Kirkland Lake Gold Ltd (TSX: KL) is a gold producer with assets in Canada and Australia. The Company conducts extensive exploration activities on its land holdings in Canada and Australia. The current exploration programs are focused on extending known zones of mineralization and testing for new discoveries in order to increase the level of Mineral Resources and Mineral Reserves in support of future organic growth. Kirkland Lake Gold is focused on delivering superior value for its shareholders and maintaining a position within the mining industry as a sustainable, growing low-cost gold producer. Over the last two years, the Company has achieved both significant production growth and increased levels of profitability and cash flow.

Investment Rationale

• Significant Capital Returned to Shareholders: Kirkland has consistently returned capital to shareholders. In the financial year 2020, a total of USD 848.3 million returned to shareholders in 2020 through share repurchases and dividends, representing USD 3.16 per share outstanding and USD 619 per ounce of FY 2020 production. A total of USD 732.4 million (CAD 974.6 million) of cash was used to repurchase 18,925,900 shares during the year through the Company’s normal course issuer bid (“NCIB”). With additional repurchases of 1,074,100 shares during the first week of January 2021, for USD 46.3 million (CAD 58.8 million), the Company has now achieved its goal of repurchasing 20.0 million shares over a 12 to 24- month period, which was announced in February 2020 following the completion of the Detour Gold acquisition. Dividend payments in FY 2020 totaled USD 115.9 million. The Company increased the quarterly dividend twice in 2020, doubling it to USD 0.125 per share effective Q1 2020 payment, with an additional 50% increase, to USD 0.1875 per share, introduced effective Q4 2020 payment, which was paid on January 14, 2021.

Source: Company Presentation

• High Quality Cornerstone Asset- Macassa: Macassa is a high-grade underground mine located in Ontario, Canada, with a high-grade mineral reserve base. Reserves & Resource estimates as at 31st December 2020 includes; Mineral Reserves of 2.3M ozs @ 20.1 g/t, Near Surface: 0.1M ozs @ 8.7 g/t, M&I Mineral Resources of 0.7M ozs @ 13.3 g/t, and Inferred Mineral Resources of 0.7M ozs @ 17.0 g/t. Moreover, Macassa is one of the lowest GHG emitters in the world and a world leader in the use of battery-powered equipment. Further, Sinking new #4 Shaft, which is targeted to complete by late 2022, is expected to grow gold production to over 400 koz per year at lower unit costs by 2023. Also, significant exploration success being achieved from this plant. However, Macassa production was 183,037 ounces in FY 2020 compared to 241,297 ounces in FY 2019. Production during the year was impacted by reduced operations due to COVID-19; however, it returned to normal workforce level by the end of Q2 2020.

 Macassa -A modern mine with exceptional upside. Source: Company Presentation

• Fosterville Achieved Record Production with Higher Profitability: Fosterville Mine achieved record production of 640,467 ounces in FY 2020, exceeding the mine’s production guidance for the year of 590,000 – 610,000 ounces by a significant margin. Contributing to the outperformance compared to guidance was higher than expected production in Q4 2020, largely due to higher-than-expected throughput levels and grade outperformance in a number of production areas. Further, Low-cost operations – Highly leveraged to continued exploration success. However, the company is reducing production to increase the sustainability of operations while exploration continues.

Source: Company Presentation

• Kirkland’s Quality Assets – Poised for Value Creation: The group’s Macassa, Detour Lake, Fosterville – are highly profitable strategic assets, with cash flow generating assets with growth. Further, these cornerstone assets delivering Strong earnings and cash flow performance. Also, the group has strong financial strength with substantial liquidity and no debt. Further, the company is committed to returning capital to the shareholders. Also, Detour Lake was the right acquisition at the right time.

• Generating Industry Leading ROCE and ROE: The strong business model with a sound balance sheet and availability of free cash flow has help Kirkland to develop a competitive advantage against its rivals. The group’s low-cost operations and prudent project selection have helped Kirkland to report industry-leading ROCE and ROE. The group’s reported ROCE stood at 18.1% against the industry median of 15.1%, and reported ROE in the same period stood at 22.8% against the industry median of 17.7%, respectively. This implies that the group is generating a significantly higher return on capital deployed and also generating higher returns for its shareholders.

Source: Kalkine Group, Refinitiv (Thomson Reuters)

• Free Cash Flow Yield of 9.4% Implies Greater Margin of Safety: Free cash flow yield is a valuable metric, especially from an investor standpoint. It acts as an indicator of the financial health of the company and indicates how capable a company can repay all of its obligations. In essence, it is a solid indicator of how financially stable a company is. Kirkland’s free cash flow yield is approximately 6.4 times of the Canada 10-year Government Bond Yield of 1.5%. This implies a greater margin of safety for the investors, despite the fact that yields have soared on Government bond recently.

• Risk Associated to Investment: The price of gold is a significant external factor affecting the profitability and cash flow of the company, and therefore, the financial performance of the company is expected to be closely linked to the price of gold. The price of gold is subject to volatile fluctuations over short periods of time and can be affected by numerous macroeconomic conditions, including supply and demand factors, the value of the US dollar, interest rates, and global economic and political issues.

Financial Highlights: FY20

Source: Company Presentation

• Gold Production for FY 2020 was a record 1,369,652 ounces, a 41% increase from FY 2019.
• The increase in production resulted from the contribution of 516,757 ounces of production from Detour Lake and record production at Fosterville of 640,467 ounces versus 619,366 ounces in 2019.
• Production costs for FY 2020 totalled USD 587.3 million versus USD 281.0 million for FY 2019. The increase from the prior year largely reflected the inclusion of USD 356.1 million of production costs from Detour Lake for the 11 months ended December 31, 2020, partially offset by reduced production costs at Holt Complex.
• AISC per ounce sold averaged USD 800 for FY20 compared to USD 564 for FY19. Excluding the impact of Detour Lake, where AISC per ounce sold averaged USD 1,171 in FY20 averaged $566, largely unchanged from the comparable FY19 level as the favourable impact of suspending operations at Holt Complex more than offset higher AISC per ounce sold at Fosterville and Macassa.
• Revenue in FY20 totalled USD 2,460.1 million, a 78% increase from $1,380.0 million in FY 2019. Of the growth in revenue, USD 575 million related to a 42% increase in gold sales, to 1,388,944 ounces, while USD 509 million resulted from a USD 367 or 26% improvement in the average realized gold price, to USD 1,772 per ounce.
• Cash flow in FY 2020 included net cash provided by operating activities for FY 2020 totalled USD 1,315.8 million with free cash flow totaling USD 733.1 million. Both net cash provided by operating activities and free cash flow for FY 2020 were impacted by USD 60.5 million of transaction and restructuring costs mainly related to the Detour Gold acquisition in Q1 2020 and a USD 132.6 million tax payment made in Australia as the final tax instalment for the 2019 tax year.
• Net earnings for FY 2020 totalled USD 787.7 million (USD 2.91 per basic share), an increase of USD 227.6 million or 41% from USD 560.1 million (USD 2.67 per basic share) in FY 2019. The increase in net earnings compared to FY 2019 mainly reflected the 78% increase in revenue year over year, which more than offset the impact of higher operating costs, as well as increase to care and maintenance and corporate G&A expenses.
• Adjusted net earnings for FY20 totalled USD 922.9 million (USD 3.41 per share), an increase of USD 346.5 million or 60% from USD 576.4 million (USD 2.74 per share) for the same period in 2019. The difference between net earnings and adjusted net earnings for FY20 related mainly to the exclusion from adjusted net earnings of foreign exchange losses, transaction costs, the USD 32.6 million increase in environmental remediation provisions, costs related to the Company’s COVID-19 response, as well as restructuring and severance costs resulting from the suspension of operations in the Northern Territory and at the Holt Complex.

Q4FY20 Highlights

Source: Company Filing

FY21E Full-Year Guidance

Source: Company Presentation

Top-10 Shareholders:

Top-10 shareholders in the company held around 29.6% stake in the company. Van Eck Associates Corporation, and BlackRock Investment Management (UK) Ltd. are among the largest shareholder in the company and carrying an outstanding position 7.7% and 4.47%, respectively. The institutional ownership in “Kirkland Lake” stood at 62.4%, and ownership of the strategic entities stood at 2.08%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: The company performed exceptionally well in the FY20, led by strong momentum in the underlying commodities it deals in. Gold prices began increasing in Q1 2020 and continued for several months, with the closing price for LBMA spot gold reaching a high of USD 2,067 per ounce on August 6, 2020, and ending the year at USD 1,888 per ounce. The company’s average realized gold price increased during the first three quarters of the year before declining slightly in Q4 2020.

The company’s gold production in FY 2021 is targeted at 1,300,000 – 1,400,000 ounces compared to re-issued FY 2020 production guidance of 1,350,000 – 1,400,000 ounces. Production in FY 2021 is expected to be led by Detour Lake, which is targeting 680,000 – 720,000 ounces of production compared to 516,757 ounces for 11 months in 2020. In addition to the impact of a full year of operations at Detour Lake in FY 2021, the increase in production in the coming year is expected to be driven by a higher average grade and increased mill throughput. Production is also expected to increase at Macassa in FY 2021, with guidance for the year of 220,000 – 255,000 ounces. However, Production at Fosterville is targeted to decline as the mine transitions to a lower-grade profile, with the impact of reduced grades to be only partially offset by higher tonnes processed. Production at Fosterville in FY 2021 is targeted at 400,000 – 425,000 ounces.

Operating cash costs per ounce sold are expected to average USD 450 – USD 475, which compares the re-issued FY 2020 guidance of USD 410 – USD 430 and FY 2020 operating cash costs of USD 404 per ounce sold. The expected increase from FY 2020 levels mainly reflects the impact of higher tonnes mined and lower grades at Fosterville, which is expected to more than offset improved operating cash costs per ounce sold at both Detour Lake and Macassa.

From the investor’s standpoint, the company is well placed to deliver a higher return on investment driven by strong competitive advantages, including a higher margin profile, a strong balance sheet with zero debt and substantial free cash flow available with the company.

Therefore, based on the above rationale and valuation, we suggest a “Buy” recommendation at the closing price of CAD 41.63 on March 24, 2021.

Daily Price Chart. Source: Refinitiv (Thomson Reuters)

 

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