KL - Kirkland Lake Gold

[JRM]

I didn't see an existing thread, so I thought I'd start a new one.

I wish I had discovered this company a few years ago, they've had a great run.  I'm thinking its still fairly undervalued and could have some upside.

They operate gold mines in Canada and Australia.  They recently purchased Detour Gold.  The all in cash cost across all mines is well under $1000 per ounce, they have $530 million in cash and no debt (~$11B market cap).  They reported ~3 million ounces of proven reserves and ~20 million ounces of probable reserves of gold.

They are buying back shares and recently doubled the dividend.  They are not currently operating at full capacity due to COVID-19, but that is somewhat offset by high gold prices relative to historical. 

Anybody else have any thoughts on this company?

[JRM]

Cash is approaching $1B, no debt, sold at an average of $1907 per ounce in the quarter (on a production cost likely much less than $1000 per ounce).  I think there is a fundamental mis-pricing of gold miners.  Analysts are assuming the price of gold goes back down (because that's what happened last time). 

Only up 20% since initial post; I think there's a lot of room to run if gold prices stay anywhere above $1300 per ounce. 

[samthefirefly]

Don't know enough about the gold industry to be fully sold (was hoping there would be a longer discussion about the industry in here). But in terms of profitability/growth/valuation, Kirkland seems to be of superb quality

[JRM]

I posted a link to this podcast episode in a thread in the General section.

https://podcasts.apple.com/us/podcast/the-end-game-ep-12-fred-hickey/id1508585135?i=1000501094047

I'd be happy to share more resources that I find compelling. 

I would enjoy more discussion on KL, as well. 

[DTEJD1997]

I think there are some interesting situations in the gold sector.  I've got quite a bit of my capital invested there.

KL looks like a nice company, but it is AWESOMELY expensive....P/S, P/B, price to cash flow and so on.

My 2nd largest gold position is trading for less than book value, less than 1X cash flow, about 2X FCF, is rapidly rebuilding their balance sheet (cash exceeding debt in 1st quarter 2021?), proving more reserves, getting more operationally efficient (increasing ounces mined), in good tier-1 jurisdictions and so on.  They also have some non-operational mines/claims that should provide about 10-15% of market cap in cash in about a year or so when they are sold/options exercised.

I would prefer to invest in gold miners that are cheap on current valuation metrics...thus if the price of gold does indeed go up....their valuation metrics should catch up AND you get even more cash flow/earnings.  Kind of a "double whammy".

[Potato]

I have to admit incompetence or laziness, but I haven't been able to figure out which one you're talking about DTEJD1997, care to give us a name? (I'm not giving up after just a few minutes -- someone else [maybe you on another thread?] had mentioned a gold miner was out there trading at 1X cash flow but I haven't been able to find it, possibly because of bad info in the databases powering TD's screener, entirely possibly that I simply suck)

[JRM]

I agree there are other good names out there.  So far, the stuff I've come across that is deep value territory has some hair for one reason or another.  Congrats on those finds.  There's probably a good chance of those companies getting bought out by a bigger company.

Also, I wouldn't necessarily consider a forward P/E of 9 expensive these days.  You could play the game of backing out $1B cash out of the $11B market cap and come up with a lower multiple.  I don't really like to think in those terms, though.

[samthefirefly]

Full transparency, I'm no valuation wizard or anything (and I'm missing so much industrial context/info). But I don't necessarily think it's crazy expensive

Maybe it's more expensive compared to peers, but you're paying a premium for consistent growth/profitability/financial health:

10-Yr Median Returns: ROA 7.2%, ROE 9.8%, ROIC 11.4%
10-Year CAGR Revenue 44.9%
Average cash flow/revenue over the past handful of years is in the high 20s
Average net margins over the past 5 years in the mid-20s
Minimal financial leverage
Quick ratio 1.79, current ratio 2.15, debt/equity 0.01, interest coverage 220

Moreover, the company's prospects seem to have only gotten better (their Fosterville mine in Australia was both the world's highest-grade and lowest cost gold mine in Q1 2020) while the valuation seems cheaper than its historical average (5-year)

- P/S 4.75 (current), 5.05 five-year average
- P/E 14.21 (current), 27.15 five-year average
- P/B 2.24 (current), 3.63 five-year average

Again, would love to hear more about the industry (context matters) and I'd love to hear the bear case for the people who don't like the stock

Also, heard the podcast that was linked in the discussion, fascinating stuff (got me even more interested in KL). Reminded me that my knowledge in this game will always be non-existent compared to the experts lol. Thanks for providing the link!!

[montizzle]

Moreover, the company's prospects seem to have only gotten better (their Fosterville mine in Australia was both the world's highest-grade and lowest cost gold mine in Q1 2020) while the valuation seems cheaper than its historical average (5-year)

Issue with Fosterville is life of mine. Currently yeah, they're just tearing through the ultra-high grade deposits there printing money, but those deposits are set to last until 2024. From that point (with quality most likely declining beforehand), Kirkland Lake's AISC is going to shoot up. Detour and Macassa aren't going to be able to fill the (proverbial) hole left by Fosterville, so management's only real choice is acquisitions. Which can get dicey, especially considering how much the market didn't like the Detour purchase

[samthefirefly]

Issue with Fosterville is life of mine. Currently yeah, they're just tearing through the ultra-high grade deposits there printing money, but those deposits are set to last until 2024. From that point (with quality most likely declining beforehand), Kirkland Lake's AISC is going to shoot up. Detour and Macassa aren't going to be able to fill the (proverbial) hole left by Fosterville, so management's only real choice is acquisitions. Which can get dicey, especially considering how much the market didn't like the Detour purchase

That’s some very interesting insight, thank you for that!

I guess my question to you would be if you expect valuation to remain depressed for those 4 years? Legitimately interested in hearing your take.

Sounds like they still have a couple of years with the mines operating at full capacity, and I’m personally bullish on the price of gold (at least for the next year). So my feeling is that you should be able to get decent mid-term returns on investment.