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

• Milking acquisition of Detour Gold Corporation:On January 31, 2020, the company acquired Detour Gold Corporation, which is helping the company in posting robust numbers. From January 31, 2020, to the end of Q3 2020, the revenue from Detour Lake totalled USD 674.9 million, earnings from operations were USD 261.0 million and the mine generated USD 231.0 million of free cash flow.

Source: Company

• Record free cash flow generation: Net cash provided by operating activities totalled USD 431.1 million with record free cash flow of USD 275.7 million, a 52% increase from Q3 2019 and 22% higher than the previous quarter. Out of this, USD 64.0 million was provided by Detour Lake Mine.
• 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, the Debt/Equity Ratio of the Company stands at 0.01%. This 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. 

Financial overview of Q3 2020 (In thousands of United States Dollars)

Source: Company

• In Q3 2020 the company reported a massive jump in revenue to USD 632.8 million, an increase of USD 251.4 million or 66%, compared to USD 381.4 million in the previous corresponding period, primarily due to higher realized metal prices and increased sales volumes.

• Earnings from operations increased by USD 80.9 million to USD 319.5 million in Q3 2020, compared to USD 238.6 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 quarter.

• In Q3 2020 Net earnings increased by USD 25.4 million to USD 202 million, compared to USD 176.6 million in the prior-year quarter. Increase in revenue, reflecting both a higher realized gold price and increased sales volumes, was the primary driver of net earnings growth. 

Risks associated with investment

The company’s revenue is 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 would continue to expand, which would lead to margin expansions.

With a robust financial position, the company expects to generate further free flows as they had re-affirmed production guidance of 1,350,000 – 1,400,000 ounces for FY 2020, which looks impressive.

Therefore, based on the above rationale and valuation, we have given a "Buy" rating at the closing price of CAD 51.85 on January 11, 2021. We have considered Wesdome Gold Mines Ltd, Barrick Gold Corp, Agnico Eagle Mines Ltd etc. as the peer group.

Source: Refinitiv (Thomson Reuters)

Wesdome Gold Mines Ltd

Wesdome Gold Mines Ltd (TSX: WDO) is a gold producer engaged in mining-related activities including exploration, processing, and reclamation. The company produces gold at the Eagle River Complex located near Wawa, Ontario from the Eagle River Underground and Mishi Open Pit gold mines.

Key Highlights

• Debt-free entity:The company has a strong balance sheet with a zero-debt component. Despite a capital-intensive business, the company maintains a zero-debt profile, which is commendable and reflects the operational resiliency and prudent management. As of September 30, 2020, the company has a cash balance of CAD 74 million with working capital of CAD 59.2 million compared to CAD 32.6 million on December 31, 2019. 

• Rise in average gold realization prices:In Q3 2020, the company realized an average gold price of CAD 2,532 per ounce, compared to CAD 1,957 per ounce realized in the previous corresponding period. Due to the rise in average realization price, the company recorded a jump in the revenue by 20%, despite a 31% decline in Gold production due to lower grade from Eagle River.

Source: Company

• Production guidance reaffirmed:The management is highly confident in their operations as they had reiterated their production guidance at 90,000 – 100,000 ounces of gold, primarily from the Eagle River underground mine. We believe that the Company is on track to meet these targets.

Source: Company

Financial overview of Q3 2020 (expressed in thousands of Canadian dollars)

Source: Company

• In Q3 2020, the company’s revenue increased by 20% to CAD 55 million against CAD 46 million in the previous corresponding period. The increase in revenues was primarily due to a higher average realized price of CAD 2,532 per ounce than CAD 1,957 in Q3 2019.
• The company reported a net income of CAD 14.6 million in Q3 2020 against CAD 12.4 million in the previous corresponding period. Net income increased mainly due to higher average realized price of gold, partially offset by COVID-19 costs, increased interest expense and other expenses.

Risks associated with investment

The Company’s revenue is mostly dependent on the gold price, which directly affects its 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 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

Q3 2020, was a transformational quarter for the Company as it came out with the robust performance. The Company is optimistic and maintaining its production guidance of 90,000 – 100,000 ounces of gold for FY2020. We believe that average realized gold prices per ounce would continue to expand, which would lead to margin expansions. We have valued the stock using Price/Cash Flow based relative valuation method and have arrived at a double-digit upside (percentage term). Hence, we recommend a "Buy" rating at the closing price of CAD 9.97 on January 11, 2021. For the said purpose, we have considered peers like K92 Mining Inc, Osisko Gold Royalties Ltd, McEwen Mining Inc, etc.

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.