Improved Guidance Driven by Higher Mining Activities: Kirkland Lake Gold Ltd. (TSX: KL) is a Canada based mining company which operates in the exploration of gold across Canada and Australia. The business indulges in production of both high-grade and low-cost underground mining operations at the Macassa mine located in northeastern Ontario, Canada and the Fosterville mine in the state of Victoria, Australia.

Investment Rationale:

• Increasing shareholders’ return: The group has announced to repurchase ~20 million shares over the next 24 months. Also, till 8 May 2020 ~7 million shares can be purchased by brokers under automatic purchase plan. In addition to this, the management decided to increase the dividend by 2x for 1Q2020 to US$0.125 per share. The group is consistently increasing the dividend, and this is the seventh hike in the dividend payment.

• Solid balance sheet with zero debt: The group has a zero debt in its balance sheet. As a result, the group is well poised to pursue inorganic growth opportunities by levering its balance sheet.

• Strong production growth with low unit cost: The company’s production increased significantly in the past few years. The group produced 974,615 oz gold in 2019, up from 313,700 oz in 2016. During the same period, AISC decreased to $564/oz from $930/oz.

• Acquisition of Detour Gold Corporation to add value to the existing portfolio: The group recently acquired Detour Gold Corporation. The acquisition is going to add ~14.8 million ounces in open-pit Mineral Reserves, ~3.9 million ounces of open-pit Measured and Indicated Mineral Resources and 1.1 million ounces of open-pit Inferred Mineral Resources. The total production of Detour Gold Corporation was 603 Kozs in 2019. Following this acquisition, the group holds three gold operations with production over 500 koz.

• Decent production outlook: The production at Macassa mine is expected to increase to ~320,000 ounce owing to production commencement from the #4 Shaft along with potential production from the planned Macassa surface ramp. The production further is expected to reach ~400,000 ounces in early FY23. The group expects strong momentum to continue in Fosterville project for the next three years, well supported by advance mining activities in the high-grade Swan Zone along with the potential for production to commence from Robbin’s Hill in FY23.

• Extensive Exploration program to extend mine life: The group planning to spend $150-170 million in FY20 towards the exploration programs to develop the prospect and expand the scale of operations which further maximize the opportunities for value creation.

• Solid Mineral Reserve: During FY19, the group reported a 257% growth in its Consolidated Mineral Reserves to 20.5 million ounces. The primary reason behind the increase was addition of 14.8 million ounces of open-pit Mineral Reserves at Detour Lake Mine.

FY19 Operational Highlights for the Period Ended 31^st December 2019: KL came up with its full-year results, wherein the company reported revenue of US$1,380 million, up 51% on y-o-y basis. The increase in the revenue was driven by higher volume of 979,734 oz (vs 722,277 oz in FY18) along with higher average realized price per ounce of US$1,405 (vs US$1,263 in FY18). EBITDA was reported at US$969.4 million, an increase of 82% from FY18. Net earnings stood at US$ 560.1 million, as compared to US$ 273.9 million in FY18, driven by improved sales volumes, lower exploration costs resulted from a revision of the company's drilling programs during Q2FY19. The business reported production costs of US$281 million vs US$267.4 million in FY18 million. Operating cash cost per ounce stood at US$284/oz, improve 22% on y-o-y basis. Net cash provided by operating activities came in at US$ 919.4 million, representing a growth of 68% on y-o-y basis. Free cash flow stood at US$463.0 million, higher than US$ 255.2 million in the previous financial year driven by strong growth in net cash provided by operating activities.

FY19 Income Statement Highlights (Source: Company Reports)

Operating Highlights for FY19 (Source: Company Reports)

Guidance: During FY20, the group expects its gold production in the range of 1,470 kozs to 1,540 kozs, while expects its operational cash costs within the range of US$450/oz to US$470/oz at an ASIC of US$ 820/oz to US$ 840/oz. The group expects its operating cash costs within the range of US$700 million to US$720 million. Royalty expense is likely to be in the range of US$ 85 million to US$90 million. The group anticipates its exploration costs between US$150 million to US$170 million. Sustaining capital is expected in between US$420 million to US$430 million. Corporate General and Administration expenses are anticipated in between US$50 million to US$55 million.

In FY20, the group indent to invest US$70 million to US$80 million, which includes US$50 million to US$55 million in Macassa location while US$20 million to US$25 million is expected from Fosterville mine. The business estimates a significant reduction in its capital expenditure program (FY19 CAPEX stood within US$175 to US$185 million) due to the completion, or near completion, of several major projects in FY19. We believe, going forward, the group would be benefitting from the added capacity expansion done in the FY19 through higher production and lower cash costs.

FY20 Guidance (Source: Company Reports)

Key Risks: Mining activities are associated with a high degree of risks such as hazards in the exploration, development and production. While drilling activities may incur unusual and unexpected geologic formations, seismic activity, rock bursts, cave-ins, flooding and other conditions which might lead to damages to the production facilities and injuries to the workers. The revenue of the business is directly correlated with the international gold price. Thus, volatility in the price might damage the profitability of the company. Several macro factors like geo-political risks, investor’s preference towards other asset classes, current economic conditions etc. might affect the supply and demand of the yellow metal.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 38.35% of the total shareholding. Van Eck Associates Corporationand Fidelity Management & Research Company hold the maximum interests in the company at 7.07% and 6.74%, respectively.

Top 10 Shareholders (Source: Thomson Reuters)

Key Metrics: The Company reported decent numbers in FY19, wherein KL posted gross margin at 64.8%, higher than FY18 of 53.3%. Debt to Equity stood at 0.01, improved from the previous two financial years of 0.02 and 0.03, respectively. Operating margin also improved from 42.3% in FY18 to 58.9% in FY19. The business reported higher ROE of 36.4%, as compared to 22.6% in FY18.

Key Ratios (Source: Company Reports)

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/EBITDA - Based Relative Valuation

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation: The stock of KL is trading at CAD 46.20 with a market capitalization of CAD 13.25 billion. The stock made a 52-week low and high of CAD 25.67 and CAD 67.87 and at the last traded level, the stock was tilted towards its upper band of its 52-week’s trading range. The stock has corrected by ~5.60% and ~26.56% in the last one month and six months, respectively. Also, amid COVID-19 -led plunge in the broader markets across the globe, KL shares have relatively performed better than the benchmark index. In a month-over period, its shares have declined just 5% and outperformed the benchmark index by 22%; on a YTD basis the relative outperformance is about 4% and on a YoY basis KL outperformed broader market by 25%. Going Forward, the group is expected to unlock the value from the Detour Lake and West Pits. The group also aims at optimizing mine plan, improvement in productivity, expansion of production and cost reduction initiatives. We have valued the stock using EV/EBITDA based relative valuation method. For this, we have considered peers Wesdome Gold Mines Ltd (TSX: WDO), B2Gold Corp (TSX: BTO), Yamana Gold Inc (TSX: YRI), etc., and arrived at a target price which is offering a lower double-digit upside (in % terms).  Hence, we give a ‘Buy’ recommendation on the stock at the closing price of CAD 46.20, down 0.82% as on 26^th March 2020. 

KL Daily Technical Chart (Source: Thomson Reuters)

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