On Tuesday Kirkland Lake Gold Ltd. (KL, Financial), Kirkland Lake Gold Ltd. a mid-tier producer of gold, announced the acquisition of another 5.03% stake in Osisko Mining Inc. (OSK), equaling 14,705,882 ordinary shares of the company at a price of 1.70 Canadian dollars ($1.30) per share.
The investment has been valued at approximately $19.2 million and will be paid in cash. Following the private placement transaction, Kirkland Lake Gold will hold about 13.61% of Osisko Mining.
According to Tony Makuch, the president and CEO of Kirkland Lake Gold, the investment will increase the presence of the Canadian miner in the Abitibi-Greenstone belt of northwestern Quebec, which is a prolific mining region.
Makuch added that the investment provides extra value potential nearby Holt and Taylor mines, which are the existing gold producing assets of Kirkland Lake Gold in Ontario.
The news may spark an increase in the share price of Kirkland Lake Gold. The market value was $17.57 per share at close Tuesday. The stock is trading below the 50- and 100-day simple moving average lines, but it is on par with the 200-SMA line. For the 52 weeks through Sept. 18, the share price has climbed 35%.
The share price at close Tuesday was $6.05 off the 52-week low of $11.52 and 35.8% from the 52-week high of $23.86. Kirkland Lake Gold is not expensive today considering its growth potential, and the $19.2 million worth investment in Osisko increased the attractiveness of the stock.
If gold rebounds to the early 2018 level, a 40% impact from Osisko stock appreciation is likely to produce 6-7% growth of Kirkland Lake Gold's stockholder equity in one year.
Osisko Mining was 2.56 Canadian dollars ($1.96) per share at close Tuesday on the Toronto Stock Exchange. Analysts are predicting a 61% stock appreciation to a target price of 4.11 Canadian dollars ($3.15) per share within the next 52 weeks.
The other 60% impact is expected from a roughly $50 million positive change in cash and cash equivalents of Kirkland Lake Gold, which is set to occur before the third quarter of 2019. The $50 million estimate is an average of the change in cash and cash equivalents of the company over the last four full fiscal years.
The gold price averaged $1,233.58 per troy ounce over the same span. Therefore a gold price over $1,275 per troy ounce, which is not chasing a chimera for the next 12-month horizon, makes that change in the company’s liquidity highly possible.
However, even 6-7% growth in the value of the total equity wouldn’t justify an increase of Kirkland Lake Gold Ltd. because it means that today investors need to spend $17.57 – the market price at close Tuesday – to acquire $6.10 book value per share of the company. Therefore the price-book ratio will still be too high, strictly from a value investor’s point of view.
An investment in Kirkland Lake Gold is worth a consideration because of the profitability of the company’s operations, the location of its mineral reserves, the financial strength of the balance sheet and a low all-in sustaining cost per ounce. But it's better to wait for the share price to fall under the mid-July 2017 level at least before increasing Kirkland Lake Gold.
The 14-day Relative Strength Index is 38 of a 20 to 80 range and its descending phase let us prefigure that some more weaknesses are likely to still happen.
Source: GuruFocus.com
The Canadian gold mining company has producing assets in Canada and Australia. For full fiscal 2018, the miner forecasts a production of 635,000 ounces of gold. The assets of the company are the Fosterville mine in Australia and the Macassa mine, Holt mine and Taylor mine in Ontario.
The assets base is underpinned by a balance sheet with financial strength GuruFocus rates 8 out of a total of 10.
Disclosure: I have no positions in any security mentioned in this article.
