Investment overview
Gold has been largely range-bound in the recent past, but the precious metal has remained well above $1,200 an ounce as escalated geopolitical tensions support gold prices. With geopolitical tensions likely to dominate global news, I expect gold to remain firm and potentially move above $1,300 an ounce in the next six to 12 months.
In line with my bullish view on gold, I have discussed some big names like Newmont Mining Corp. (NEM, Financial) and Barrick Gold Corp. (ABX, Financial) in the recent past. In particular, I am bullish on Newmont Mining among the big names in the gold mining space and I advise exposure to the stock even at current levels.
Today I will discuss a relatively lesser-known name in the gold mining industry. Kirkland Lake Gold Ltd. (TSX:KL, Financial) is traded on the Toronto Stock Exchange and has delivered stellar returns of 90% year to date. Even after a big rally, I am bullish on this gold miner.
Strong fundamentals
Being a relatively small company, the first point to discuss is the company’s fundamentals.
As of June 30, Kirkland reported cash and equivalents of $267.4 million. Excluding the convertible debenture payment scheduled for December, the company’s cash position currently stands at $220 million. With a strong liquidity buffer, the company is well positioned for accelerated investments in its assets.
Another important point to note is Kirkland reported operating cash flow of $140 million for the first half of 2017. For the same period, the company’s free cash flow was $82 million. While I expect free cash flow numbers to be higher in the second half of the year, even if this performance is replicated, Kirkland is likely to close fiscal 2017 with cash and equivalents of $300 million.
The strong liquidity buffer will help Kirkland pursue organic as well as inorganic growth. I do not see any concerns from a financial perspective even if gold trades in a broad range of $1,200 to $1,300 an ounce.
Robust production growth
While strong fundamentals is a key consideration in analysis, the major reason for 90% upside in 2017 is the company’s production growth and cost profile.
To put things into perspective, Kirkland Lake Gold reported production of 160,305 ounces for the second quarter, which was 23% higher than in the first quarter.
For 2017, Kirkland provided production guidance of 530,000 to 570,000 ounces. The guidance has now been revised higher to between 570,000 and 590,000 ounces. The revised guidance has taken the stock higher and has also been associated with an improvement in the company’s all-in sustaining costs.
In the first quarter, the company’s AISC was $873 an ounce. It declined to $729 an ounce during the second quarter. Further, the company’s prior full-year AISC guidance was $850 to $900 an ounce. It has declined to $800 to $850 an ounce.
The point is the company has seen all around growth and improvement in financial metrics, production guidance and cost guidance. Multiple factors have contributed to the stock upside, so I believe the upside momentum will sustain as the average gold price is likely to be higher in the second half of the year.
Another key factor that will ensure the second half is better than the first is the company’s investment plan. For first-half 2017, Kirkland Lake reported capital expenditures of $62 million. The company has now revised its full-year capital expenditure guidance to $180 million to $200 million. Considering the mid-range of the guidance, the company is likely to incur capital expenditures of $125 million to $130 million during the second half of the year.
With accelerated investments, I expect positive results from production in the second half of the year and into 2018. Importantly, with $300 million in potential liquidity buffer in fiscal 2017, the company is fully funded for investments through 2018.
Conclusion
Kirkland Lake Gold has been surging higher as the company’s assets in Canada and Australia have been delivering strong production growth along with cost improvements.
Since gold remains stable and the company’s production outlook is robust, I expect cash flows to swell further, contributing to stock upside.
In addition, I expect the stock to be re-evaluated if cash flows remain robust and dividends increase along with cash flow growth.
Disclosure: No positions in the stocks discussed.
