Kirkland Lake Gold: Another Blowout Quarter Preceding Agnico Merger

Jan. 18, 2022 12:16 AM ETAgnico Eagle Mines Limited (AEM), AEM:CA134 Comments49 Likes
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Taylor Dart
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Summary

  • Kirkland Lake Gold released its Q4 and FY2021 preliminary results this week, reporting record production of ~380,500 ounces, a 3% increase from the year-ago period.
  • This helped to push annual gold production to ~1.43 million ounces, with Kirkland Lake, true to form, managing to over-deliver and easily exceed guidance despite COVID-19 related headwinds.
  • The outstanding performance was driven by grade outperformance at Fosterville and record throughput at Detour Lake, but there's still meaningful growth left in the tank at its Canadian operations.
  • Assuming all approvals are granted, Kirkland Lake and Agnico Eagle will combine to create arguably the most attractive gold producer sector-wide, so I plan to continue to accumulate Agnico Eagle on weakness.

Fosterville Gold Mine

tracielouise/E+ via Getty Images

We're nearing the beginning of the Q4 Earnings Season for the Gold Miners Index (GDX), and one of the first companies to report its preliminary Q4 results is Kirkland Lake Gold (KL). True to form under CEO Tony Makuch's leadership, the company has once again outdone itself in FY2021, producing ~1.43 million ounces of gold, a 6% beat vs. its guidance mid-point of 1.35 million ounces. Assuming all approvals are granted, Kirkland Lake and Agnico Eagle (NYSE:AEM) will combine to create arguably the most attractive gold producer sector-wide, so I plan to continue to accumulate Agnico Eagle on weakness.

Kirkland Lake Gold Operations

Kirkland Lake Gold Operations

Company Presentation

Kirkland Lake Gold ("Kirkland Lake") released its preliminary Q4 and FY2021 results this week, reporting quarterly gold production of ~380,500 ounces, a record for the company. This impressive Q4 performance helped to push annual production to ~1.43 million ounces, a 6% beat vs. the guidance mid-point of 1.35 million ounces despite COVID-19 related headwinds. The outstanding performance was attributed to continued grade outperformance at the world's highest-grade Fosterville Mine and record throughput at Detour Lake, with ~24.1 million tonnes processed for the year. Let's take a closer look at the quarter below:

Kirkland Lake Gold Production Statistics By Mine

Kirkland Lake Gold Production Statistics By Mine

Company Filings, Author's Chart

As shown in the chart above, it was a solid quarter across the board for each of Kirkland Lake's operations, with gold production of ~211,000 ounces at Detour Lake, ~108,200 ounces at Fosterville, and ~61,300 ounces at Macassa. At Detour Lake, the team has clearly delivered ahead of schedule on their plans to turn Detour Lake into a higher-volume, lower-cost operation. This is evidenced by ~712,800 ounces produced in 2021, up from ~601,600 ounces in 2019 while it was managed by Detour Gold Corporation. On a year-over-year basis, production increased more than 30%, with this being a huge contributor to Kirkland Lake's near ~1.5 million-ounce production profile.

Production vs. Guidance

Production vs. Guidance

Company News Release

The table above shows that the guidance beat was driven by Fosterville and Detour Lake, which beat their initial guidance mid-points by 1.8% and 24%, respectively. Unfortunately, the company's smaller Macassa Mine did come in below guidance, with ~210,200 ounces produced, below the initial guidance mid-point of 237,500 ounces. This was partially related to poor battery performance and delays in receiving new batteries. For those that are unfamiliar, Kirkland Lake was the leader in battery technology at its underground mine at Macassa, adopting the technology over a decade ago. However, with increased demand, there have been some quality issues and supply tightness in the market.

Z40 Haul Truck, Macassa Mine

Z40 Haul Truck, Macassa Mine

Kirkland Lake Sustainability Report

Despite these headwinds, the company still put together a solid year at the mine. It's also worth noting that while Macassa has produced just ~393,000 ounces combined over the past two years, which was below estimates, the mine is on track to see significant growth beginning next year. This is because the #4 Shaft sinking is finally complete as of January 12th.

With the full #4 Shaft Project completion on track for late 2022, hoisting capacity will increase to 4,000 tonnes per day, supporting gold production of 400,000+ ounces of gold per annum. Hence, while it's easy to be negative on what has two sub-par years for the mine, affected by extreme heat issues and poor battery performance, the best is yet to come for this high-grade asset. Let's take a look at production at each asset in a little more detail:

Mine-by-Mine Performance

Beginning with Detour Lake, we can see that Q4 was another incredible quarter for the asset, with ~211,000 ounces produced, up 38% year-over-year (Q4 2020: ~153,100 ounces). This was driven by higher throughput and grades, with ~6.3 million tonnes processed at an average grade of 1.14 grams per tonne gold. The increased grades (1.14 grams per tonne gold vs. 0.89 grams per tonne gold) were related to higher grade zones in the Phase 2 Mine Plan, while the throughput continues to improve as the company works on projects to boost throughput to 28 million tonnes per annum.

Detour Lake Mine Production

Detour Lake Mine Production

Company Filings, Author's Chart

While the medium-term goal is to run at 28 million tonnes per annum, it's very encouraging to see Detour Lake operating at an annualized rate of 25.2 million tonnes per annum already in Q4. Assuming the operation was running at this higher capacity rate, Detour could have easily produced another 115,000+ ounces of gold at a grade of 1.0 grams per tonne gold, suggesting that this asset has a clear path to producing 825,000+ ounces per annum. This would make Detour Lake the largest gold operation in Canada by a wide margin, edging out Canadian Malartic, which produces just below 700,000 ounces per annum.

Detour Lake Mine Production + Forward Estimates

Detour Lake Mine Production + Forward Estimates

Company Filings, Author's Chart & Estimates

Based on the life-of-mine plan, gold production at Detour Lake is expected to come in at approximately 700,000 ounces per annum in 2022 through 2024, with a jump to 825,000 ounces in FY2025. However, given the solid progress already, I would not be surprised to see this 825,000-ounce target met earlier than FY2025. So, while FY2021 was an outstanding year for this asset, like Macassa, the best is still yet to come. To date, this acquisition has been brilliant, with Tony Makuch having the foresight to acquire Detour in a softer M&A and gold market, ahead of M&A heating up in 2020/2021, allowing him to transact at a very attractive price in hindsight (0.90x P/NAV).

To put this in perspective, Newcrest (OTCPK:NCMGF) just paid closer to 1.45x P/NAV to acquire Pretium (PVG), a higher-cost asset with a shorter mine life and one that has had its challenges due to its nuggety mineralization. The plans for Detour Lake outlined at the time of the acquisition looked a little ambitious. This is because it was a high-cost mine, and it was a significant deviation from the high-grade, low-cost underground mines that had helped Kirkland Lake build itself into a multi-billion dollar producer. However, the exploration success and operating results to date at Detour are another clear example of Tony Makuch and his team under-promising and over-delivering.

This is one reason why Agnico 2.0 (assuming approvals are granted) is one of the names that one can comfortably buy & hold in the sector and why I believe it may steal investment dollars from other senior producers. The reason is that it will be managed by two leaders who have steadily delivered on their promises, focusing on production per share growth vs. growth simply for the sake of growth, like many other producers. While geology and jurisdiction are important, management is everything in this sector.

Fosterville Mine Gold Production

Fosterville Mine Gold Production

Company Filings, Author's Chart

Moving over to Fosterville, it was another solid quarter at the Australian mine, with gold production of ~108,200 ounces. While this represented a 34% decline in production year-over-year, the mine was up against very difficult comps, with an average processed grade above 28.0 grams per tonne gold in the year-ago period. On a full-year basis, though, Fosterville beat its guidance by more than 20%, producing ~509,600 ounces. The company noted that the much stronger than planned output in 2021 was driven by positive grade reconciliation, with three stopes contributing to much of the outperformance. During Q4, Fosterville processed ~153,100 tonnes at 22.3 grams per tonne gold.

Robbin

Robbin's Hill - Fosterville Mine

Company Presentation

In addition to a solid year at this incredible asset, Kirkland Lake also reported very solid exploration results in Q3, with highlight intercepts that included 2.6 meters of 51.7 grams per tonne gold, 4.9 meters of 9.6 grams per tonne gold, and 3.7 meters of 10.8 grams per tonne gold down-plunge from the reserves base. Meanwhile, at Cygnet, the company also released several solid intercepts which include 1.5 meters of 141.8 grams per tonne gold, 1.4 meters of 258 grams per tonne gold, and 3.4 meters of 49.4 grams per tonne gold, with splays identified that are coming from the main structure (Pan, Ptarmigan).

Elsewhere, at Robbin's Hill, a future mining center, the company hit 3.4 meters of 19.7 grams per tonne gold, 1.1 meters of 28 grams per tonne gold, and 1.4 meters of 23.1 grams per tonne gold outside of the current resource base. Meanwhile, just outside the inferred resource base, the company also hit a very impressive intercept of 2.5 meters of 81.3 grams per tonne gold, suggesting that Robbin's Hill grades are getting better at depth, similar to what we saw from Swan.

Robbin's Hill reserves currently stand at 180,000 ounces at 5.3 grams per tonne gold, with an additional 329,000 ounces at 4.8 grams per tonne gold in the measured & indicated category. Based on the grades we're seeing here, there is certainly the potential to see a boost in resource/reserve grades at this future mining area. To summarize, Fosterville looks to at least another 9 years of production ahead of it, with discussions of a cessation of mining here due to declining reserves greatly exaggerated. Given Agnico/Kirkland's exploration budgets that are typically well above that of their peers on a dollar spent per ounce produced basis, I wouldn't rule out another major discovery here by the end of the decade.

Finally, at Macassa, Kirkland Lake processed 89,800 ounces at a grade of 21.6 grams per tonne gold, compared to 74,400 tonnes at 22.4 grams per tonne gold in Q4 2020. This helped production to increase 15% year-over-year to ~210,200 ounces. As noted previously, Macassa was up against a mediocre year in 2020, exacerbated by a brief shutdown, so the year-over-year beat is not overly impressive. Still, it was a satisfactory year considering the headwinds. Investors can look forward to much higher production beginning in 2023, as disclosed earlier. Meanwhile, there is the potential for an immediate boost to reserves, with orphaned ounces sitting right next door that are currently held by Agnico Eagle, which could be processed at the Macassa Mill and accessed via a ramp.

Kirkland Lake Gold Operations

Kirkland Lake Gold Operations

Company Website

AK Resource Area

AK Resource Area

Company Presentation

Financial Results

Based on ~386,000 ounces sold in Q4 at an average realized price of $1,795/oz, Kirkland Lake Gold appears to have generated revenue of ~$693 million in Q4, translating to 0.3% revenue growth vs. $691.6 million in Q4 2020. This is quite impressive considering that the company was up against tough year-over-year comps due to a huge quarter from Fosterville and a much higher average realized gold price in Q4 2020.

On a full-year basis, Kirkland Lake generated revenue of more than $2.55 billion, a nearly 5% increase from FY2020 levels (~$2.46 billion). This was driven by increased production and sales, more than offsetting having to lap a record gold price in Q3 2020 and a $1,875/oz gold price in Q4 2020. In a year where some producers will struggle to grow revenue on a year-over-year basis after lapping record gold prices in H2 2020, this certainly makes Kirkland Lake Gold stand out among its peers. Of course, the other differentiator is beating the top end of guidance despite record COVID-19 cases in Ontario in Q4, a testament to the team's operational excellence and the quality of its operations.

Agnico Eagle & Kirkland Lake Gold Merger

As discussed earlier, Kirkland Lake Gold and Agnico Eagle have received shareholder approval for their merger but are awaiting approval from the Australian Foreign Investment Review Board. The deal is expected to close by mid-February based on the current timeline. With these two producers with industry-leading track records set to join forces, I see Agnico Eagle 2.0 as the most attractive gold producer sector-wide, checking multiple boxes, which include the following:

  • industry-leading margins (all-in sustaining costs of $925/oz)
  • organic growth (Detour throughput increase, Macassa #4 Shaft, Hope Bay Expansion, Meliadine Phase 2, Kittila throughput increase)
  • an impressive development pipeline (Upper Beaver, Santa Gertrudis, Hammond Reef)
  • industry-leading greenhouse gas emissions per ounce of gold produced
  • operating in the most favorable jurisdictions (Australia, Canada, Finland)
  • industry-leading exploration spending per ounce of gold produced

GHG Emissions + Water Consumption

GHG Emission + Water Consumption

Company Presentation

Among other senior gold producers, it's very difficult to check 3 of these boxes, let alone all six, with most producers having redeeming qualities but a couple of blemishes. This includes Barrick (GOLD) being a clear leader from a geology standpoint but operating out of a few sub-par jurisdictions and not having medium-term and long-term production growth. Meanwhile, though Newmont (NEM) has long mine lives and diversification, it lacks Agnico 2.0's industry-leading margins, its enviable growth profile. In addition, it spends less on exploration per ounce of gold produced while also having a few less attractive jurisdictions (Peru, Suriname, Ghana).

Agnico 2.0 vs. Peers

Agnico 2.0 vs. Peers

Company Presentation

The amalgamation of the two companies should create a senior producer that will be producing ~3.6 million ounces in FY2023 across three continents (12 mines) at all-in sustaining costs below $925/oz. This would place the company just behind Barrick Gold, but with more attractive costs, more attractive jurisdictions, a higher dividend yield (2.6% vs. 1.9%), and a more attractive growth profile.

With Upper Beaver being the most attractive development project (240,000+ ounce per annum potential), Detour Lake growing to 800,000+ ounces per annum, and Macassa set to grow to 400,000+ ounces per annum, I see the potential for Agnico 2.0 to produce ~3.9 million ounces in FY2025. This would give the combined company a ~4.2% compound annual growth rate between FY2022 and FY2025. It's worth noting that there is an upside case to ~4.1 million ounces if Hope Bay can be optimized, with Agnico seeing 275,000 to 300,000-ounce potential for this asset long-term, as well as smaller production increases at Kittila and Meliadine. This would push the company's compound annual production growth rate closer to 6.0%.

Finally, looking out later in the decade, Agnico brings two other attractive development projects to the table in the proposed merger: Santa Gertrudis and Hammond Reef. Hammond Reef could easily produce 270,000 ounces per annum at costs below $900/oz, which would result in ~6.7% growth vs. the ~4.0 million-ounce 2025 production profile. It is worth noting that Hammond Reef is a more expensive project, with capex likely to come in closer to $1.1 billion. However, given the combined company's significant free cash flow generation, financing the project should not be an issue, especially because its other growth projects are relatively low capex (filling Holt Mill, Upper Beaver).

Santa Gertrudis

Santa Gertrudis

Agnico Eagle Company Presentation

Meanwhile, in Mexico, Santa Gertrudis is small, but should have very attractive margins. For those unfamiliar, it is a past producer with historic heap-leach operations and has pre-stripped pits, haul roads, water sources, and buildings already in place. The project is home to an open-pit resource of ~850,000 ounces of gold (oxide) at grades above 1.0 gram per tonne gold, with an additional ~880,000 ounces of gold and 6.5 million ounces of silver that could be extracted in an underground mining scenario, with a gold-equivalent grade of ~3.80 grams per tonne. This project could support the production of 125,000 ounces per annum at costs below $850/oz.

Suppose we add in the upside from these two projects and the possibility of finding an ore source for the Holt Mill, which is sitting idle just north of the Kirkland Lake Mining camp in Ontario. In that case, Agnico 2.0 could grow into a ~4.5+ million ounce per annum producer with zero need for acquisitions by 2030. This doesn't mean that the company won't acquire if something exciting comes across the plate at the right price, but it's nice to see that there is 30%+ growth within the portfolio from FY2022 levels (~3.45 million ounces) with no need to spend on acquisitions. This provides a straightforward and relatively easy path to growth. The only real "challenge" is prioritizing which assets get developed first, with Upper Beaver being the clear priority currently.

To summarize, I see Agnico 2.0 as the most attractive way to play the sector, and I would not be surprised if Agnico Eagle outperforms its peers on a 3-year and 5-year basis. This is because the combined company should attract funds, with it being very difficult to find a mix of growth, ~50% AISC margins, and top-ranked jurisdictions in the million-ounce producer space. The closest comparison that comes to mind is Northern Star (OTCPK:NESRF), but it has hedges in place, lacks diversification (3 mining centers vs. 10+ for Agnico), and it has much higher costs. Given this superior investment thesis, I plan to continue to accumulate Agnico 2.0 on weakness. This is the only reason I am not long Kirkland Lake Gold, having transferred my KL position over to AEM, assuming that the deal will close in Q1.

This article was written by

Taylor Dart profile picture
25.14K Followers
"A bull market is when you check your stocks every day to see how much they went up. A bear market is when you don't bother to look anymore."- John Hammerslough - Disclosure: I am not a financial advisor. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading or investing.
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Disclosure: I/we have a beneficial long position in the shares of GLD, AEM, NEM either through stock ownership, options, or other derivatives. 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: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.

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