Kirkland Lake Gold: Gold Production Is Impressive by Fun Trading
Summary
- The total production for 2019 was 974,615 Au Oz, up 34.7% from a year ago. 2019 was a fantastic year for the company and its shareholders.
- The company announced that it raised the quarterly dividend to $0.06 per share with cash now at $705 million.
- However, the imminent merger with Detour Gold is a subject of anxiety and may slow down the stock in its ascent.
Source: Fosterville Mine from Kirkland Lake Gold.
Investment Thesis
The Toronto-based Kirkland Lake Gold (NYSE:KL) never ceased to amaze me. Gold production growth is frankly incredible - especially at Fosterville. It equals in strength to the sharp increase in gold price due to geopolitical tensions in the Middle East, with a possible direct armed conflict between the USA and Iran.
A few months ago, while I was impressed by the company's performance, I decided to invest a small long-term position, but I may have been too shy, and what I see developing pushes me to add to my position.
Kirkland Lake Gold has outperformed the industry with an increase of 67% in one year. Beating one of my favorite long-term miners, Agnico Eagle (NYSE:AEM), which also outperformed the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX), but not as much.
ChartData by YCharts
The crucial issue is that it is difficult to determine a fair valuation for the stock in those conditions, and I am still undecided whether the stock price has factored in most of the potential growth already or not. The recent news about the acquisition of the Canadian miner Detour Gold (OTCPK:DRGDF) is a reminder of such uncertainty. Please read my preceding article on the subject.
In this case, my "combo" strategy is a perfect way to deal with the ambiguity. While investing long term is potentially beneficial, it will be useful to trade the gold volatility short term to reduce the risk of a sudden drop due to a technical hiccup coming from nowhere or another acquisition, which is always negative for the stock, at least for a while.
During the fourth quarter of 2019, the company managed to produce a record of 279,742 Au Oz, increased cash on hand to $705 million, increased the quarterly dividend to $0.06 per share, bought back C$35 million in shares outstanding, etc. It is a huge positive that will create plenty of free cash flow and substantial revenues when the results will be announced.
However, the investment thesis is not as simple as the production numbers seem to describe. New investors need to see return on investment, which essentially means that the company's stock must show that it has more upside, sufficiently enough to generate a profit assuming an investment now. Of course, this question cannot be answered and always requires some leap of faith.
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