Kirkland Lake Gold Ltd.

Kirkland Lake Gold Ltd. (TSX: KL) is a Canada based mining company which operates in the exploration of gold across Canada and Australia. The Group 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.

Due to the ongoing COVID 19 pandemic, KL has reduced mining operations at Detour Lake and Macassa mines while temporarily suspended operations at Holt Complex. The Management expects a surge in FY20 production costs due to the ongoing suspension of mining operations. The group has withdrawn its FY20 guidance.

During Q1FY20, the Group repurchased 9,713,500 common shares through the NCIB at a price consideration of US$ 329.8 million.

Q1FY20 Financial Highlights: For the quarter ended March 31, 2020, KL posted a stellar set of numbers and reported an 82% y-o-y jump in revenue, supported by the addition of recent acquisition of Detour Lake’s income. The top line was supported by 48% y-o-y increase in gold sales of 344,586 ounces, followed by an improved price realization of US$ 1,586 per ounce versus US$1,307 per ounce in Q1 FY19. The Group reported an EBITDA of US$ 391.5 million, up 94% over Q1FY19. Earnings from operations stood at US$ 223.84 million, surged from US$ 160.97 million, supported by lower exploration costs. Net earnings stood at US$ 202.88 million, considerably higher than US$ 110.15 million in Q1FY19. Adjusted free cash flow stood higher at US$ 191.36 million, as compared to US$ 94.49 million in pcp.

Q1FY20 Income Statement highlights (Source: Company Reports)

Valuation Methodology (Illustrative):  P/CF based Relative Valuation

Note: All forecasted figures and peers have been taken from Refinitiv (Thomson Reuters), NTM-Next Twelve Months 

Stock Recommendation: The stock of KL has rose ~29% in the last one year due to the positive impact from higher gold prices. The stock has witnessed investor’s interest in the recent past due to its latest acquisition of Detour Lake mine in January 2020. The group is facing a temporary headwind owing to COVID-19, which resulted in reduced activities or temporary suspension in its mines. A temporary suspension is expected to weigh on the group's margins in the near term. Consequently, the stock has corrected ~5% in the last five trading sessions. However, the company has solid fundamentals and seems to have sufficient liquidity which would help to sustain in difficult times. The Stock of KL is trading above its 200-day simple moving average (SMA) of CAD 55.61, which indicates a bullish trend. Also, we expect the Gold prices to remain elevated as the investor prefer ‘Safe Asset’ class in challenging times. We have valued the stock using Price/CF based relative valuation approach and taken peers like Wheaton Precious Metals Corp (TSX: WPM), Kinross Gold Corp (TSX: TO), B2Gold Corp (TSX: BTO)  etc. and arrived at a target price offering a lower double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 57.54 as on May 11, 2020.

KL One-Year Daily Price Chart, Source: Refinitiv (Thomson Reuters)

Torex Gold Resources Inc.

Torex Gold Resources Inc. (TSX: TXG) is an intermediate producer of gold and other precious metals and operates in the exploration and development activities.

Q1FY20 Financial Highlights: TXG announced its quarterly results, wherein the Company reported robust growth in revenue of US$ 172.0 million, stood significantly higher from US$ 101.9 million in pcp. The increase was driven by a considerable jump in the average realized gold price of US$ 1,571/oz from US$ 1,302/ oz in Q1FY19. The Group reported a loss before income tax of US$ 20.6 million, as compared to a profit of US$ 4.9 million, primarily attributed to a derivative loss of US$ 37.8 million, which was partially offset by a lower finance cost. Net loss stood at US$ 47 million, as compared to a loss of US$ 1.3 million in pcp. Adjusted net earnings improved to US$ 19.9 million, from a loss of US$ 5.7 million in pcp, primarily due to a growth in the average realized margin of US$ 777/oz versus US$ 557/oz in Q1FY19.

During the quarter, total Gold production stood at 108,537 oz, while gold sales came in at 108,064 oz.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology (Illustrative):  Price/ CF based Relative Valuation

Note: All forecasted figures and peers have been taken from Refinitiv (Thomson Reuters), NTM-Next Twelve Months

Stock Recommendation: The stock of TXG has generated an exuberant return of ~51% in the last one year. The Business witnessed a margin improvement due to higher price realization, which has further supported the cash flows. The group seems to have ample liquidity and withdrew an additional US$ 50.0 million on the revolving facility to provide a safeguard in current COVID 19 crisis. Further, the company made a debt repayment of US$ 21.8 million during the quarter, which would strengthen the company’s balance sheet. The stock TXG is trading above its 200-day simple moving average (SMA) of CAD18.09, which indicates a bullish trend. The company’s mine is under planned maintenance and will resume operation once the lockdown eases in Mexico. We have valued the stock using Price/CF based relative valuation approach and taken peers like Lundin Gold Inc (TSX: LUG), New Gold Inc (TSX: NGD), B2Gold Corp (TSX: BTO)  etc. and arrived at a target price offering a double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 18.53 as on May 11, 2020.

TXG One-Year Daily Price Chart, Source: Refinitiv (Thomson Reuters)

Franco-Nevada Corporation

Franco-Nevada Corporation (TSX: FNV) is the leading gold-focused royalty and streaming company and has the largest and most diversified portfolio of cash-flow producing assets.

On May 11, 2020, FNV entered into an agreement with SolGold PLC to acquire a 1% net smelter royalty at a price consideration of US$100 million with reference to all minerals produced from the Alpala copper-gold project in northern Ecuador. FNV is entitled to receive certain minimum royalty payments from 2028 onwards. SolGold has the option to increase the size of the transaction to US$150 million for a 1.5% NSR until January 11, 2021 followed by a buy-back option of 50% of the NSR for a period of time.

The Board of Directors announced a quarterly dividend of US$0.26 per share, payable on June 25, 2020.

Q1FY20 Financial Highlights: For the quarter ended March 31, 2020, FNV reported total revenue of US$ 240.5 million, higher than US$179.8 million in Q1FY19. The increase was driven by higher Gold Equivalent Ounces Sold (GEOs) at 134,941, up 10.6% over Q1FY19.  Gross profit stood at US$132.5 million, significantly higher than US$86.5 million in pcp, thanks to higher revenue, while a rise in costs of sales and depletion & depreciation remained a drag. Net loss stood at US$ 98.8 million, as compared to US$ 65.2 million profit in pcp. The stiff decline was primarily attributable to inclusion of impairment of royalty amounting to US$ 271.7 million. Cash Costs per GEO sold increased to US$ 308, as compared to US$254 in pcp.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The Stock of FNV stood resilient in the last one year and generated a stupendous return of ~101%, which is impressive, looking at the current slowdown in the market. Franco-Nevada is a debt-free company and has ample free cash flow to expand its portfolio and pay dividends. The Company reported higher realization in the gold prices due to the ongoing upswing in the gold prices. The Company has a diversified portfolio which includes 56 producing assets consisting of four large and 52 small mines. Due to the ongoing COVID pandemic, some of the mines has suspended the operations temporarily or reduced the production. The Company is a leading Gold producer, and the performance is expected to be benefited from the recent appreciation in international gold prices. We expect the gold prices to remain elevated in coming quarters due to the lack of investment tool for the investors. The group also have some energy assets where the production is reduced owing to the lower demand for oil and gas. The group recorded an impairment of US$ 207.4 million from these assets which dampen the bottom line during the quarter. The stock of FNV is quoting at a premium valuation of EV/EBITDA of 32.7x on NTM basis, as compared to the industry (Basic Material) of 6.7x. The premium valuation is justified due to the Company’s strong fundamentals, market share and better than industry growth rate. We are positive that the group continues to drive the growth from its gold assets while the performance of the energy assets remains a concern owing to the high volatility in crude oil prices. Based on the aforementioned facts, we recommend a ‘Hold’ on the stock at the closing price of CAD 198.05 per share as on May 11, 2020.

FNV One-Year Daily Price 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.