Kirkland Lake Gold Releases Production Targets for Next 3 Years
- By Alberto Abaterusso
Kirkland Lake Gold Ltd. (KL) jumped 2.27% to $24.34 on Tuesday after posting production targets for 2019, 2020 and 2021.
The Canadian miner is targeting substantial production growth to 740,000 to 800,000 ounces in full fiscal 2019, up from 655,000 to 670,000 ounces forecasted for full fiscal 2018. The Fosterville mine in Australia and the Macassa mine in Canada will drive the improvement in production.
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The intrinsic value of KL
The miner has produced the precious metal from higher ore grades for some time at Fosterville, and especially at Macassa, and will continue to do so over the coming years.
The production of gold from higher ore grades also caused the mining company to raise its guidance on all-in sustaining costs to between $630 and $680 in 2019 from the forecasted $735 to $760 range for full fiscal 2018 because the ore grade influences the efficiency of operations. The higher the gold grade is, the lower the operating costs the miner sustains. Increased output at Fosterville and throughput at Macassa will also reduce unit costs as fixed costs will be spread over a larger base.
Kirkland Lake Gold now has also more control over the gold grade at Macassa. This means the miner can now predict costs with a higher grade of reliability, positively impacting the economics of the company, which have already impressed the market over the last 12 months of operations through the third quarter.
The company has an earnings before interest, taxes, depreciation and amortization margin of 52% versus an industry median of 23%. GuruFocus has also assigned a high profitability and growth rating of 8 out of 10. The increased predictive ability on costs will also give the Toronto-based miner more flexibility when deciding how much financial resources will be allocated on exploration activities and capital growth. For 2019, Kirkland Lake has already budgeted $100 million to $120 million for exploration expenditures and $155 million to $165 million for growth capital expenditures.
The Holt complex of mines in Canada will also impact growth. T he miner, however, depends on the advancement of growth projects at Fosterville for the accomplishment of 1 million ounces of gold production for 2021. Of course, the miner also plans to keep operating costs low so margins will increase and free cash flow will become more effective for investment needs.
Hence, Kirkland Lake Gold's business is going to become less exposed to the volatility of the gold market. The company will be able to set aside a higher portion of operating cash flow for dividend payments as well. For the last 52 weeks through Sept.30, the company has produced levered free cash flow of $175.33 million, or 41% of total operating cash flow of $431.33 million, and paid $14.85 million in dividends, or about 7 cents per share.
The company is distributing a quarterly cash dividend of 4 cents per share, for a forward dividend yield of about 0.49% versus an industry median of 3.36%. The company announced the quarterly dividend on Tuesday, reflecting a 33.3% increase from the previous distribution. Kirkland Lake Gold will pay the dividend on Jan. 11 to shareholders of record as of Dec.31.
The dividend already increased 50% this year, making the share price of Kirkland Lake Gold climb 9.2% to $19.57 in a matter of days after the announcement of the dividend hike on May 2. There are analysts who see gold prices heading much higher in 2019 and, together with production growth and better unit costs, should determine additional dividend hikes with positive consequences for the share price. The hike will likely be more robust as growth capital spending will start to lessen in 2020, according to the company's current growth plans.
The balance sheet of Kirkland Lake Gold has $257.2 million in cash and cash equivalents, total debt of $27 million and an interest coverage ratio of 101.17. GuruFocus has assigned a high financial strength rating of 8 out of 10.
Between 2019 and 2021, the company will hit another gold production growth target of 850,000 to 910,000 ounces in 2020, with the Fosterville mine in Australia leading the way.
Kirkland Lake Gold's closing share price of $24.3 on Tuesday was the result of a 71% increase for the 52 weeks through Dec. 11 and is abundantly above the 50-, 100- and 200-day simple moving average lines.
The price-book ratio is 4.34 versus an industry median of 1.74 and the EV-to-EBITDA ratio is 11.13 versus an industry median of 9.3.
The stock is not trading cheaply; the 14-day Relative Strength Indicator of 83.44 suggests the stock may start to downtrend soon as it has exceeded overbought levels.
Taking into consideration all the production, costs, margins and cash flow catalysts highlighted here, it wouldn't be a bad idea to wait for a significant weakness before adding Kirkland Lake Gold to a portfolio
Consensus is for a stock that will outperform within the next 52 weeks.
Disclosure: I have no positions in any securities mentioned in this article.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 4 Warning Signs with KL. Click here to check it out.
The intrinsic value of KL
