Kirkland Lake Gold Ltd (TSX: KL) is a gold producer with assets in Canada and Australia. The company conducts extensive exploration activities on its land holdings in Canada and Australia. The current exploration programs are focused on extending known zones of mineralization and testing for new discoveries in order to increase the level of Mineral Resources and Mineral Reserves in support of future organic growth. Kirkland Lake Gold is focused on delivering superior value for its shareholders and maintaining a position within the mining industry as a sustainable, growing, low-cost gold producer. Over the last two years, the company has achieved both significant production growth and increased levels of profitability and cash flow.

Investment Rationale

• Industry Leading Margin Profile: The company reported a solid margin profile against the industry median, with EBITDA margin stood well above the industry median, Operating margin also significantly higher to industry median, and registered solid number at the bottom line. However, the gross margin was slightly lower than the industry median.

• Exceptionally Strong Balance Sheet: Within the gold miner arena, Kirkland balance sheet is extremely strong against the broader peers in the sector. The company is virtually debt-free, with a Debt/Equity ratio of 0.01x compared to the industry median of 0.22x, and long-term debt contribution in the total capital stood at 0.4%, whereas the industry median stood at 13.2%. This reflects a robust balance sheet.

• Recorded Consistency in Margin Profile: The company has consistently reported an EBITDA margin above 35% and an operating margin above 25% since 2017. This reflects the strong competitive advantage of the company and maintaining consistency in the margin profile reflects the quality of earning and strength of the business model to generate consistent cash flow regardless of the economic cycle. Moreover, the company recorded an improvement in its net margin since 2017.

• Detour Gold Acquisition- A Long-term Value Enhancement: The acquisition of Detour Gold was an important development for the Company in its efforts to generate long-term value and attractive returns. Detour Lake is a large-scale, high-quality asset with significant current production, attractive growth potential and substantial unit-cost improvement opportunities. The 2021 Detour Lake Technical Report and 2021 LOMP, issued on March 31, 2021, included solid production growth compared to previous mine plans, low unit costs and 22-year production life.

• Positive Gold Outlook: Given an extremely stretched valuation in the equity markets and recent free fall in the crypto market, gold would continue to attract investors looking for a safe haven to hedge against any unprecedented market volatility. Therefore, we believe gold is likely to remain in the limelight of the investor’s community throughout 2021.
  

• Outlook Stable: Kirkland Lake Gold is committed to generating returns for shareholders and all stakeholders by achieving high levels of operational excellence, investing in future growth and value creation, both at its existing cornerstone assets and through potential acquisitions, continuing to return capital to shareholders and by maintaining an overriding commitment to responsible mining. The Company has achieved significant growth over the last several years, increasing production from 596,405 ounces in 2017 to 1,369,652 ounces in 2020. The Company continues to target significant organic growth in production and/or mine life, including through the completion of the Macassa #4 Shaft project, multiple projects at Detour Lake and the Robbin’s Hill exploration drive at Fosterville, as well as through continued exploration success at all three of these assets. Further, KL is well-positioned to benefit from potential increases in the price of gold while continuing to focus on cost management and mine efficiencies from its existing mines to mitigate against a gold price decline.

• Risk Associated to Investment: The price of gold is a significant external factor affecting the profitability and cash flow of the Company, and therefore, the financial performance of the Company is expected to be closely linked to the price of gold. The price of gold is subject to volatile fluctuations over short periods of time and can be affected by numerous macroeconomic conditions, including supply and demand factors, the value of the US dollar, interest rates, and global economic and political issues.

Financial Highlights: Q1FY21

• Revenue in Q1 2021 totalled US$551.8 million, at par with US$554.7 million in Q1 2020. Contributing to the change in revenue from Q1 2020 was a US$55 million favourable impact from rate factors, mainly reflecting a US$202 per ounce or 13% increase in the average realized gold price, to US$1,788 per ounce from US$1,586 per ounce for the same period in 2020.
• The benefit of a higher average realized gold price was offset by an unfavourable volume impact of US$58 million, reflecting an 11% reduction in total gold sales to 308,029 ounces from 344,586 ounces in Q1 2020.
• Detour Lake contributed revenue of US$252.6 million in Q1 2021, which compared to US$179.4 million for the two months of Q1 2020 following its acquisition on January 31, 2020.
• Revenue at Macassa totalled US$88.7 million, 10% higher than US$80.6 million in Q1 2020. The increase in revenue at Macassa resulted from the higher average realized gold price in Q1 2021, with gold sales for the quarter of 49,467 ounces largely unchanged from 50,765 ounces in Q1 2020.
• Fosterville contributed revenue of US$210.6 million in Q1 2021 versus US$247.3 million for the same period in 2020, with the reduction resulting from lower gold sales (117,450 ounces in Q1 2021 versus 153,752 ounces in Q1 2020) in line with the transition to a lower-grade production profile.
• Net earnings in Q1 2021 totalled US$161.2 million (US$0.60 per share) compared to US$202.9 million (US$0.79 per share) in Q1 2020. Compared to Q1 2020, the most significant factor contributing to the change in net earnings was a US$73.6 million (US$50.8 million after-tax or US$0.19 per share) reduction-related to other income in Q1 2020 of US$72.2 million versus other loss of US$1.4 million in Q1 2021.
• The Company’s cash balance on March 31, 2021, totalled US$792.2 million, which compared to cash of US$847.6 million on December 31, 2020. Net cash provided by operating activities totalled US$208.2 million, which compared to net cash provided by operating activities of US$241.5 million in Q1 2020 and US$420.9 million the previous quarter.
• Free cash flow in Q1 2021 totalled US$42.7 million, which compared to free cash flow of US$130.9 million in Q1 2020. The change in free cash flow compared to the prior period mainly reflected lower net cash provided by operating activities. In addition, the change from Q1 2020 also reflected an increase in mineral property additions and additions to property, plant and equipment to US$165.5 million in Q1 2021 versus US$110.6 million for the same period in 2020.
• Gold production in Q1 2021 totalled 302,847 ounces, which exceeded the guidance range of 270,000 – 290,000 ounces issued on February 25, 2021. The outperformance versus guidance largely resulted from higher-than-expected production at both Fosterville and Detour Lake in March, with Fosterville benefiting from significant grade outperformance and Detour Lake achieving higher than planned grades and tonnes processed.
• AISC per ounce sold for Q1 2021 averaged US$846, significantly better than guidance for the quarter of approximately US$1,000. The better-than-expected AISC per ounce sold in Q1 2021 resulted from higher than planned sales volumes and lower than expected sustaining capital expenditures during March when AISC per ounce sold averaged US$667. The Company remains on track to achieve the full-year 2021 guidance for AISC per ounce sold of US$790 – US$810, with AISC per ounce sold in the second half of 2021 targeted at approximately US$700.

Top-10 Shareholders

Top-10 shareholders together holds 29.38% stake in the company, with Van Eck Associates Corporation and BlackRock Investment Management (UK) Ltd. are the major shareholders in the company with an outstanding position of 6.3% and 4.3% respectively.

Valuation Methodology (Illustrative): EV to Sales Based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: KL has built upon strong fundamentals and commands a strong competitive advantage within the gold miner arena. The company’s advantage can also be gauged by looking at the strong margin profile and consistency in margin over several years. Also, a strong margin spread between KL and Industry median also reflects its dominance. Further, the acquisition of Detour Gold was an important development for the company in its efforts to generate long-term value and attractive returns.

The company is returning capital to shareholders through dividends and share repurchases. A total of US$944.9 million has been returned since the beginning of 2020, including US$778.7 million used to repurchase 20.0 million shares through the Company’s NCIB and US$166.2 million in quarterly dividend payments. Also, the company had tripled the quarterly dividend in 2020 through two dividend increases, from US$0.06 per share when the year began to US$0.1875 per share effective the Q4 2020 dividend payment, which was made on January 14, 2021, to shareholders of record on December 31, 2020.

We expect gold prices to remain high in the mid-term given the stretched equity market valuation and free fall in the crypto market. Higher gold prices would help the group in reporting improved financial performance.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock at the closing price of CAD 48.72 on June 23, 2021.  

1-Year Price Chart (as on June 23, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid at June 24, 2021 price as well.

Disclaimer

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