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Alberto Abaterusso
Alberto Abaterusso
Articles (1179) 

Kirkland Lake Gold Reaches Record 3rd-Quarter Production

But the stock is not a buy

October 10, 2018 | About:

With a share price of $18.80, Kirkland Lake Gold Ltd. (NYSE:KL) was flat on Tuesday despite the release of strong results on gold production for the third quarter of 2018. The share price jumped only 0.21% from the previous close.

Third quarter results tell that the use of a second gravity circuit and the processing of high-grade gold ore from the first Swan Zone stope at the Fosterville mine in Australia enabled Kirkland Lake Gold to achieve record quarterly production of the precious metal. Also, thanks to the support of high-performing Canadian operations, Kirkland Lake Gold produced 180,155 ounces of gold, reflecting 30% growth compared to the prior year quarter.

In Canada, Kirkland Lake Gold produces the metal from the Macassa, Holt and Taylor mines.

The results are very important for investors of Kirkland Lake Gold. They were so strong that the mining company is now well-positioned to exceed 635,000 ounces of gold produced. If accomplished, such production will positively influence revenues, cash flow and net income of the company for full fiscal 2018. The price of gold will also determine the magnitude of those issues of financial statements.

The company cannot influence the price of the commodity. But on the side of operations, the Fosterville and Macassa assets will continue contributing with a higher-grade ore to process. The Holt mine should also continue benefiting from a combination of higher throughput and better average grades.

The company now has a better control over the gold grade at Macassa. This piece of information is crucial to the economics of Kirkland Lake Gold. In fact, since the gold grade influences operating performance, the company can now predict costs with a higher grade of reliability. That increases the efficiency of how the company manages and allocates the financial resources on its mineral assets.

Regarding the Taylor mine, investors can only hope that a higher throughput will continue to sustain production, offsetting declining gold grades and recoveries. However, Fosterville, Macassa and Holt will be enough for the company to hit the production target for full fiscal 2018, should Taylor not be supportive.

To reach the lower end of the production guidance for the Taylor mine, workers need to make about 21,000 ounces of gold in the last quarter of 2018. This means that either the mill facility of the Taylor mine should be supplied with tonnages that have never seen before or that the average gold grade of the ore to process should be in line with two years ago. The gold recovery rate too should be much higher than the average of 94.6% for the first nine months of 2018.

Therefore, I am skeptical that Taylor will meet production guidance of 60,000 to 70,000 ounces for full fiscal 2018. But if that happens, it will be an amazing catalyst. In such a scenario, the company will have made something like 645,000 ounces of total gold produced for full fiscal 2018. The chances that it happens are extremely low.

The share price at market close on Oct. 9 was still more than 60% off the 52-week low of $11.52 per share. The market capitalization is about $3.94 billion. The stock is not cheap. At such valuation, the Taylor mine is not worth the risk, even though the stock is still trading below the 100- and 50-day simple moving average lines.

The price-book ratio is 3.27 compared to an industry median of 1.74.

As a result, I would wait for a meaningful weakness before adding to any positions. The odds of a chance to acquire the stock at a more compelling price in the coming weeks is high. Until 2019, gold is predicted to trade about 6.5-7% lower than the cumulative average of $1,279.74 per troy ounce. That will push the share price down.

After that, I would increase Kirkland Lake Gold and take advantage of a rise in the tonnages, which is expected to occur at the Fosterville mine in the second part of 2019.

The company has also informed the market that the liquidity available in cash on hand and short-term securities is about $275 million as of the third quarter of 2018. It will issue operating and financial figures for the third trimester of 2018 on Oct. 30.

Disclosure: I have no positions in any security mentioned in this article.

About the author:

Alberto Abaterusso
If somebody asks what being a Value Investor means, Alberto Abaterusso would answer: “the Value Investor is not the possessor of a security that represents the company, but he is the owner of that company. As an owner of the company the Value Investor is actively involved in the dynamics of that company and his first aim is how to have sales progressively growing.”

Alberto Abaterusso would add: “probably the Value Investor is one of the least patient persons in the world concerning sales.”

Alberto Abaterusso is a freelance writer based in The Netherlands. He primarily writes about gold, silver and precious metals mining stocks. His articles have also been widely linked by popular sites, including MarketWatch, Financial Times, 24hGold, Investopedia, Financial.org, CNBS, MSN Money, Zachs, Reuters and others. Alberto holds an MBA from Università degli Studi di Bari (Italy), Aldo Moro.

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