Kirkland Lake Gold Ltd.

Kirkland Lake Gold Ltd. (TSX: KL) is a Canada-based company which operates in gold mining, development and exploration and has a diversified portfolio of exploration projects.

Key Highlights:

• Increase in Dividend Payment amidst turbulent times: The company paid a higher dividend to its shareholders of USD 50.268 million in Q1FY21, significantly higher than USD 12.577 million in Q1FY20. The increase was supported by stable cash flows, which is a key positive. 

• Debt-free balance sheet: The company operates in the development and exploration of minerals, which is capital intensive in nature. Meanwhile, the company has prudent capital management and has financed its projects from internal accruals, which is encouraging. Notably, the company is a debt-free entity, which is a key positive and indicates greater financial flexibility.

• Improved Prospects from Detour Lake project: KL acquired Detour Lake during January 2020, and since then, Detour has contributed strongly to the overall production. During the quarter, Detour Lake contributed 146,731 ounces to total production of 302,847 ounces. Moreover, the project has a large base of Mineral Reserves that supports 22-year production life, while the company is focusing on significant growth in Mineral Reserves through extensive drilling in the coming days.              

Expected Production from Detour Lake (Source: Company Presentation)

Q1FY21 Financial Highlights:

• KL announced its quarterly results, wherein the group posted revenue of USD 551.846 million, as compared to USD 554.738 million in the previous corresponding period (pcp). The decline was primarily due to lower gold sales (308,029 oz v/s 344,586 oz in pcp).
• Earnings from mine operations stood at USD 259.271 million, down from USD 279.058 million in the previous corresponding period (pcp). The decline was primarily attributable to a higher production cost (USD 170.081 million v/s USD 161.592 million in pcp), and a higher depletion and depreciation expense (USD 104.100 million v/s USD 92.839 million in Q1FY20), partially offset by lower royalty expense (USD 18.394 million v/s USD 21.249 million in pcp).
• Earnings from operations were reported at USD 238.006 million, higher than USD 223.837 million in pcp. The quarter was marked by lower general and administrative expense (USD 12.343 million v/s USD 12.562 million in pcp), a higher care and maintenance (USD 4.196 million v/s USD 2.890 million in Q1FY20), along with an inclusion of rehabilitation costs amounting to USD 0.760 million.
• Net earnings stood lower at USD 161.193 million as compared to USD 202.878 million in Q1FY20..
• The group reported cash & cash equivalents of USD 792.239 million, while total assets were recorded at USD 7,078.880 million.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: A volatility in gold prices would affect the company’s realization prices and likely impact the margins and cash flows.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

For FY21, the group expects total gold production of 1,300 - 1,400 kilo oz, while operating cash costs/ounce sold is expected in between USD 450 – 475/oz. The company expects the operating cash costs in between USD 600-630/oz in FY21.

Source: Company Report

We have valued the stock using the Price to CF based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like B2Gold Corp, Wesdome Gold Mines Ltd etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 53.11 on May 18, 2021.

One-Year Price Chart (as on May 18, 2021). Source: Refinitiv (Thomson Reuters)

Equinox Gold Corp.

Equinox Gold Corp. (TSX: EQX) is a Canada-based mining company, engaged in the development and operation of mineral properties. It operates approximately six wholly owned gold mines.

Key highlights 

• The management's bullish stance: Recently, the management stated that their 2021 production would be in a range of 600,000 - 665,000 ounces of gold, a 33% increase over 2020 production of 477,200 ounces of gold. The cash costs would be USD 940 - 1,000 per ounce of gold sold and all-in-sustaining costs "AISC" would be USD 1,190 - 1,275 per ounce of gold sold.  

• Acquired Premier Gold Mines: Recently, the company acquired Premier Gold Mines, which would further increase its diversification and scale with the addition of a producing mine in Mexico and a construction-ready project in Ontario, Canada. Whereas it sold its Pilar Gold Mine in Brazil to Pilar Gold Inc. for aggregate consideration of USD 38 million along with 9.9% equity interest in Pilar Gold Inc and 1% net smelter returns royalty on production from the Gold Mine. 

• Reduced debts: The on-going steady performance of the company’s operations, agile management and higher average realization cost helped the company to minimize its net debt to USD 229.8 million in Q1 2021, against USD 446.8 million in the previous corresponding period. We believe this would further improve the margins.

Source: Company 

Financial overview of Q1 2021 (In Thousands on USD)

Source: Company 

• In Q1 2021, the Company sold 128,555 ounces of gold at an average realized price of USD 1,786 per ounce and generated revenue of USD 229.7 million, an increase of 76.7% against USD 130.0 million in Q1 2020. The rise in revenue was primarily based on higher gold sold, and higher realized gold prices.
• Earnings from mine operations were reported at USD 44.2million, against USD 36.6 million in the previous corresponding period.
• Income from operations increased to USD 31.9 million from USD 26.4 million, although it registered higher operating expenses. 
• The Company reported enhanced net income at USD 50.3 million in the reported period, against USD 5.5 million in the previous corresponding period. 

Risks associated with investment

The Company’s financial performance is mostly dependent on the price of gold, which directly affects their profitability and cash flow. Any drawdown in the gold prices would impact the group’s performance.

Valuation Methodology (Illustrative): EV to Sales

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

Stock recommendation

With the Premier Gold purchase completed, the Mercedes Mine and Greenstone Project integrated into the company's portfolio, and the company's stake in Greenstone increased to 60%, it's been a busy start to the year. Q1 2021 results reflected delivery on its growth and diversification strategy. Its operating mines generated 129,233 ounces of gold and sold 128,555 ounces of gold compared to 88,951 and 82,629 ounces of gold, respectively in the previous corresponding period. Furthermore, with strong cash flow from operating mines and a healthy balance sheet, the company is in an excellent position to achieve ambitious goals in 2021 and beyond in terms of gold production and cash flow as it continues to develop its extraordinary pipeline of development and expansion projects. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 11.15 on May 18, 2021. We have considered, Kinross Gold Corp, B2Gold Corp, Alamos Gold Inc. as the peer group for the comparison.

1-Year Price Chart (as on Mayl 18, 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.