Kirkland Lake Gold (KL)

Investment Thesis: KL is trading at an unjustified discount to similar sized peers despite having best in class tier 1 assets in stable geographies.  The reason is i) KL is not well covered and only very recently jumped from junior to mid-tier status, ii) 3-part merger in 2016 making it difficult to assess run-rate production and cash flow capability, iii) deceivingly low reserve life.  In addition, KL just announced they high graded their asset base by putting one higher cost low volume mine on “care and maintenance” and closing a second high cost mine allowing them to focus all of their energies and resources on their lower cost tier 1 mines which means they will likely come in lower on costs than last year and much lower than guidance.

This is not a difficult thesis though someone will likely want to get into the nitty gritty of analyzing drill results and / or debating the merits of gold (…is it really an asset class?) –both debates I welcome as it will also deepen my own understanding.  But at the end of the day, this is a company 100% levered to the price of gold and is trading several turns cheap to peers despite having a clean balance sheet and excellent assets with improving trends in grade and reserves.

Valuation: Using Company guidance, despite management’s likely sandbagged numbers, KL trades at 5x EBITDA vs 9x for the peer set and $3,100 EV/oz vs $4,900 EV/oz for the peer set.  The Company below shows a cash flow comparison as well (7x vs 10x cash flow for the peers).  KL has no corporate debt, $85mm in converts due in 2017 and $234mm of cash.  I think the correct price today for the stock is $14-15/share based on current operations.  

Company Overview:  Kirkland Lake Gold (“KL”) is a new mid-tier, Canadian listed, gold producer currently with five wholly owned underground operating mines in Canada and Australia. The Company is targeting over 500,000 ounces of annual production with a production profile anchored by three operations, the Macassa Mine (“Macassa”), the Taylor Mine (“Taylor”) located in northeastern Ontario, Canada and the Fosterville Gold Mine (“Fosterville”) located in the state of Victoria, Australia.  KL also has two smaller gold operations: Holt Mine, also located in northeastern Ontario and the Cosmo Gold Mine (“Cosmo”) located in the Northern Territory, Australia. In addition, KL has a pipeline of growth projects within Australia, including the Maud Creek Gold Project in the Northern Territory and the Big Hill Gold Project in the state of Victoria.

Recent History: Kirkland Lake Gold acquired St. Andrews Goldfield in January 2016 which included the Taylor mine and Newmarket Gold in November 2016 which includes the Fosterville mine.  For a good history of Newmarket, read LA2NYC’s write-up on January 21, 2016.  The Company announced a $0.04/year dividend on its 4^th quarter 2016 earnings call on March 29, 2017.

Reserves:  As of March 29, 2017, the date of the most recent reserve report, overall P+P reserves increased 20.6% to 3,700,000 oz from 3,070,000 oz.  Reserves continue to improve as the Company is not only by improving grades but is investing excess cash flow to drill out additional zones.  

Upside Options: Management currently have a number of projects where additional capex could lead to organic growth. 

1.      Currently their Macassa mine only supports 50% throughput ad their mill – building a second mine shaft would double throughput

2.      Repurchase of royalty (repurchased 1% of Macassa royalty paid to Franco-Nevada in q4 ‘16, reduced 2.5 down to 1.5%)

3.      Maud Creek and Big Hill gold projects

4.      Additional high probability exploration capex at Macassa, Holloway and Taylor

Risks:

-Gold prices: the Company does not utilize any hedging programs to mitigate the effect of gold price movement.

-FX rates:  The Company does not currently have an fx hedging program in place.  Gold is sold throughout the world based principally on a United States dollar price, but most of the Company’s operating and capital expenses are incurred in Australian dollars and Canadian dollars.