With gold on a clear uptrend, investors have turned their focus to gold mining stocks that have outperformed broader markets. They should pay attention to Kirkland Lake Gold (NYSE:KL), a relatively smaller name in the industry. The company is on a high growth trajectory, and that makes Kirkland Lake Gold stock attractive.
The sector as a whole has been doing well. As an example, Newmont Corporation (NYSE:NEM) is currently trading near 52-week highs. Similarly, Barrick Gold (NYSE:GOLD) has also been surging higher.
And there’s plenty of reasons to believe gold will trend higher still. According to the most recent jobs report, unemployment in the United States has surged to 14.7%. It could potentially take years for unemployment to return to pre-crisis levels.
Last month, the Federal Reserve pledged to keep interest rates near-zero levels until full employment returns. Taken together, that implies year of expansionary monetary policy. This will be positive for the precious metal.
It’s also worth noting that central banks continue to buy gold in order to diversify their currency holding. This provides additional trigger for gold price upside. From a value perspective, I see more upside for gold in the coming quarters.
Over the past 10-years, U.S. stocks have provided annualized returns of 13.5%. During the same period, gold has returned 4.5%. With the Fed’s balance sheet swelling, I expect gold to outperform.
Factors That Make Kirkland Lake Gold Attractive
The first reason to like Kirkland is the fact that the company has been on a high growth trajectory. For fiscal year 2017, the company reported gold production of 596.4Kozs. This increased to 723.7Kozs in FY2018 and further to 974.6Kozs in the last financial year. With the acquisition of Detour Gold in Jan. 2020, the company is positioned for even strong production growth.
From an all-in-sustaining-cost perspective, Kirkland is attractive. For FY2019, the company’s AISC was $564 an ounce. For the first quarter of 2020, AISC increased to $776 an ounce due to the acquisition of Detour Gold.
However, even with the AISC at $700 to $800 an ounce, the company is likely to report robust EBITDA margin. Gold currently trades at $1,700 an ounce and is likely to trend higher. Therefore, EBITDA margin expansion and cash flow growth are key reasons to be bullish on Kirkland Lake Gold stock.
From a balance sheet perspective, Kirkland is also attractive. For Q1 2020 the company reported a healthy cash buffer of $530.9 million. Importantly, the company has no debt and this provides financial flexibility for expansion and growth.
It’s also worth mentioning that for the quarter, the company reported operating cash flow of $302 million. Further, adjusted free cash flow was $191.4 million. Strong free cash flows are likely to sustain as gold trends higher and the AISC is low. This will increase the company’s financial strength.
For Q1 2020, Kirkland doubled quarterly dividend to $0.125 per share. I expect dividends to increase further considering the fact that the company is likely to report robust cash flows. This is another reason to be bullish on Kirkland Lake Gold stock. As dividends increase, the stock will be re-rated.
My Concluding Thoughts on Kirkland Lake Gold Stock
For the coming quarter, the company does not expect to achieve full production. Additionally, production and output cost are likely to be impacted through the year. However, this factor is discounted in the stock and as gold trends higher, the focus will be on cash flow growth.
Once mines resume full operations after the novel coronavirus driven disruption, Kirkland is well positioned to report stellar growth. The impact of Detour Gold acquisition on production and cash flow growth will be seen in the coming quarters. For two months of operation with Kirkland, the acquired Detour Gold generated $78 million in free cash flows. This is an indicator of things to come and will keep the positive momentum going for Kirkland Lake Gold stock.
Overall, there is a strong case for further upside in gold price in the coming quarters. This is bullish for gold miners and Kirkland gold is well positioned to benefit. In addition to stock upside, incremental value creation will come through dividends and share repurchases.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
