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Kirkland Lake Gold: Not Cheap Anymore

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

Kirkland Lake provides gold production for the third quarter of 2019.

Production for the third-quarter is 248,100 Au Oz, 37.7% higher than the output for the same quarter a year ago.

The strategy short term I recommend is to sell 25% of your position at above $48, then wait for a retracement between $41 and $42 to buy and accumulate again.

Source: Fosterville Mine from Kirkland Lake Gold.

Investment Thesis

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

As I have explained in my preceding article, 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 asset quality rarely achieved in the sector.

Source: KL Presentation

The company operates primarily two mines, which are located in Australia and Canada.

1 - Fosterville mine in the state of Victoria, Australia.

During the third quarter of 2019, Production resulting from processing 119,412 tonnes of ore produced an average grade of 41.8 g/t with average mill recoveries of 98.6%.

2 - The company is also mining a prolific site called Macassa, located in Northeastern Ontario, Canada. During the third quarter of 2019, the mine produced from processing 85,834 tonnes an average grade of 23.3 g/t with average recoveries of 97.8%.

Two high-grade, low-cost operations which support the unprecedented long-term success of the company. Great mines that are located in regions defined as "safe jurisdiction" for the mining industry.

Further, Kirkland Lake Gold owns Taylor and Holt mines, both located in Northeastern Ontario, often designated as the Holt Complex.

The business model could not be more appealing with such an asset profile. Thus, it is essential to consider Kirkland Lake as a long-term investment. However, I always recommend trading short term about 30% of your position to take advantage of the volatility of the gold sector. KL is a "good" stock, and it is not cheap.

Kirkland Lake is highly correlated to the gold price and should be timely invested after completing a serious analysis of the future gold market.

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 that 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:

Kirkland Lake Gold investment

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.

Kirkland Lake Gold: Financials And Production In 3Q 2019 (Estimated/Preview)

Kirkland Lake Gold 2Q'18 3Q'18 4Q'18 1Q'19 2Q'19 3Q'19
Total Revenues in $ Million 214.65 222.70 280.32 304.91 281.27 ~374
Net Income in $ Million 61.49 55.88 106.54 110.15 104.20 n/a
EBITDA (Company) $ Million 123.11 119.23 186.95 201.31 185.56 n/a
EPS diluted in $/share 0.29 0.26 0.50 0.52 0.49 n/a
Cash from operating activities in $ Million 120.91 128.38 204.14 174.36 178.38 n/a
Capital Expenditure in $ Million 51.36 71.92 112.50 79.24 125.34 n/a
Free Cash Flow (Company) In $ Million 60.70 52.20 91.64 95.12 53.04 n/a
Total Cash $ Million 318.36 257.20 332.23 416.11 469.39 ~615
Current and non-current LTD and capital lease in $ Million 16.20 13.19 9.76 9.59 7.25 n/a
Shares outstanding (diluted) in Million 213.00 212.70 211.59 211.97 211.66 n/a
Dividend per share $ 0.023 0.03 0.03 0.04

0.04

0.04

Production Au Oz 2Q'18 3Q'18 4Q'18 1Q'19 2Q'19 3Q'19
Total Production gold 164,685 180,155 231,217 231,879 214,593 248,100
AISC (co-product) from continuing operations 757 645 567 560 638 n/a
Gold Price 1,301 1,204 1,237 1,306 1,310 ~1,505

Source: Company press release and Morningstar/YCharts

Trends And Charts: Revenues estimated, Cash, And Gold Production Details

1 - Revenues and trend. Estimated revenue for the third quarter is $374 million

Kirkland Lake Gold's revenue will climb significantly and probably to a new record-high in the third quarter of 2019.

Based on about $1,505 Au Oz on average for the 3Q'19 and gold production of 248,100 Au Oz, I believe the company will post a record revenue of $374 million, which is up 68% from the same quarter a year ago.

2 - Available capital, no net debt, and ample liquidity

The company has already indicated that cash and cash equivalent were $615 million at the end of September 2019. It is an increase of $146 million from 2Q'19. It is just impressive.

However, the best is yet to come for Kirkland Lake Gold. According to the company's projected cash balance, Kirkland Lake is accumulating cash at a fast pace, with the projected balance expected to reach about $1.2 billion by 2021.

3 - Production in gold equivalent ounce and details

Gold production is rising to another record high again. Output for the third-quarter is 248,100 Au Oz, 37.7% higher than the output for the same quarter a year ago.

All-in sustaining costs, or AISC in short, should remain below $650 per ounce.

As we can see below, Macassa and Fosterville mines are the two leading gold producers and represent 89.2% of the total output for 3Q'19.

Fosterville continues to deliver impressive results, and Macassa, which encountered some challenges in Q2, is now back in business with a production up 13% from the same quarter a year ago and up 28% from the previous quarter (please look at the graph below).

In the press release, the company said:

The increase compared to the previous quarter reflected both an increase in the average grade and higher tonnes processed.

Below is the production history of the two primary mines.

4 - Guidance 2019.

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 cannot be brushed aside. It is right in front of our eyes and very shiny. Fosterville and Macassa mines are the key supports of this outstanding success, and the management led by Tony Makuch, the CEO, is the necessary brain that makes it running smoothly. In short, you get it, KL is excellent.

With the price of gold that continues to be healthy and now has reached over $1,500 per ounce for the 3Q'19, such a gold miner doesn't come cheap.

All this success, a good part of it at least, has probably found its way to the stock price, in my opinion.

Thus, I am afraid that KL is now reaching an overbought zone. Not to be alarmed because the risk of a severe retracement is quite remote, but the potential of a stable, above-average return from an investment in KL is now quite slim. Then, the question is what to do next? Quo Vadis?

Thus, it is imperative to trade short-term volatility based on the price of gold as a beacon. I recommend trading short term about 30% of your position to be able to profit plainly of the volatility, whereas it would be wise to reduce your long-term position.

Technical Analysis

KL is forming a rising channel pattern with resistance at about $52.50 and support at $45. However, we may also be in an intermediate descending triangle pattern that Finviz defined accurately, with a resistance level at around $48 and support around $41.

The strategy short term I recommend is to sell 25% of your position at above $48, then wait for a retracement between $41 and $42 to buy and accumulate again.

This recommendation implies a price of gold between $1,475 and $1,520 per ounce. Any breakout of these two supports for gold could radically affect KL by potentially about $5 up or down. In conclusion, watch gold prices like a hawk.

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 am/we are long KL. 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 own a small long-term position, but I trade mainly short-term now.