Company Overview: Kirkland Lake Gold Ltd. (ASX: KLA) is a gold production company operating in Canada and Australia. The company runs three high-quality operations, including the Macassa Mine and Detour Lake Mine, both located in Northern Ontario, and the Fosterville Mine located in the state of Victoria, Australia. Notably, the Macassa Mine is located in an area with well-developed infrastructure and it is considered as one of the highest gold grade mines in the world. The Fosterville Mine is a high-grade, low-cost underground gold mine, located in an area with well-developed infrastructure and is accessible by paved roads. KLA is listed on three stock exchanges – Toronto Stock Exchange, New York Stock Exchange, and Australian Securities Exchange.

KLA Details

Financial Growth Supported by Decent Production Performance: Kirkland Lake Gold Ltd. (ASX: KLA) is a senior gold producer that owns and operates 3 high-quality gold mines across two prolific mining jurisdictions: Canada and Australia. In Northern Ontario, the company operates the Macassa Mine and Detour Lake Mine. KLA also operates the Fosterville Mine, located in the state of Victoria, Australia. The company’s strategy is focused on increasing its shareholders’ value by growing low-cost production at its existing assets, returning capital to shareholders, and pursuing new growth opportunities. From 2016 to 2020, the company’s revenue and net profit have grown at a CAGR of ~56.83% and ~107.98%, respectively, supported by the improving production performance.

Five Years Top & Bottom-Line Performance (Source: Refinitiv, Thomson Reuters)

Looking ahead, the company is focused on generating returns for shareholders by achieving operational excellence, effectively allocating capital, and by increasing the profitability and value of its operations. KLA is targeting significant organic growth in production and mine life through the completion of the Macassa #4 Shaft project and by continued exploration at each of its three cornerstone assets, Macassa, Detour Lake and Fosterville. KLA continues to focus on the aggressive exploration of both near-term and longer-term opportunities on its district-scale land positions in Canada and Australia.

Decent Production Performance in FY20: During the year ended 31 December 2020, the company produced 1,369,652 ounces of gold, up 41% on FY19, in line with full-year 2020 guidance of 1,350,000 – 1,400,000 ounces. In the fourth quarter alone, the company produced 369,434 ounces of gold, up 32% increase on the previous corresponding period (pcp). During the year, the Fosterville Mine achieved record production of 640,467 ounces, exceeding the mine’s FY20 production guidance of 590,000 – 610,000 ounces by a significant margin, mainly due to higher-than-expected throughput levels and grade outperformance in a number of production areas. On 31 January 2020, the company completed the acquisition of Detour Gold Corporation, which added a third cornerstone asset, i.e., Detour Lake Mine, to the company’s portfolio. During the 11 months ended December 31, 2020, Detour Lake produced 516,757 ounces of gold and generated free cash flow of US$308.0 million. The gold production from Macassa stood at 183,037 ounces in FY 2020. AISC per ounce sold averaged US$800 for FY20 compared to US$564 for FY19.

FY20 Production and Costs (Source: Company Reports)

Decent Rise in FY20 Revenue and Net Earnings:  During FY20, the company sold 1,388,944 ounces of gold, generating a total revenue of US$2.46 million, up by 78.27% on the previous year. The operating cash costs per ounce sold averaged at US$404 in FY20 compared to US$284 in FY19. Free cash flow in FY20 stood at US$733.1 million, up from US$463.0 million in FY19. The company reported net earnings of US$787.7 million in FY20, up by 41% from FY19, mainly due to a rise in revenue, offset by the impact of higher operating costs, as well as increases to care and maintenance and corporate G&A expenses. During the year, KLA returned US$848.3 million to shareholders through share repurchases and dividend payments. As at 31 December 2020, the company had cash of US$847.6 million, up 20% from US$707.2 million at December 31, 2019.

FY20 Results (Source: Company Reports)

Key Metrics: Over the past five years (2016 to 2020), the company has witnessed decent improvement in its profitability metrics, supported by the growth in its production. EBITDA margin and Gross Margin for FY20 stood at 68.9% and 57.1%, respectively. ROE for FY20 stood at 22.8%. Current ratio for FY20 stood at 1.95x in FY20, slightly higher than 1.91x in FY19.

Past 5-year Financial Performance for Year Ending 31 December, Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Quarterly Dividend Announced: For Q1FY21, the company has recently declared a dividend of US$0.1875 per common share payable on April 14, 2021. The dividend has a record date of 31 March 2021.

High-Grade Intersections at Detour Lake: On 15 March 2021, the company released the results from 30 holes (21,928 m) of drilling at the Detour Lake property. The results from the drilling in the central portion of the Saddle Zone, which included nine holes (7,672 m), confirmed the presence of a broad corridor of mineralization extending between the West and Main pits (a distance of over 800m). Moreover, the results from the drilling below the west pit, which included five holes (4,059 m) confirmed the continuation of mineralization through the west portion of the Saddle Zone and into the area under the West Pit.

Key Risks: The company is exposed to the risks associated with variability of gold prices, fluctuating currency rates and increases or decreases in costs of materials and consumables. The company is also exposed to foreign currency exchange risk.

Outlook: For FY21, the company expects its total gold production to be in the range of 1,300,000 – 1,400,000 ounces. From Detour Lake, KLA expects production of 680,000 – 720,000 ounces in FY21, up from the production level in FY20, driven by a higher average grade and increased mill throughput. This higher level of production is targeted to be maintained for the next few years and eventually increase further to around 800,000 ounces in 2025 based on the existing mine plan. From Macassa, KLA expects production to be between 220,000 – 255,000 ounces. The production at Macassa is expected to 400,000 ounces in 2023 following the completion of the #4 Shaft. Production at Fosterville is targeted at 400,000 – 425,000 ounces in FY21. The company’s exploration expenditures in 2021 are expected to be in the range of US$170 – US$190 million. Corporate General and Administrative expenses in FY21 are estimated at US$50 – US$55 million.

Three-Year Production Guidance (Source: Company Reports)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

** 1USD = ~1.29 AUD

Stock Recommendation: Over the last three months, the stock has corrected by 18.17% and is trading towards its 52-weeks low price of A$42.2, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~A$38.201 and a resistance of ~A$51.944. We have valued the stock using the price to earnings multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight premium to its peer average, considering the improved gold price environment, and modest outlook. We have taken peers like Resolute Mining Ltd (ASX: RSG), Regis Resources Ltd (ASX: RRL), Dacian Gold Ltd (ASX: DCN). Considering the company’s decent operational and financial performance in FY20, high-grade intersections at Detour Lake, FY21 production guidance, current trading level and valuation, we give a “Buy” recommendation on the stock at the closing price of A$44.81, down by 2.162% as on 23 March 2021.

KLA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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