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Buy Shares of Kirkland Lake Gold

The spread between the two-year and 10-year Treasury note yield curve inverted for the first time since 2007 on Tuesday, pushing gold prices and shares of several mining stocks higher as the inversion signals a potential recession.

Gold and its publicly traded producers are safe-haven assets as they provide a shield against economic downturns.

We will likely see more upside in the share price of gold mining stocks in the coming weeks.

Therefore, in order to make the best out of this gold bull market, it is wise to increase positions in operators that are outperforming the industry.

Canadian miner Kirkland Lake Gold Ltd. (NYSE:KL) is performing better than most of its competitors.

As illustrated in the following charts, Kirkland Lake Gold topped the VanEck Vectors Gold Miners (GDX) exchange-traded fund by 39%, gaining 74% so far this year, and by an impressive 84%, recording an astonishing 141% growth over the past year through Aug. 14.

In addition to rising commodity prices, two other factors had positive impacts on the stock:

  • First, 31.3% growth in total funds allocated to the payment of dividends to $12.7 million.
  • Second, a boost in total net cash used for the repurchase of common stock to $12.8 million.

The increase in cash used for financing activities was the result of strong growth in cash flows thanks to improved operating performance at Fosterville in Australia and Macassa in Canada, where higher-than-expected grades allowed the miner to surpass target production levels.

Operations delivered record gold production at Macassa in the first quarter of year and at Fosterville in the second quarter.

Fosterville's outstanding performance made it possible for Kirkland to post a 70% year-over-year increase in earnings per share to 49 cents on $281.3 million in revenue, surpassing projections by $3.27 million. Revenue grew 31% from the prior-year quarter.

During the second quarter, the miner produced 214,593 ounces of gold, up 30% year over year but below record quarterly production of 231,879 ounces in the previous quarter. The all-in sustaining cost improved to $638 per ounce of metal sold from $757 per ounce.

Kirkland Lake Gold is well positioned to deliver robust cash flows also in the second half of the year as Fosterville and Macassa will continue to grow production. The Holt mine in Ontario should also contribute to the growth with its expected higher levels of throughput to deliver at the mill in the third and fourth quarters.

Therefore, the company is set to achieve its full 2019 consolidated production guidance of 950,000 to 1,000,000 ounces at an AISC of $520 to $560 per ounce sold.

The balance sheet of Kirkland is solid. It had $469.4 million in cash on hand and short-term securities and $40.8 million in gold inventories as of June 30. Property, plant and equipment were valued $1.32 billion and total debt amounted to only $19.15 million. The equity was worth $1.47 billion.

GuruFocus assigned a very high financial strength rating of 8.6 out of 10.

The balance sheet provides Kirkland Lake Gold with ample financial means to proceed with the Macassa phase one project and with the construction of new plants for water treatment and underground ventilation at Fosterville.

For these reasons, I agree with sell-side analysts who recommend buying shares of Kirkland Lake Gold, targeting a share price of $48 to hit within 52 weeks.

The target implies 5.7% upside from Wednesday's closing price of $45.4. The stock has a market capitalization of $9.62 billion and the 52-week range is $17.26 to $49.13.

The 14-day relative strength index of 53 suggests the stock is neither overbought nor oversold.

The price-book ratio is 6.06 versus the industry median of 1.47 and the enterprise value-Ebitda ratio is 12.32 versus the industry median of 8.35.

These ratios indicate the stock is not at its cheapest.

Disclosure: I have no positions in any securities mentioned.

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This article first appeared on GuruFocus.