manson, the company can confidently make a construction decision and transition to a producer on their own. This doesn't mean that the company won't end up being taken over by a suitor, but it does give the company options in the case this doesn't occur.

On the exploration front, the company released more positive results from their Leprechaun deposit this week, with the highlight intercept being 26 meters of 4.00 grams per tonne gold. Their drill program at Leprechaun is now complete with just over 20,000 meters drilled, and this has resulted in the high-grade portion of Leprechaun increasing from a strike length of 300 meters to up to 700 meters. This is significant as many of the intercepts in the high-grade portion are more than 30% higher grade than the current 2.00 gram per tonne gold weighted average grade of the deposit. Based on these developments, I believe that it's possible the Leprechaun deposit's resource estimate could increase by more than 50% from the current 1.1 million ounce resource.

Beginning of Drill Program (March 2019)

(Source: Company Presentation)

Drill Program Completion (August 2019)

(Source: Company Presentation)

As we can see from the above drill maps, the company has significantly infilled any gaps in the deposit which has tightened up drill spacing. I believe that the high-grade Main Zone portion of the Leprechaun deposit could hold upwards of 800,000 ounces, and the total deposit could be upgraded to 1.6 million ounces total, from a current resource estimate of 1.1 million ounces. The current measured and indicated portion of the deposit would likely increase from 643,000 ounces as of the October 2018 resource estimate to closer to 950,000 - 1.10 million ounces based on the tight drill spacing. Finally, we could see a minor bump in grades for the total deposit on a weighted average basis thanks to the higher grade intercepts coming out of the high-grade Main Zone the past few months. This should greatly benefit the economics of the deposit for the upcoming Pre-Feasibility Study expected for early 2020.

Kirkland Lake Gold - Earnings Per Share Growth Tapers Off

Moving over to arguably the most popular producer in the space, Kirkland Lake Gold, the company reported more robust results in Q2 2019. Production on a half-year basis came in at 446,000 ounces, up 43% from the 312,000 ounces produced in the first half of 2018, and all-in sustaining costs dropped 25% to $597/oz, from $793/oz the year prior. While this is excellent news, it's difficult to see how Kirkland Lake Gold is going to see anywhere near the returns they've enjoyed in the past. The stock has seen a huge run for shareholders, but prior growth rates of 60% - 100% are expected to decelerate to single-digits for FY-2020. This is because the company's annual gold production is expected to see a mid-point of 975,000 ounces in FY-2019, and a guidance mid-point of 1.03 million ounces in FY-2020.

(Source:, Author's Chart)

Without a significant reduction in costs or a significant buyback to reduce share count, there is no way to achieve even one third the growth rate in earnings per share that they saw during 25% production increases year-over-year. Outside of a nearly immediately accretive acquisition of a near-term producer or an average gold price in FY-2020 of $1,580/oz or higher, I don't see how they will see higher than $2.75 in annual EPS. As long as the company comes in below $2.75 in EPS, this will translate to 17% earnings per share growth in FY-2020. It's important to note that current estimates for FY-2020 are pegged at $2.37, so the $2.75 in EPS on the high-end is being ambitious, in my opinion.

Looking at the above chart of annual earnings per share I've built, we can see that annual EPS is expecting to show roughly no growth for FY-2020. I have given an ambitious estimate of $2.75 in annual EPS vs. current estimates of $2.37 based on the odd chance we see an average gold price of $1,580/oz or higher for FY-2020, but this will still translate to significant deceleration. Basically, this means that Kirkland Lake Gold is transitioning from a hyper-growth stock to a low-growth stock, and the best days of share price performance are over. This does not mean the stock is an outright sell, just that investors have to temper their expectations for future returns. The stock had no problem doubling and tripling its share price in a year when earnings per share growth were also doubling, but outside of a $1,800/oz gold price next year, the path for the next double in share price will likely take three times as long. For this reason, I expect the stock to be a market performer at best, and no longer the leader it has been. As a comparative example, Agnico Eagle Mines (AEM) is expecting to see 74% growth in annual EPS in FY-2020, compared to Kirkland's 1% growth.

The market typically looks forward by twelve to eighteen months and the market is no longer looking at Kirkland Lake Gold's 74% earnings per share growth for FY-2019, but instead at the single-digit growth in EPS for FY-2020. There are ways that these estimates could change significantly like a massive move in the gold price, an acquisition, a significant buyback in shares, or an extensive new discovery, but I prefer to be more of a realist. Some commenters are throwing around expectations of $3.50 in annual EPS for FY-2020, and the company is going to need a miracle to even see $3.00 in EPS for FY-2020. I believe the stock is a hold, but I see the stock as putting up similar returns to the fully mature gold majors going forward, not the astounding performance it's seen in past years.

Elsewhere in the sector, we have Barrick Gold (GOLD) reporting results on August 12th. The stock has run up very nicely and barring a decent beat; the stock looks to be priced for perfection short-term. With sentiment already a little frothy in the sector, a miss would not be ideal for the mining group from the largest producer. Revenue estimates are currently sitting at $2.09 billion for Q2 2019, and shareholders are going to want to see a minimum of $2.07 billion, as any miss is likely going to hit both the stock and the sector.

Disclosure: I am/we are long ROGFF. 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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.