Kirkland Lake Gold Ltd

Kirkland Lake Gold Ltd (TSX: KL) is a Canada-based gold mining, development and exploration company with a diversified portfolio of exploration projects. The company has production plants across Macassa mine complex located in northeastern Ontario and the Fosterville gold mine located in the State of Victoria, Australia.

Recently, the company made a strategic alliance with Newmont, wherein both the companies would conduct exploration opportunities around Newmont’s Timmins properties and Kirkland’s Holt Complex in Ontario, Canada. As a result of the above alliance, Newmont expects to reduce its ~USD 350 million liability for the Holt Royalty on its balance sheet as on June 30, 2020 and record a gain of approximately USD 275 million in net profit. The formation of the Strategic Alliance provides Kirkland Lake Gold with capital to evaluate strategic alternatives for the future of the Holt mining complex, explore on its existing properties, and evaluate other regional opportunities where Kirkland and Newmont may cooperate in the future.

Q2FY20 Financial Highlights: KL announced its quarterly results, wherein the company posted revenue of USD 581 million, representing a growth of 107% from Q2FY19. The increase was underpinned by elevated gold prices along with a 54% annual increase in production to 329,770 ounces due to the contribution from Detour Lake while suspending operations at Holt Complex remained a drag. Average realized price stood at USD 1,716/oz, as compared to USD 1,320/oz in the previous corresponding quarter. EBITDA increased to USD 701.2 million, reflecting a growth of 81% on y-o-y basis. The group reported a marginal increase in the cash cost at USD 374/ oz, as compared to USD 312/ oz in the previous corresponding period (pcp). Free cash flow stood relatively higher at USD 94.079 million, as compared to USD 54.394 million in pcp. Net earnings soared to USD 150.232 million, as compared to USD 104.195 million in pcp.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: Kirkland Lake Gold’s financial performance is closely tied to the prices of gold. The prices of gold are subject to volatility and can be affected by multiple macroeconomic factors. Further, mining activities involve a high degree of risks stemming from unexpected geological formations. Further, the company is also exposed to crude oil prices, currency exchange and interest rate risks.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of KL gained ~62% in the last six months. The company has a strong fundamental with a robust balance sheet, with a cash balance of USD 537.4 million at June 30, 2020, with no debt. The group has a solid operating platform in leading mining jurisdictions with high-quality projects and significant exploration upside. Further, we are bullish on the gold prices and believe that despite a little pull-back, gold, as an asset class would continue to remain in the limelight as uncertainty over the global economic growth has heightened, with economies across the globe witnessing very slow recovery rate and COVID-19 cases continue to edging higher day by day. Further, ETFs are showing no sign of decline in gold buying, which is likely to send yellow metal prices higher. As the gold prices are likely to remain elevated, we believe that average realized gold prices per ounce would continue to expand, which would lead to margin expansion, higher free cash flow for the company. We have valued the stock using Price to CF based relative valuation method and have arrived at a target upside of double digit (in percentage terms). For the said purposes, we have considered peer average like B2Gold Corp, Yamana Gold Inc, Barrick Gold Corp etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 70.02 on August 28, 2020.

KL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Bank of Montreal

Bank of Montreal (TSX: BMO) is a diversified financial-services provider based in North America, which operates through four business segments namely, Canadian P&C banking, U.S. P&C banking, wealth management, and capital markets.

Q3FY20 Financial Highlights: BMO announced its quarterly results, wherein the Company posted revenue of CAD 7,189 million as compared to CAD 6,666 million recorded in the previous corresponding quarter. The Company’s net income declined to CAD 1,232 million from CAD 1,557 million in the previous corresponding quarter, primarily due to a higher provision for credit losses. On a segmental basis, U.S. P&C reported a lower net income of CAD 263 million against CAD 368 million in the previous corresponding period (pcp), while the company’s corporate service segment reported a net loss of CAD 118 million, as compared to a net loss of CAD 25 million in pcp. The Company’s BMO capital market and BMO Wealth Management segment posted an improved net income at CAD 426 million and CAD 341 million, reflecting a growth of 36% and 37%, respectively on y-o-y basis. The Company reported improved CET 1 ratio of 11.6%, up from 11% in Q2FY20, primarily aided by retained earnings growth, lower source currency risk-weighted assets, due to a decline in commercial lending and a reduction in the credit valuation adjustments charge.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The COVID-19 pandemic has heightened risks of higher non-performing assets for the FY20, which had led banks to create significantly higher provisions that had an impact on the bank's profitability. Further, a low-interest-rate environment and increased chances of loan default are likely to put pressure on the bank's performance, as the lower interest rate would drag NIM and heightened uncertainties may lead to slow loan book growth.

Valuation Methodology: Price to Book Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of BMO corrected ~17% so far this year. Due to the current demand destruction scenario in the economy, the Company took a conservative approach and made higher provision for credit losses. Though the higher provisioning has taken a toll on the profitability, it is likely to provide a cushion against the future setbacks if non-performing assets surge.  The Company reported a decline in its expenses by 2% from the prior quarter and year-over-year basis through strict expense management, which is a key positive. During the quarter, we were among eight select U.S. banks chosen to offer mobile-first chequing accounts managed via Google Pay, launching in 2021. This collaboration is an acknowledgement of the bank’ proven ability to deliver innovative and customer-centric digital financial services. Further, the bank’s balance sheet is strong enough to sustain comfortably against any blow. The bank’s CET-1 ratio of 11.6% stood well above the regulatory requirement, which reflects the balance sheet strength of the bank. Further, a lower interest rate environment is likely to help the bank in expanding the loan book, while it would put pressure on the net interest margin. We expect the performance of the capital market segment to improve as the global equity markets have recovered well, and millions of new investors and traders have joined the league. Further, the bank is a friend of income investors, and at the last traded price, the stock was offering a dividend yield of 5.11%, which is lucrative considering the current interest rate environment. We have valued the stock using P/BV based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Canadian Imperial Bank of Commerce, Bank of Nova Scotia, Royal Bank of Canada etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 82.83 on August 28, 2020.

BMO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

SSR Mining Inc.

SSR Mining Inc. (TSX: SSRM) is a Canada-based precious metals producer with three operations, including Marigold gold mine in Nevada, US, the Seabee Gold Operation in Saskatchewan, Canada and Puna Operations in Jujuy, Argentina. The company operates through two feasibility stage projects and a portfolio of exploration properties in North and South America.

Q2FY20 Financial Highlights: SSRM announced its second quarter results, wherein the company posted revenue of USD 92.485 million, significantly lower than USD 155.149 million in the previous corresponding period (pcp). The decline in the revenue was due to a lower production 49,918 oz of Gold, as compared to 81,461 oz in the previous corresponding quarter due to temporary suspension of mining from the Puna Operations and Seabee Gold Operation. Realized gold price, however, stood at USD 1,722/oz, against USD 1,314/oz in pcp. Income from mine operations stood higher at USD 34.177 million, as compared to USD 29.827 million in pcp, due to a significant decline in the cost of sales. The quarter was marked by inclusion of the care & maintenance expenses amounting to USD 19.727 million due to COVID 19 maintenance which resulted in an operating loss of USD 5.111 million, as compared to an operating income of USD 19.591 million in pcp. The Company reported a net loss of USD 6.276 million as compared to a net profit of USD 12.414 million in pcp. The company ended the quarter with cash and cash equivalent of USD 461.716 million, while total assets stood at USD 1,634.694 million.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The company derives its major part of the revenue from Gold sales, and a fall in the international gold prices is likely to dampen the company’s top-line and cash flows.

Valuation Methodology: EV to EBITDA Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of SSRM appreciated ~33% and ~27% in the last nine months and one year, respectively due to elevated Gold prices, which supported the company’s top-line and cash flows. Investors should note that the stock has closed above its 200-days simple moving average of CAD 24.28, indicating a bullish pattern. The second quarter was marred by a temporary halt in the mining operations across its major location. Recently, the Management disclosed that the mining operations have been resumed and are operating at expected levels, which is a key positive. Further, an all-stock merger with Alacer Gold Corp. would result is a new company that can produce roughly 780,000 ounces of gold each year. The merger with Alacer would diversify the group’s mine portfolio in terms of geographic locations. The merger is likely to reduce the cost and help the group in creating substantial free cash flow for its shareholders. Notably, drilling activities from Trenton Canyon yielded high-grade gold results from newly discovered sulphide mineralization in a geologic setting analogous to other high-grade underground gold mines in Nevada, which is encouraging. Going forward, we expect the price of the yellow metal to remain elevated owing to heightened uncertainty about economic recovery, increasing COVID-19 cases and continuous buying from the ETFs. Higher gold prices are likely to drive the company’s revenue and cash flow higher in the near to medium term. We have valued the stock using 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 Alamos Gold Inc, Pretium Resources Inc and B2Gold Corp etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 27.59 on August 28, 2020.

SSRM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Saputo Inc.

Saputo Inc. (TSX: SAP) is engaged in the processing and production of dairy and cheese products and has operations across Canada, the U.S., Argentina, the United Kingdom, and Australia. The company ranks among the top cheese producers in the U.S. and Canada and derives the majority of the revenue from these Geographies. The company's brands include Saputo, Armstrong, Frigo, and Stella.

Q1FY20 Financial Highlights: Saputo Inc. announced its quarterly results, wherein the company reported revenues of CAD 3.391 billion as compared to CAD 3.668 billion in the previous corresponding quarter. The decline in revenue was primarily due to lower volumes from foodservice and industrial segments, partially offset by improved retail performance. Adjusted EBITDA stood at CAD 366.5 million, depicting a growth of 2.4% on y-o-y basis. The quarter was marked by improved fluid milk performance from the Canada region on y-o-y basis, aided by increase sales volume while in the USA, lower sales volumes affected efficiencies and the absorption of fixed costs. The international sector reported growth due to an increased milk availability in Australia and acquisition of specialty cheese business of Lion Dairy & Drinks Pty Ltd. The company reported net earnings of CAD 141.9 million as compared to CAD 121.4 million in the previous corresponding quarter.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: The food-service segment might witness headwinds due to travel restriction and suspension of operations of several restaurants, which might hinder the overall demand of the company’s products.

Valuation Methodology: Price to Earnings Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The demand from foodservice segment remained tepid in the recent past, as most of the customers are staying at home. Further, additional measures for social distancing and temporary suspension of the stores as instructed by the Governments impacted the foodservice sector and other raw materials manufacturers. Consequently, the stock of SAP fell ~16% so far this year. The sales volumes within the retail market segment witnessed a decent growth amidst setback across the foodservice and industrial market segments, which is a key positive. Further, demand improvement across the European market has rendered a room for growth for the business. Further, the recent acquisition of Lion Dairy & Drinks Pty Ltd is expected to improve the Company’s reach to the new customers, which is positive for growth perspective. We expect the Company would be benefitted from elevated demand from the retail segment coupled with the gradual reopening of the foodservice industry. The Company also announced a higher quarterly dividend (up ~2.9%) of CAD 0.175 per common share, payable on October 02, 2020. Increasing dividend at a time when most of the businesses are cutting the distribution shows the financial strength of the group. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered peer Alimentation Couche-Tard Inc, Dollarama Inc and Maple Leaf Foods Inc. Hence, considering the aforesaid facts, current price levels, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 32.88 on August 28, 2020.

SAP Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Cogeco Communications Inc

Cogeco Communications Inc (TSX: CCA) operates in cable operation within the regions of Canada and the USA. The group provides internet, video, and telephony services with broadband fibre networks to residential and business customers. The company operates through two operating segments, namely, Canadian broadband services and American broadband services.

Q3FY20 Financial Highlights: CCA announced its third quarter results, wherein the company posted revenue of CAD 605.821 million, higher than CAD 587.345 million reported in the previous corresponding period (pcp). The growth in revenue was driven by a higher income from both residential and business Internet service customers coupled with the positive impact from revised rate and revenue addition from Thames Valley Communications acquisition, an American broadband services company. Adjusted EBITDA stood at CAD 294.717 million as compared to CAD 283.927 million in the previous corresponding period (pcp) while adjusted EBITDA margin stood at 48.6%, increased slightly from 48.3% recorded in Q3FY19. Profit for the period from continuing operations stood at CAD 96.724 million, against CAD 99.571 million in Q3FY19. The decline was due to higher depreciation and amortization and income tax expenses, partly offset by higher adjusted EBITDA. The group reported free cash flow at CAD 116.158 million as compared to CAD 136.999 million in Q2FY19 due to the increase in acquisitions of property plant and equipment.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group might face a decline in the number of residential and business consumers due to tepid macro scenario and higher unemployment rate, which might hinder the performance of the Company.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of CCA corrected 11% so far this year amid volatility in the equity markets. Despite the challenging time, the company reported stable financials driven by improved operating performance, which is commendable. The acquisition of Thames Valley Communications would enhance the company’s footprint across new markets and would increase the company’s income and cash flows. Amidst the current downturn, the company reaffirms its FY20 financial guidance and expects revenue to grow at lower single digits. Adjusted EBITDA and free cash flow are likely to grow at lower single digit during the year. Overall, the company has a prominent presence across the North American region, and with the gradual revival of the economy, we believe consumer spending is likely to improve which further augers well for higher demand for communications and related services. The company has distributed a dividend CAD 0.58 per share, which is encouraging amid a time when most of the companies are cutting or suspending the dividend. We have valued the stock using P/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 Quebecor Inc, Shaw Communications Inc, Telus Corp etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 100.52 on August 28, 2020.

CCA Daily Technical Chart (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.