Kirkland Lake Gold Ltd

Kirkland Lake Gold Ltd (TSX: KL) is a Canada-based gold mining, development and exploration company holding diversified portfolio of assets, located in the stable mining jurisdictions of Canada and Australia. The Company’s primary gold mines are, the Macassa Mine located in northeastern Ontario, Detour Lake mines in Northern Ontario and the Fosterville Gold Mine located in Victoria, Australia. 

Key highlights

• Solid production in the first quarter of 2021: Recently, the company announced production results for Q1 2021 of 302,847 ounces, which exceeded guidance for the quarter of 270,000 – 290,000 ounces. The strong result was on account of higher production at both Fosterville Mine and Detour Lake Mine in March, with Fosterville benefiting from significant grade outperformance and Detour Lake achieving higher than planned grades and tonnes processed.

Source: Company

• Record free cash flow generation: In FY 2020, the company generated record cash flow from the operation at USD 1,315.7 million, increased by 43% against USD 919.3 million in FY 2019. Free cash flows increased by 58% to USD 733 million against USD 463 million in FY 2019.

Source: Company

• Almost zero debt balance sheet: The Company's business model is so strong that they generate enough cash from its operating activities and hardly require any debt; this is commendable. As a result, Debt/Equity Ratio of the Company stands at 0.01%. This picture reflects significant financial strength, which provides financial flexibility to support the Company's growth plans, including continued aggressive exploration of both near-term and longer-term opportunities.

• Industry Beating Margins: The resilient business of the company assisted in outperforming the industry margins. The chart below gives a glimpse of this.

Source: Refinitiv (Thomson Reuters)

Financial overview of FY2020 (In thousands of United States Dollars)

Source: Company

• In FY 2020 the company reported a massive jump in revenue to USD 2,460.1 million, an increase of USD 1080.1 million or 78%, compared to USD 1,379.9 million in the previous corresponding period, primarily due to higher realized metal prices and increased sales volumes.

• Earnings from operations increased by USD 417.1 million to USD 1,229.4 million in FY 2020, compared to USD 812.3 million in pcp. The increase was primarily due to higher realized metal prices partially offset by higher G&A expenses and Rehabilitation cost incurred in the reported period.

• The company’s net earnings increased by USD 227.7 million to USD 787.7 million, compared to USD 560.0 million in the previous corresponding period. The higher realized gold price and increased sales volumes were the primary driver of net earnings growth.

Risks associated with investment

The company’s financial performance mostly dependent on the price of gold, which directly affects the company’s profitability, margins and cash flows. The price of gold is subject to volatility. It is affected by various factors, such as the strength of the US dollar, Interest rates, Inflation rates, demand and supply, all of which are beyond the company’s control. 

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock recommendation

We believe that despite a little pullback, gold, as an asset class would continue to remain in the limelight as uncertainty over the global economic growth is still prevailing. We believe that average realized gold prices per ounce to remain elevated, which would lead to margin expansions. With a robust financial position, the company expects to generate further free flows as it has re-affirmed production guidance of 330,000 – 360,000 ounces in Q2 2021 and 700,000 – 750,000 ounces expected during the second half of 2021, which looks impressive. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 46.12 on April 29, 2021. We have considered Wesdome Gold Mines Ltd, B2Gold Corp, Agnico Eagle Mines Ltd etc. as the peer group for the comparison.

1-Year Price Chart (as on April 29, 2021). Source: Refinitiv (Thomson Reuters)

SNC-Lavalin Group

SNC-Lavalin Group (TSX: SNC) is a fully integrated professional services and project management firm that offers a wide range of services, including financing, consulting, engineering and construction, procurement, and operations & maintenance. 

Key highlights

• Awarded USD 15 million contract for California Department of Transportation: The corporation was recently awarded a three-year contract by the California Department of Transportation to provide a Transportation Asset Management System (TAMS). Data Transfer Solutions (DTS) division would offer services such as TAMS installation, program licensing and servicing, and optional post-implementation assistance.

• Foray in hydroelectric engineering in the US: Recently, the company has been awarded an engineering services contract for three hydroelectric projects from Rye Development, LLC to add powerhouses to the existing dam and lock facilities at each of the sites, which the US Army Corps of Engineers own.

• Rise in net cash generated from operating activities: In FY2020, the company clocked CAD 122 million of cash from operating activities against net cash used for operating activities of CAD 355.3 million in 2019. The rise in operating cash flow was primarily due to healthy performance from SNCL Engineering Services.

Source: Company

• Robust order backlog: The Company’s revenue backlog decreased slightly to USD 13.2 billion as of December 31, 2020, compared with USD 14.1 billion in 2019, mainly reflecting a decrease in Infrastructure EPC Projects, Nuclear and Infrastructure Services, partially offset by an increase in EDPM. Furthermore, in 2021 the backlog is expected to be recognized in revenues for USD 4.4 billion and in 2022 for USD 2.0 billion. 

• Healthy liquidity: As of December 31, 2020, the Company had cash and cash equivalents of USD 932.9 million, along with unused credit facilities of USD2,394.7 million. Simultaneously, its net recourse debt to EBITDA ratio stood at 2.1x, below the required covenant level of 3.75x, which is noteworthy.

Source: Company

Financial overview of FY 2020

Source: Company

• In FY2020, the company reported revenues of CAD 7,007.5 million, against CAD 7,629.8 million in the previous corresponding period. The decline in revenue was primarily due to lower performance from SNCL Projects.
• The company reported an EBIT of CAD (292) million in FY2020, against an EBIT of CAD 2,968.6 million in the previous corresponding period. The higher SG&A expenses and lower gain from the disposal of capital investment were the main reasons behind negative EBIT.
• On the back of the above-discussed points, the company’s net loss stood at CAD 956.3 million in 2020, against a net profit of CAD 330.6 million in the previous corresponding period. 

Risks associated with investment

The Company's worldwide operations have been and will likely to be disrupted at varying degrees, mainly due to disruptions in the Company's supply chains, project delays resulting from temporary or partial project shutdowns, and the Company's inability to continue or resume projects because of extended or complete project shutdowns. All these factors could impact the company's top line as well as on the bottom line.

Valuation Methodology (Illustrative): EV to Sales 

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

Stock recommendation

The Company’s Engineering Services business continued to deliver strong performance in its three segments, EDPM, Nuclear and Infrastructure Services. The group significantly improved its operating cash flows in 2020. Segment Adjusted EBIT margins remained strong, while the backlog for EDPM business in Q4FY20 increased by 9% year-over-year, despite COVID-19. Furthermore, the company is expanding its operational reach as recently it forayed in hydroelectric engineering in the US. Moreover, the management expects its SNCL Engineering Services revenue to grow by a low single-digit percentage, compared to 2020, and Segment Adjusted EBIT to revenue ratio to be between 8% - 10% for 2021. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 28.02 as of April 29, 2021. We have considered Stantec Inc, Aecon Group Inc, Bird Construction Inc. etc. as the peer group for the comparison.

1-Year Price Chart (as on April 29, 2021). Source: Refinitiv (Thomson Reuters)

Chartwell Retirement Residences

Chartwell Retirement Residences (TSX: CSH.UN) is an unincorporated open-ended trust. The company is engaged in the ownership, operation, and management of retirement and long-term care communities in Canada.

Key Updates:

• Bullish Technical Indicator: The stock of CSH.UN is in the upward trend since last one year and generated a solid return of ~28% and ~41% in the last six months and one year, respectively. Moreover, the stock closed above its long-term simple moving averages 100-days, 150-days and 200-days, indicating a bullish pattern.

Source: Refinitiv (Thomson Reuters)

• Stable Dividend Payment: Over the years, the company has paid consistent dividends to its shareholders, supported by ample cash flow from its operations, which indicates operational resiliency. Moreover, the stock carries a dividend yield of ~4.98%, which is decent considering the persisting interest rate scenario.

10-years Dividend History, Source: Refinitiv (Thomson Reuters)

• Ample Liquidity: At the end of FY20, the company reported higher liquidity of CAD 459.510 million, as compared to CAD 414.671 million in FY19. The above liquidity constitutes cash and cash equivalents of CAD 70.157 million and credit Facilities amounting to CAD 389.353 million. The current liquidity seems sufficient to cater to the working capital needs of the company. Notably, the major source of liquidity for the company is the net operating income generated from the property operations, which is expected to remain positive.

Source: Company Report

• Event Update: The company would report its first-quarter FY21 result on May 06, 2021.

FY20 Financial Highlights:

• The trust announced its full-year result, wherein the company posted the revenue of CAD 928.587 million, higher than CAD 915.312 million in pcp. The increase was supported by additional reimbursements received from the government for the additional expenses incurred due to the pandemic coupled with increased revenue from the provision of additional care and services. The positives were partially offset by lower occupancies and the disposition of properties.
• Increase in the direct property operating expense (CAD 622.499 million v/s CAD 590.016 million in FY19) and finance costs (CAD 93.150 million v/s CAD 85.526 million in pcp) remained a drag.
• The company reported a net income of CAD 14.879 million, significantly higher than CAD 1.067 million in FY19.

FY20 Income Statement Highlights (Source: Company Reports)

Risk: The group’s revenue depends on rent collection and occupancy; hence, any fluctuation in occupancy rate or delay in rent collection would affect the financial performance.

Valuation Methodology (illustrative): EV to EBITDA Based

All forecasted figures and peers have been taken from Thomson Reuters. 

Stock Recommendation:

The operations of the retirement residences witnessed a temporary glitch in FY20 due to restrictions imposed on account of the COVID 19 pandemic. The sector witnessed a fall in the occupancy rate and was impacted due to higher input costs due to inclusion of sanitization related expenses etc. As per the management, the above scenario is temporary in nature, and the long-term outlook remains bright due to the rise in the population of senior citizens across Canada, which is likely to create a demand-supply gap. Due to the limited number of retirement residences, the sector is expecting a shortage in the number of beds in the coming years. We believe the company is highly poised to cater to the growing demand arising from the sector. We have valued the stock using the EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Brookdale Senior Living Inc, Capital Senior Living Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 12.29 on April 29, 2021.

One-Year Price Chart (as on April 29, 2021). Source: Refinitiv (Thomson Reuters)

Vermilion Energy Inc.

Vermilion Energy Inc. (TSX: VET) is an international oil and gas producing company, engaged in full-cycle exploration and production programs mainly focused on the acquisition, exploration, development, and optimization programs across North America, Europe, and Australia. 

Key Highlights:

• Improved Operational efficiency: The company showcased a consistent reduction in its cost structure, which has not only supported the bottom-line but also contributed to a stable cash flow generation. During FY14 to FY20, the company lowered its general & administrative costs and transportation costs by 49% and 17%, respectively. Moreover, royalty expenses were also lowered by 49% during the period, which is a key positive.

Source: Company Presentation

• Elevated Production Profile with lower reinvestment ratio: Historically, the company reported consistently higher production on a y-o-y basis and also maintained its prudent capital management. The company has not only increased its North American production but also successfully enhanced production in its international geographies. Moreover, VET is focusing on establishing low-cost production units across the Pannonian Basin, which includes countries such as Hungary, Slovakia and Croatia. Exploration and Development Capital Expenditure in terms of Fund from Operations stood at 64% in FY20 and is expected to come down to 40% in FY21.

Source: Company Presentation

• Revival in Crude Oil prices: Due to the demand-supply mismatches, FY20 turned out to be a tepid year for the major oil and gas exploration companies. However, during the second half of FY20, crude oil prices tend to normalize and showed a price revival, backed by the recovery in the overall demand. The momentum also continued in the first quarter of FY21 and the group reported a higher realization price (WTI crude stood at USD 57.84/bbl, up 25% on y-o-y), which helped the company to report higher revenue despite lower production levels.

Q1FY21 Financial Highlights:

• VET announced its quarterly result, wherein the company posted Petroleum and natural gas revenue of CAD 375.455 million, higher than CAD 353.297 million in Q1FY20. The company derived 66% of its revenue from North America and the rest from the International segment at an average production of 86,276 boe/day, as compared to 97,154 boe/day in Q1FY20.                               

Source: Company Presentation

• The quarter was marked by a gain from impairment reversal expense amounting CAD 662.866 million, as compared to an impairment expense of CAD 1,564.854 million in pcp. Moreover, the group reported a decline in Purchased commodities (CAD 43.764 million v/s CAD 56.108 million in pcp), lower Operating costs (CAD 96.241 million v/s CAD 121.138 million in pcp), and decreased transportation cost (CAD 17.021 million v/s CAD 17.330 million in pcp).
• The company reported its net earnings of CAD 671.261 million, as compared to a net loss of CAD 1,566.216 million in pcp.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks:  The company’s revenue is directly correlated with crude oil and natural gas prices, and a volatility in price would affect the company’s revenue and cash flows.

Valuation Methodology (Illustrative): Price to CF

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

Stock Recommendation:

For FY21, the company expects its production at 83,000 – 85,000 boe/day and expects the North American region to contribute ~67% of the total production. VET expects its Exploration & Development Capital expenditure at CAD 300 million, out of which ~55% is allocated for North America and the rest ~45% for International operations. The company expects its net debt to funds from operations ratio at around 2.6x in FY21.

Source: Company Report

We have valued the stock using the Price to CF based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered Crescent Point Energy Corp, ARC Resources Ltd and Baytex Energy Corp etc., as a peer group. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of VET at the last closing price of CAD 9.28 on April 29, 2021.

One-Year Price Chart (as on April 29, 2021). Source: Refinitiv (Thomson Reuters)

Silvercorp Metals Inc.

Silvercorp Metals Inc. (TSX: SVM) is a mineral mining company that acquires, explores, develops, and mines precious and base metal mineral properties at its producing mines and exploration and development projects in China.

Key Updates:

• FY21 Production meets estimates: In FY21, the company had been able to perform as per its guidance and produced ~6.3 million ounces of silver (guidance: 6.2 – 6.5 million ounces), 68.4 million pounds of lead (guidance: 66.1 – 68.5 million pounds), while produced ~28 million pounds of zinc, beating its guidance of 24.5 – 26.7 million pounds. The company reported total ore mined of 964,925 tonnes in FY21, up 8.9% on y-o-y basis. During the period, SVM sold 6.3 million ounces of silver and 4,700 ounces of gold.

Source: Company Report

• Growing Reserves and Resource base: Over the years, the company reported a constant growth in its reserves and resource base, which indicates a positive long-term outlook. Due to constant mining activities, the reserves tend to reduce every year and hence, the company has to add constant mining reserves under its portfolio to maintain the future operations.

Source: Company Presentation

• Industry Beating Margins: The company reported a better margin profile than the industry median. In Q3FY21, EBITDA margin and operating margin stood at 51.90% and 35%, respectively, compared to the industry median of 41.50% and 26.30%, respectively. Moreover, the company reported its net margin at 23.10% in Q3FY21, as compared to the net margin of 13.90% of the industry median.        

Source: Refinitiv (Thomson Reuters) 

Q3FY21 Financial Highlights:

• SVM announced its quarterly result, wherein the company posted revenue of USD 53.296 million, as compared to USD 44.508 million. The increase was driven by 20% y-o-y higher silver income at USD 30.720 million, coupled with strong growth in zinc (USD 7.923 million, grew 57% on y-o-y basis).        
• Income from mine operation stood at USD 24.801 million, higher than USD 15.770 million in pcp. The company reported lower production costs (USD 18.025 million v/s USD 18.395 million in pcp), while reported increase in general and administrative costs (USD 2.760 million v/s USD 2.348 million in pcp).
• Income from operations stood at USD 18.630 million, significantly higher than USD 11.443 million in pcp, despite higher corporate general and administrative costs (USD 3.525 million v/s USD 2.568 million in pcp), and a surge in foreign exchange loss (USD 2.954 million v/s USD 1.277 million in pcp).
• Net income was recorded at USD 12.289 million v/s USD 8.716 million in pcp.        

Q3FY21 Income Statement Highlight (Source: Company Report)

Risks: Volatility in the precious metal prices would affect the realization price and consequently, the overall performance of SVM.

Valuation Methodology (illustrative): Price to CF

All forecasted figures and peers have been taken from Thomson Reuters. 

Stock Recommendation:

For FY21, the company reported an impressive production and reported decent growth in mined ores from its Ying Mining District and GC Mine as compared to the previous year, which is a key positive. Moreover, the company has a healthy balance sheet with very low debt and reported higher cash from operations of USD 83.681 million in 9MFY21, compared to USD 70.968 million in pcp. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Altius Minerals Corp, Maverix Metals Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of SVM at the closing price of CAD 6.52 on April 29, 2021.

One-Year Price Chart (as on April 29, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.