Kirkland Lake: My Number 1 Gold Stock Pick Is Just Getting SA condensed version of an article by Gold Mining Bull on Seeking Alpha.
As of Jan 26, he states KL is undervalued by 2/3 when compared to its peers based on cash flow. It also states KL is undervalued by approx. 50% based on 2017E production.
Based on the grades at Macassa and Fosterville, I think KL should have a superior EV compared to its peers.
Kirkland Lake: My Number 1 Gold Stock Pick Is Just Getting Started Jan. 26, 2017 7:59 AM ET
Gold Mining Bull Following(5,055 followers)
Summary Every year, I list my top 10 gold stocks to buy for the upcoming year.
This year, I chose Kirkland Lake Gold as my top pick following its takeover of Newmarket Gold, another favorite gold miner of mine.
I felt the stock was wrongfully undervalued at the time of writing that article, as shares traded at a Price/2017E operating cash flow of 6.1X; I pointed out that compared to peers this was a very low figure. There was no reason for such a large discount in my view given the strength of Kirkland Lake Gold's assets (its two operating mines are very high-grade and are located in the top-tier mining jurisdictions of Canada and Australia), its profitability and solid balance sheet, and exploration potential.
With all-in sustaining costs expected to fall under $800 this year, a solid balance sheet with a large net cash position and huge exploration upside at the Fosterville mine in Australia, the pick felt like a no-brainer, plain and simple.
First, for the production results. Kirkland Lake says its 2016 consolidated pro-forma gold output from Canadian and Australian operations was 542,751 ounces. In Canada, production of 295,838 ounces exceeded 2016 guidance set by Kirkland Lake of 270,000 to 290,000 ounces.
At the Macassa mine, Kirkland Lake achieved incredible gold grades of 16.52 g/t and recovery of 97.1%. And in the fourth quarter, these grades actually improved to 21.46 g/t. In Australian, production was 239,724 ounces, exceeding the guidance set by Newmarket Gold of 225,000 to 235,000 ounces. The Fosterville mine in Australia produced record average grades of 7.55 g/t and recoveries of 90.1%. And in the fourth quarter, grades improved to 8.48 g/t. So from a production standpoint, both companies really finished the year strongly, production more gold than expected and at record grades.
And that leads me to the next news, Kirkland Lake's exploration success at Fosterville. On Jan. 17, the company reported some of the best drill results I've ever seen on an active gold mine when it announced the following drills in the lower Phoenix gold system at Fosterville:
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1,429 g/t gold over 15.15 meters, including 21,490 g/t gold over 0.6 meters in hole UDH1817 ·
356 g/t gold over 7.2 meters, including 1,339 g/t gold over 1.85 meters in hole UDH1943 ·
83.9 g/t gold over 3.5 meters, including 234 g/t gold over 0.65 meters in hole UDH1941 I don't think I've seen such high grades over long intersections before. With these record drill results, it's clear that there is high-grade visible gold mineralization at the underground resource at Fosterville. The drill results support the expansion of Fosterville's current resource and reserve base. The company says it currently has nine drill rigs active at the mine, with the goal of extending the mine life and increasing the resource base. The drilling program certainly looks like it will be money well spent.
In conclusion, I think Kirkland Lake Gold is off to a great start in 2017, but is just getting started. While the 2017 production and cash cost guidance doesn't look that great, investors need to keep in mind the aggressive drill programs and the future production upside from Macassa and Fosterville.
And the company continues to trade at a discount to peers, as it trades at a price/2017 cash flow of 2.5X, compared to a peer average of 7.3X, with an EV/2017E production of $1,961 compared to a peer average of $3,950, according to its corporate presentation. This is my second largest real-life gold holding, and I remain confident in my top gold stock pick for 2017.