Description

Going for a bit of relative bordeom, when contrasted with SPAC's, Bitcoin, TSLA, etc. P.M.'s have caught a bid, and as long as M2 grows at even a fraction of the recent rate it has been, gold should be a winner, and high quality miners even more so.

Kirkland Lake Gold (KL) engages in the acquisition, exploration, development, and operation of gold properties. The company’s principal properties include the Fosterville Mine located in the State of Victoria, Australia and the Macassa Mine situated in Kirkland Lake, Ontario, Canada. The company was formerly known as Newmarket Gold and changed its name to Kirkland Lake Gold in December 2016. The company is headquartered in Toronto, Canada.

Kirkland Lake Gold owns and operates four underground gold mines – three in Canada and one in Australia. Both countries are politically stable and historically mining friendly jurisdictions and both mines sit in regions with well-developed infrastructure. The Fosterville Mine is easily accessible by paved roads, making transportation easy. And the area around the Macassa Mine includes a provincial highway, a railway, and an airport. Tony Makuch is the company’s president and CEO, and is a professional engineer with more than thirty-five years of experience in the mining industry and is a well-respected and competent manager.

Kirkland Lake currently relies on two main assets, Fosterville and Macassa. The Fosterville mine in Australia came under Kirkland Lake’s control when the company merged with Newmarket Gold in 2016. The move roughly doubled Kirkland Lake’s overall size. This mine is the company’s crown jewel. Fosterville is the largest gold-producing mine in the state of Victoria. Most of Kirkland Lake’s previous rapid growth comes from this property. In 2015, the Fosterville mine only produced 123,000 ounces of gold. Last year though, the mine produced more than 600,000 ounces. Fosterville contains around 1.7 million ounces of proven and probable gold reserves with an incredible average grade of 23 grams per ton (g/t) of gold. To put that in perspective, the World Gold Council, a nonprofit organization focused on the gold industry, defines a high-quality underground mine as having a grade of 8 -10 g/t of gold.

Kirkland Lake’s other critical asset is the Macassa mine, located along the company’s namesake, Kirkland Lake in Ontario, Canada – roughly 360 miles north of Toronto. Kirkland Lake is part of the prolific Abitibi gold belt, a geological district that has produced more than one hundred mines and 170 million ounces of gold since mining started there more than a century ago. This mine was commissioned in 2002, but the deposit has been producing gold since 1933. Last year, Kirkland Lake produced more than 245,000 ounces of gold at Macassa. By 2021, the company anticipates a steady increase to about 250,000 ounces of gold annually. The Macassa mine has more than two million ounces of proven and probable gold reserves. Like Fosterville, the mine is very high quality with an average grade of 21 g/t of gold.

The investment thesis revolves around the optionality of Kirkland Lake’s third critical asset, acquired when the company purchased Detour Gold and its Detour Lake mine, located on the same Abitibi Gold Belt as Kirkland’s Macassa mine in Canada. The market did not like the transaction and the company’s stock dropped by more than twenty percent after the all-stock acquisition was announced on November 25, 2019. The primary concern is that the acquisition merges two very different mining operations. Wall Street did not see any cost-saving synergies, although today Kirkland Lake is already realizing $100/ounce savings in interest, purchasing, and overhead expenses.

Detour is a large open pit mill operation, mining low grades of under 1.0 g/t of gold. Efficient trucking and processing huge volumes are critical—the mill processes 55,000 tons per day, a rate of 20 million tons per year. Detour’s gold is so fine that one cannot see it. By contrast, at Macassa and Fosterville, all employees must pass through metal detectors when leaving work to discourage employees from pocketing gold nuggets.

The original Detour mine closed in 1999 after producing 1.8 million ounces for owner Placer Dome. Gold’s rise above $1,000 per ounce after the 2008 financial crash resurrected interest again in the mine. Detour Gold raised $2 billion and reopened the mine in 2013 with enough capacity to average 660,000 gold ounces per year at a cash operating cost of $749 per ounce. Unfortunately, the mine opened during a period of lower gold prices. The mine struggled and was starved for capital. Without the necessary capital investment, Detour Gold could not make the needed upgrades to the mine. Low profits prevented lenders from extending credit to the company. Company management at the time operated like managers collecting a paycheck rather than owners trying to maximize shareholder value. Large, outside investors grew tired of waiting and in late 2018 replaced the entire board of directors, brought in new operating management, and persuaded Kirkland Lake to buy Detour Gold in late 2019.

Kirkland Lake immediately deployed the accumulated cash on its balance sheet into making the needed changes and upgrades to the Detour mine. In Kirkland Lake’s midyear 2020 management report, the company reduced the mine’s cash operating cost per ounce forecast for 2020 by $100 per ounce. Management’s current priority is to increase milling to the 75,000 tons per day permit limit, with an eventual increase to 90,000 tons per day. If so, the mine would see a 50% increase in production, from 600,000 to 900,000 ounces per year, a production rate easily supported by the mine’s fifteen million ounces of proven and probable reserves.

KL currently has a market capitalization of c. $10.2 billion. Based on 2021 production forecasts, assumed cash operating costs and gold at $2,000 per ounce, the company should generate over $2.4 billion in cash flow from operations. The company has over $700 million in cash on its balance sheet and no long-term debt. With this squeaky clean balance sheet and a seasoned management team, KL shoud do extremely well in an environment that is very favorable for precious metals. Another attribute, all of KL's mines reside in politically safe nations and operate one large open pit mine along with several valuable underground operations. 

KL pays approximate 2% USD yield at current pps, and should enjoy healthy appreciation as gold rises, which seems so nearly certain that it makes me a bit nervous, though not so nervous when looking at the market leader landscape and accepted certainties of today. 

Catalyst

Gold price appreciation.