Company name: Common Stock: Kirkland Lake Gold (KL)
Current Market Price: $41.88
Market Capitalization: $8.77 Billion
Kirkland Lake Gold – Summary of the Company
Kirkland Lake Gold is a gold mining company headquartered in Toronto, Canada. The company has 5 wholly owned and producing gold mines, as well as several exploration stage projects in Canada and Australia. The company has 2 anchor mines, Macassa mine in Ontario and the Fosterville mine in Australia. Kirkland Lake Gold was founded in 1988.
Revenue and Cost Analysis
Kirkland Lake produced 974,615 ounces of gold in 2019 which equates to revenue of $1.37 billion. This was a substantial increase in revenue from $915 million in 2018.
The company estimates it has an “all in” cost of $564 per ounce. Due to their low production cost, the company can operate at a significant margin. Net income in 2019 was $560 million, more than double 2018 net income of $273 million.
Cash Flow from operating activities was $919 million in 2019, a significant increase from $548 million in 2018.
In January of 2020 Kirkland Lake acquired a 100% interest in the Detour mine, significantly increasing its production capacity. The acquisition was made with a combination of existing and newly issued common shares.
Royalty and Streaming Agreements
Kirkland Lake Gold had a total royalty expense of $36.4 million in 2019, up from $26.4 million in 2018.
The company has several royalty obligations related to its Fosterville mine, including a 2.5% gold royalty, a 2% net smelter royalty, and a 2.75% royalty to the Australian government.
Balance Sheet Analysis
The company has a very strong balance sheet. It had high levels of cash, $707 million at year end 2019, and low liability levels. Total balance sheet liabilities were $740 million at the end of 2019.
Debt Analysis
The company has no debt outstanding and a small lease obligation. Financing costs are very low.
Kirkland Lake Gold Stock – Share Dynamics and Capital Structure
As of March 2020, The company had 277 million shares of common stock outstanding. The company has a very low number of options and share based compensation outstanding.
Given that the company has no senior debt, no preferred shares, and a negligible number of dilutive instruments outstanding, I believe their capital structure is favorable to common stock holders.
Dividends
Kirkland Lake Gold stock paid a dividend of $.125 per share in March 2020. The company has been consistently paying dividends since 2017
Management structure – Skin in the game
Over the past 12-18 months Kirkland Lake Gold insiders have been net sellers of a significant number of shares. However, given the large portion of the outstanding shares owned by insiders, 6%-7%, long-term incentives appear to be aligned with common stock holders
Kirkland Lake Gold Stock – 3 Metrics to Consider
Price to Book Ratio
Price of common stock/Book Value per share
$41.88/$6.55= 6.4
The stock has a book value per share of $6.55. Based on the current market price of the stock, this implies a price to book ratio of 6.4. This means that Kirkland Lake Gold Stock is currently trading at a significant premium to the book value of its assets.
Cash Coverage Ratio
Cash/Total Liabilities
$707 million/$740 million = .95
A cash coverage ratio of .95 indicates very strong balance sheet liquidity. The company could almost pay back all its outstanding liabilities out of its cash account.
Dividend Payout Ratio
Dividends/Net Income
$29.4 million/$560 million=5%
A dividend payout ratio of 5% means the company is paying out 5% of its net income to its shareholders and retaining 95% of net income This is not necessarily a bad sign, so long as the remaining 95% is put to work effectively on behalf of shareholders.
Gold Market – Economic Factors and Competitive Landscape
Gold mining is a highly competitive, capital intensive business. The company will need to compete fiercely for both new projects and capital. However, given the current economic environment of global money printing and zero or negative interest rates, it would appear gold companies are poised to benefit from a strong economic tailwind.
Kirkland Lake Gold Stock – Summary and Conclusions
Kirkland Lake Gold is a strong mining stock. The company has a well-diversified asset portfolio in stable jurisdictions. In addition, the company’s 2 anchor assets have a very low production cost, resulting is strong operating and profit margins.
The stock has a non-dilutive capital structure which is favorable for common shareholders. Management has proved willing to return capital to shareholders via dividend payments and despite some recent insider selling, long term insider incentives appear to be aligned with common stock holders due to heavy inside ownership.
The company has very strong liquidity and no debt, leaving it well positioned to capitalize on future opportunities. I have no doubt Kirkland Lake gold will continue to perform well for the foreseeable future. However, at current share prices, the stock is by no means undervalued. Despite being fully valued, the company’s strong balance sheet and dividend mean Kirkland Lake Gold stock should perform just fine within a well-diversified portfolio of gold stocks.
Disclaimer
This is not investment advice. Nothing in this analysis should be construed as a recommendation to buy, sell, or otherwise take action related to the security discussed. If I own a position in the security discussed, I will clearly state it.
This is not intended to be a comprehensive analysis and you should not make an investment decision based solely on the information in this analysis. I hope this serves as a useful starting point for a more comprehensive analysis, and hopefully draws attention to aspects of the company that were overlooked or merit further investigation. This is by no means intended to be a complete analysis. Again, this is not investment advice, do your own research.
