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

• Industry Leading Margin Profile: The company reported industry leading margin profile in the second quarter of fiscal 2021, with Gross margin stood at 55.7% vs 49.2% industry median, EBITDA margin 69.9% vs 40.10% industry median, Operating margin of 50.9% vs Industry median of 25.80%, and Net Margin of 36.8% vs 15.7% of the industry median.

• Detour Lake Reported Strong Performance: Detour Lake achieved record quarterly production in Q2 2021 of 165,880 ounces based on processing 5,881,953 tonnes at an average grade of 0.96 g/t and average recoveries of 91.5%. The 165,880 ounces of production was 26% higher than the 131,992 ounces produced in Q2 2020 and increased 13% from the previous quarter. The increase in production mainly reflected a significant improvement in the average grade, as the mine sequenced into higher grade areas as part of the Phase 2 mining plan during Q2 2021, as well as an increase in tonnes processed, with first quarter throughput typically the lowest of the year due to seasonal factors (record first quarter throughput achieved in Q1 2021)
• Record Net Earning in Q2FY21: The company reported record net earnings in second quarter of the fiscal 2021, with net earnings soared by 67% on a YoY basis to USD 224.2 million on the back of higher revenue and the favourable impact of other income.
• Trading above the Rising Trend Line: On the daily price chart, KL shares are gaining momentum and its shares are trading above the rising trend line, which will act as near-term support for the stock. Moreover, the 14-day RSI is hovering in a neutral zone with strong bullish bias.

Technical Analysis (as on September 22, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Long-term Technical Trend is Bullish: On the monthly price chart, KL shares are gaining momentum, and now the current month Candle is moving above the Middle Bollinger Band© and 14-Period RSI also improving with a bullish bias. These indicators suggest that there may be an upside from the current trading levels.

Monthly Price Chart (as on September 22, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Hovering Above the Crucial Support Levels: On the daily price chart, KL shares are hovering well above the crucial short-term as well as long-term support levels of 50-day and 200-day SMAs, which considered to be a bullish indication in the stock. Further, the Moving Average Convergence Divergence (MACD) is rising, with the spread between short-length 12-day EMA and long-length 26-day EMA is rising, a bullish indicator. Also, the MACD oscillator is hovering above the 9-day SMA signal line, which is another bullish indicator.

Technical Price Chart (Daily) (as on September 22, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Positive Gold Outlook: Given an extremely stretched valuation in the equity markets and recent free fall in the crypto market, gold would continue to attract investors looking for a safe haven to hedge against any unprecedented market volatility. Therefore, we believe gold is likely to remain in the limelight of the investor’s community throughout 2021.

• 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: Q2FY21

Source: Company Filing

• During the quarter under consideration the company reported revenue of USD 662.73 million compared to USD 580.98 million in the previous corresponding period. Contributing to the change in revenue from Q2 2020 was USD 42 million favourable impact from rate factors, mainly reflecting a 6% increase in the average realized gold price to USD 1,814 per ounce in Q2 2021 from USD 1,716 per ounce for the same period in 2020.
• The company reported strong production growth in the quarter under consideration with 379,195 oz of gold, up 15% from Q2FY20.
• The company reported an EBITDA of USD 451.3 million, 46% higher than the same period of the corresponding financial year and 32% increase from the previous quarter.
• Net earnings in the second quarter of FY21 stood at USD 244.2 million, a USD 94.0 million or 63% increase from USD 150.2 million the corresponding quarter of the previous financial year and a 51% increase from USD 161.2 million the previous quarter. Compared to Q2FY20, the increase in net earnings was driven by higher revenue and the favourable impact of other income of USD 2.0 million in Q2FY21.
• Adjusted net earnings in Q2 2021 totalled USD 246.9 million (USD 0.92 per share), like net earnings for the quarter. Adjusted net earnings in Q2 2021 increased 13% from USD 219.3 million (USD 0.79 per share) in Q2 2020 and were 47% higher than USD 167.8 million (USD 0.63 per share) the previous quarter.
• The Company’s cash balance on June 30, 2021, totalled USD 858.4 million, which compared to cash of USD 792.2 million on March 31, 2021.
• AISC per ounce sold stood at USD 780 compared to USD 751 in the Q2FY20 and USD 846 in Q1FY21.
• Net cash provided by operating activities totalled USD 330.6 million, an increase of 49% from USD 222.2 million in Q2FY20 and 59% higher than USD 208.2 million the previous quarter. The increase in net cash provided by operating activities from Q2 2020 mainly resulted from strong earnings growth.
• Free cash flow totalled USD 131.2 million in Q2FY21, a 39% increase from  USD 94.1 million in Q2FY20 and more than triple the  USD 42.7 million of free cash flow in Q1 2021.

Top-10 Shareholders

Top-10 shareholders in the company together holds approximately 31.82% stake, with Van Eck Associates Corporation and T. Rowe Price Associates, Inc. are the major shareholders in the company with an outstanding position of 6.46% and 4.43%, respectively.

Valuation Methodology (Illustrative): EV to Sales 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 is built upon solid fundamentals and commanding the industry leading margin profile, which reflects the robustness of the business model and competitive advantage of the company against its peers.

The company has a strong balance sheet with no debt, a solid liquidity position and availability of free cash flow to fund its growth. The robust financial health of the company gives KL a strong competitive advantage over the competition.

Moreover, regardless of the recent volatility in the gold prices, still, current gold prices are quite lucrative for the miners, and the solid run-in yellow metal prices since March 2020 have actually helped these miners to generate a lot of free cash flow, deleverage balance sheet and strengthen the balance sheet. KL current financial position is well placed to capitalize on future opportunities.

From the technical standpoint, KL stock is carrying a potential for an upside move from the current trading levels, as the stock hovering well above the crucial short-term as long-term support levels, with leading momentum indicator the 14-day RSI hovering in the neutral zone with a bullish bias.

Hence, based on the above rationale and valuation, we recommend a “Buy” rating on the stock at the closing price of CAD 54.12 on September 22, 2021.

 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

1-Year Price Chart (as on September 22, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on September 23, 2021, price as well.

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Disclaimer

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