Kirkland Lake Gold Stock: A Sad Farewell, A Missed Opportunity
Toronto’s Kirkland Lake Gold (NYSE:KL) published its results for the third quarter of 2021 on November 3, 2021.
1 – 3T snapshot
The company reported better-than-expected net income of $254.95 million, or $0.96 per diluted share, in the third quarter of 2021, compared to $202.02 million, or $0.73, in 3Q20. Adjusted earnings per share was $0.91.
Gold production this quarter was healthy at 370,100 Au Oz. Fosterville and Macassa production declined sequentially, but Detour production was exceptional, as we can see below:
Production at Fosterville of 134,772 ounces was down from 161,489 ounces for the same period in 2020 and 157,993 ounces in 2Q21.
The reduction in gold sales at Fosterville was consistent with the plan to transition to a lower production profile to create a more sustainable operation. At the same time, the mine continues to advance its extensive exploration programs.
2 – Stock market performance
Since June, the gold miners group has been struggling, as can be seen in the graph below. KL is down nearly 8% year on year. However, KL has done quite well compared to most of its peers, while AEM is down 32%.
3 – Investment thesis in view of the merger
In my previous article on the upcoming mergerI said I was unhappy with the decision to merge Kirkland Lake Gold with Agnico Eagle (NYSE: AEM) and pushed my followers to sell KL as soon as the news broke.
I was a major shareholder of AEM and KL and decided to sell my entire KL position from $44.50 to over $46 and reduced my AEM position by 25%. I was there.
The main question is not about the benefit of a “merger of equals”, which obviously made no difference for the shareholders. Yes, the new Agnico Eagle is a bigger gold mine, but what was lost along the way was the huge intrinsic potential that Kirkland Lake had on its own.
We will now have a larger business, larger gold production, and unfortunately diluted potential for considerable upside potential. I said in my previous post:
“However, what may be a good idea at the corporate level may be a bad idea from a long-term shareholder perspective, and I think that is the case here, unfortunately. It comes down to the same recurring problem. Bigger is not necessarily better.
This merger reminds me of the merger between Barrick Gold (NYSE: GOLD) and Randgold Resources (66.6%/33.4%) in September 2018 which I covered here. It was a great idea with potential for significant synergies, but GOLD, the new post-merger ticker, ultimately came to nothing.
I firmly believe that the shareholders of Kirkland Lake Gold have been harmed by this “too soon” merger. »
However, I recently bought in an average position below $38 as a short-term opportunity only. The trader in me couldn’t resist.
Kirkland Lake Gold: financial data and production in 3Q21
Note: Data is shown in US$.
|Kirkland Lake Gold||3T20||4T20||1Q21||2Q21||3Q21|
|Total revenue in millions of dollars||632.84||691.55||551.85||662.74||666.98|
|Net income in millions of dollars||202.02||232.57||161.19||244.17||254.95|
|EBITDA in millions of dollars||383.92||456.66||340.90||450.77||450.94|
|Diluted EPS in $/share||0.73||0.85||0.59||0.91||0.96|
|Cash flow from operating activities in millions of dollars||431.12||420.93||208.17||330.57||322.99|
|Capital expenditures in millions of dollars||155.43||188.51||165.48||199.34||181.20|
|Free cash flow in millions of dollars||275.69||232.43||42.70||131.23||141.79|
|Total cash in millions of dollars||848.52||847.63||792.2||858.37||822.42|
|Current and non-current LTD and capital leases in millions of dollars||26.20||26.18||26.20||24.74|
|Shares outstanding (diluted) in millions||275.47||274.98||267.91||267.19||265.38|
|Dividend per share $||
|Au Oz production||3T20||4T20||1T21||2Q21||3Q21|
|Total Gold Production/Sold||339,584/sold 331,959||369 434/sold 371,009||302,847/sold 308 029||379 195/sold 364,575||370 101/sold 372,100|
|AISC (co-product) from continuing operations||886||790||846||780||740|
The data source: company financial report
Note: Historical data for 2015 is only available to subscribers.
As a reminder, Kirkland Lake Gold also holds an interest in two gold companies:
- Novo Resources Corp. (TSE: NVO) (OTCQX: NSRPF) 9,225,168 shares.
- Wallbridge Mining Company Ltd. (TSE: WM) (OTCPK: WLBMF) 78,109,200 shares.
Analysis: revenue, profit details, free cash flow, debt and gold production details
1 – Revenue was $666.98 million for the third quarter of 2021
Kirkland Lake Gold recorded revenue of $666.98 million for the third quarter of 2021, compared to revenue of $632.84 million a year ago. The company reported net income of $254.95 million, or $0.96 per diluted share, compared to $0.73 in 3Q20. Adjusted earnings per share was $0.91.
The realized gold price this quarter was $1,791 per ounce and the company sold 372,100 Au Oz in 3Q21.
CEO Tony Makuch said on the conference call:
We had a recent announcement of an agreement to combine a merger with Agnico Eagle Mines. From our perspective, this is a very exciting development for our business, our belief and our shareholders. And most importantly, this merger creates a new leader in the global gold mining industry. And if you know, we’re creating a gold mining company that can certainly be a leader in terms of transforming their – normally transforming the industry, but also transforming the perception of our industry as we move forward.
2 – Free cash flow was a profit of $141.79 million in 3Q21
Note: Generic Free Cash Flow is calculated by subtracting CapEx from Operating Cash Flow.
Quarterly free cash flow was $141.79 million and trailing twelve month FCF was $548.15 million.
3 – Available capital, no debt, abundant liquidity and share buyback
The company has no debt and excellent cash and liquidity. Total cash at the end of September 2021 was $822.42 million.
Quick Overview and Review of 3Q21 Gold Production
Below are Kirkland Lake Gold’s three producing mines. The few graphs below can really demonstrate the progress made by the company.
- Macassa mine in northeastern Ontario, Canada.
- Fosterville mine is located in the state of Victoria, Australia.
- Detour Lake Open Pit Mine in northeastern Ontario, Canada.
- Taylor and Holt Mineslocated in northeastern Ontario, are often described as the Holt complex. Still inactive.
The company produced 370,101 Au Oz this quarter (sold 372,100 Au Oz), and the gold price for the third quarter was $1,791 an ounce.
All-in sustaining costs or AISC decreased by $740 per ounce this quarter. The AISC is well below the industry average.
Below is a quarter-over-quarter comparison for the three producing mines. Full production began in 2Q20 at the Detour mine and passed Fosterville.
Note: The Holt Complex has been placed in care and maintenance mode.
As we can see below, the Detour Lake and Fosterville mines are the two main producers of gold and account for 87.5% of total 3Q21 production.
AISC chart below Newmont (NYSE:NEM)Barrick Gold, Agnico Eagle (AEM) and others.
We can see that Kirkland Lake has the best AISC despite adding Detour Lake into the mix.
Source: Data from Fun Trading (more data is available for subscribers only).
Orientation 2021 and Reserve 2020 issued in December (unchanged)
- “Proven and probable” increase in the reserve 3% Year after year.
- The guidance for 2021 is confirmed.
Technical analysis and commentary
KL Forms a downward wedge pattern with resistance at $40.5 and support at $37.5.
The trading strategy is to partially sell between $39 and $40 and wait for a retracement below $38 to build up again. If the stock breaks through the resistance with high volume (breakout), the next higher resistance is $46.
I recommend trading the LIFO of short-term stocks using around 80%-100% of your position, unless you want to hold a position that will then be rolled into new AEM stocks once the merger is complete.
KL and AEM have fallen sharply from the valuation of the merger and present a good opportunity at the moment.
Warning: The TA table must be updated frequently to be relevant. This is what I do in my stock tracker. The table above has a possible validity of approximately one week. Remember that the TA chart is a tool only to help you adopt the right strategy. This is no way to predict the future. Nobody and nothing can.
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