Kirkland Lake Gold: What A Ride

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

Kirkland Lake Gold posted record revenues of $281.27 million for the second quarter of 2019, compared to year-ago revenues of $214.65 million.

Gold production is quickly rising, and the last quarter was again very impressive. However, it was a little lower sequentially due to some technical issues at Micassa Mine.

I see KL as a real long-term investment which should be accumulated on any weakness.

Source: Fosterville Mine from Kirkland Lake Gold.

Investment Thesis

The Toronto-based Kirkland Lake Gold (KL) is possibly the most compelling mid-tier gold miner that we can find in the gold industry. Some will call the miner an incredible growth stock, and it is easy to see why.

According to Zack, the asset utilization ratio, also called sales-to-total-assets rate, is 0.6 for Kirkland Lake Gold.

This ratio measures how well a miner is employing its gold assets to produce revenues. If we compare this ratio to the Industry average - which is 0.26 - we quickly realize how efficient the company is.

Source: KL

It means that Kirkland Lake Gold is getting 2.3x times more revenues than the industry average, for each dollar invested in its mine assets. A level of assets quality rarely achieved in the sector. David Soares, the CFO, said in the conference call:

Revenue growth of 42% was the key driver of the increase in year-to-date profitability year-over-year. We also benefited from an improved unit cost and lower expensed exploration.

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 2Q'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 and it has been reinforced by the price of gold's recent momentum. I see KL as a real long-term investment which should be accumulated on any weakness.

Finally, Kirkland Lake Gold qualifies as a unique candidate with its high-quality asset base and ultra-low AISC. It owns 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 conference call:

[W]e really had a solid quarter in Q2. This year may it wasn't quite as good as Q1, which was really a good quarter, but it was still a very strong quarter. And we expect the next two quarters this year to continue to be significant improvements and really strong quarters, especially when you get a sense of where our guidance are.

Kirkland Lake Gold: Financials And Production In 2Q 2019

Kirkland Lake Gold 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 2Q'19
Total Revenues in $ Million 212.36 198.24 214.65 222.70 280.32 304.91 281.27
Net Income in $ Million 40.98 50.04 61.49 55.88 106.54 110.15 104.20
EBITDA (Company) $ Million 93.63 105.62 123.11 119.23 186.95 201.31 185.56
EPS diluted in $/share 0.19 0.25 0.29 0.26 0.50 0.52 0.49
Cash from operating activities in $ Million 96.20 89.64 120.91 128.38 204.14 174.36 178.38
Capital Expenditure in $ Million 40.95 39.43 51.36 71.92 112.50 79.24 125.34
Free Cash Flow (Company) In $ Million 55.25 50.20 60.70 52.20 91.64 95.12 53.04
Total Cash $ Million 231.60 275.34 318.36 257.20 332.23 416.11 469.39
Current and non-current LTD and capital lease in $ Million 22.22 22.24 16.20 13.19 9.76 9.59 7.25
Shares outstanding (diluted) in Million 209.16 212.24 213.00 212.70 211.59 211.97 211.66
Dividend per share $ 0.016 0.023 0.023 0.03 0.03 0.04

0.04

Production Au Oz 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 2Q'19
Total Production gold 166,579 147,644 164,685 180,155 231,217 231,879 214,593
AISC (co-product) from continuing operations 816 833 757 645 567 560 638
Gold Price 1,278 1,333 1,301 1,204 1,237 1,306 1,310

Source: Company filings and Morningstar/YCharts

One conventional way to establish 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. Then, let's do it.

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

1 - Revenues and trend. Impressive $281.27 million for the second quarter of 2019. Kirkland Lake Gold posted record revenues of $281.27 million for the second quarter of 2019, compared to year-ago revenues of $214.65 million. The company declared net earnings of $104.2 million or $0.49 per diluted share or adjusted net earnings of $105.5 million or $0.50/share. The increase since 2016 is very impressive as the graph above demonstrates it.

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

The key drivers of earnings growth compared to last year were strong revenue growth and improved unit cost. We also had lower expense exploration cost year-over-year. These factors more than offset slightly higher G&A costs and other loss of $5.4 million pretax largely related to foreign exchange which compared to other income of $4.3 million in Q2, 2018.

2 - Free cash flow was $53.04 million in 2Q'19

For Kirkland Lake Gold, the second quarter of 2019 indicates another positive FCF at $53.04 million and free cash flow yearly of $292 million. FCF is showing the strength of the company, which was able to:

  1. Invest in public entities that totaled 66.1 million (e.g., Novo, Osisko Mining).
  2. Realize a buyback of 400K common shares in 2Q'19 at an average price of $12.8.
  3. Pay a quarterly dividend of $0.04 per share.

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 accumulating cash fast, with the projected balance expected to reach about $1.2 billion by 2021.

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. However, it was a little lower sequentially due to some technical issues, now apparently resolved, at Macassa Mine. 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 impressive. 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 $638 per ounce this quarter. The AISC was up $119 the same quarter a year ago.

As we can see below, Macassa and Fosterville mines are the two leading gold producers and represent 88.5% of the total output for 2Q'19. While Fosterville continues to deliver impressive results, Macassa, on the other side, had some challenges in Q2, following its record performance in Q1. Ian Holland said in the conference call:

The most significant impact was from the water-related to the spring runoff, getting into the mine and plugging our lower loading pocket. We expect - we expected it to be resolved by June; it ended up going right through the quarter. We will have our 5,700 level loading pocket back in use very soon. And I can tell you that we had a strong July with an average period over 25 grams.

However, on a year-to-date basis, the company is on track to produce 240,000 to 250,000 ounces at cash costs around $400 per ounce.

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

Kirkland Lake Gold's success is flashing in gold letters. Fosterville and Macassa mines are the pillars of this outstanding success, and the management led by Tony Makuch is the force behind it. With the price of gold that continues to increase and now has reached well over $1,500 per ounce, such well-run gold miner will be quite in demand.

However, the price of gold is an essential stock growth 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 no exception. Mining is not an easy-walk-in-the-park type of business, and we must always be aware of a potential hiccup. The recent issue at Macassa is one reminder of this unavoidable fact.

I repeat it; we know by now that we should accumulate such a right miner for the long term. But it is imperative, in my opinion, to trade the short-term fluctuation as well. I recommend trading short term about 30% of your position to be able to profit plainly of the volatility.

Technical Analysis

KL is forming an ascending channel pattern, which is a bullish pattern with a potential crossing of the resistance.

  • Line resistance is now at $48.80-50 (light selling recommended at this level if the price of gold shows signs of weakness again).
  • Line support now about $42 (I recommend buying and accumulating at this level, unless gold price turns negative and trades below $1,450 per ounce). If a sharp retracement happens, the next support should be around $36 (buy signal).

Conclusion, watch closely the price of gold before making any investment decision on KL.

Author's note: If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

Additional disclosure: I am trading short term KL