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Kirkland Lake Gold
Offers the Best Combination of
Value and Return at its Current Price

The latest SmallCap Informer includes editor Doug Gerlach’s best suggestion in the gold mining industry. Gerlach dug into companies in the gold mining industry, both miners and royalty companies, before settling on a stock that appeared to offer the best combination of value and return at its current price – Kirkland Lake Gold.

Is it Gold’s Time to Shine?

In analyzing gold mining stocks, it’s important to understand that, at the end of the day, they’re no different than any other business. They make money if the cost of producing their product is less than the price for which they can sell it. If their “all-in sustaining costs” (AISC) are higher than the price of gold, then the risk of insolvency can be very high.

Gold miners may try to scale their output to match market prices, which is quite difficult if not impossible – witness the large number of publicly-traded gold miners that are currently unprofitable. It’s no use hitting a new vein and having a banner production year if gold prices have fallen. As a result, many gold miners hedge their exposure to gold price risk using derivatives.

While our selected stock can be analyzed using the Stock Selection Guide, the characteristics of other miners and royalty companies often don’t fit the analytical framework as well. EPS and revenues can be less consistent, and P/E ratios can seem excessively high by usual standards.

When considered against the longer-term cycles of gold prices, though, these companies could still be considered reasonable investments at their current prices. When studying some profitable gold mining companies, you might put less weight on the importance shorter-term growth trends and historical growth consistency, and consider current P/E ratios in the context of the company’s history, not relative to peers or the broader market of growth stocks.

Gold miners with the ability to make a profit fairly consistently are rare to come by, so be sure to evaluate them appropriately. Kirkland Lake Gold Ltd. (TSE/NYSE: KL) is a gold mining company located in Canada and currently operating three mines, including the Fosterville Mine located in Victoria, Australia, and the Macassa Mine and Detour Lake Mine, both located in Northern Ontario, Canada. Earlier in 2020, the company halted test mining and processing at its Northern Territory, Australia, facility with no plan to resume operations. It also temporarily closed its Holt Complex mine in Ontario as part of its COVID-19 response, and this site remains closed as management carries out a strategic review of this asset.

Kirkland Lake Gold has a strategic alliance agreement with Newmont Corporation to assess regional exploration opportunities around properties in Ontario.

In January 2020, the company completed its acquisition of Detour Lake in Ontario, Canada, one of world’s largest open-pit gold deposits with growth potential. Kirkland Lake Gold’s stock price declined 17% on the day that the deal was announced in November 2019, but the acquisition has since proven to be profitable despite the higher costs of the Detour Lake operation compared to Kirkland Lake Gold's other operations. The company estimates that Detour Lake has more than 14 million ounces in proven and probable reserves which should drive future growth for many years to come. Kirkland Lake Gold was known as Newmarket Gold before changing its name in December 2016.

Growth Analysis

Since 2010, revenues at Kirkland Lake Gold have risen an average of 32.4% a year, while EPS growth has averaged 57.9% annually. From 2016 to 2019, Kirkland Lake Gold’s production more than tripled from 313.7 Kozs to 974.6 thousand Kozs, while their all-in sustaining costs (AISC) per ounce fell from $930 to $564. Strong production growth and low unit costs are the formula for long-term success.

In the second quarter ended June 30, 2020, Kirkland Lake Gold resumed operations at Detour Lake and Macassa with COVID-19 protocols in place, while the Holt Complex operations remained suspended.

Nonetheless, the company reported EPS up 10.2% to $0.54 while revenues were up 106.6 to $581.0 million. For the first half of 2020, net EPS increased 65% over the same period of 2019, and free cash flow grew 92% in the same timeframe.

For the full-year 2020, Kirkland Lake Gold expects AISC/ounce sold to be $790 - $810 and total production to be 1,350-1400 Kozs.

We project revenues to grow at 12.0% a year through 2024, with EPS gaining a bit more through margin expansion and growing 14.0% annually. This is roughly in line with analysts’ expectations for the next two fiscal years.

Quality Analysis

In fiscal 2019, Kirkland Lake Gold saw pre-tax profits reach a decade-high 57.8%, considerably better than most of its peers. The company had cash on hand as of June 30, 2020, of $537.4 million with no debt, again superior to many (if not most) gold mining companies.

ROE is also on an uptrend, and once again superior to its peer group.

On September 18, Kirkland Lake Gold announced that a quarterly dividend payment of US$0.125 per common share will be paid on October 14, 2020 to shareholders of record as of the close of business on September 30, 2020. The payment represents the 14th quarterly dividend payment made to shareholders following the Company’s adoption of a dividend policy in March 2017.

Valuation Analysis

Kirkland Lake Gold’s stock currently trades just slightly above its adjusted average P/E of 14.7. If the P/E reaches 20.1, the average high P/E of the last four years, the stock could reach $113.

On the downside, if the P/E falls to 9.2 and EPS stall at the TTM level of $2.94, a low price of $27 is indicated.

From the current price, this represents a 3.2-to-1 upside/downside ratio, and a potential 19.3% annual total return.

The current indicated annual dividend is $0.50, representing a current yield of 1.0%.

Editor’s Note: The track record of SmallCap Informer, edited by Douglas Gerlach, continues to demonstrate a market-beating edge in stock newsletter ratings. Compared to the S&P Small-Cap 600 Index, the SmallCap Informer's stock picks have outperformed in the lifetime of the newsletter and for every other period calculated.

In each monthly issue, the SmallCap Informer presents profiles of small-cap stocks with superior track records and outstanding long-term prospects. Two or More In-Depth Small-Cap Stock Profiles, Alerts and Updates. Educational Articles on Small-Cap Stock Investing, Portfolio Management, and More. Subscriptions are available by mail or online. For a limited time, use Promo Code CHARTER99 and save 50% off an online subscription! Call 1-877-334-2582 or for an online subscription, Click Here.

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