Kirkland Lake Gold: Smart Money Plus Insider Buying

09/11/2017 2:54 am EST

Focus: COMMODITIES

Jack Adamo

Editor, Jack Adamo's Insiders Plus

For our latest recommendation, we have a case of smart money plus nsider buying. You may have heard the name Sprott before; it's asset management firms are known for physical gold and physical silver trusts, explains Jack Adamo, editor of Insiders Plus.


Get Top Pros' Top Picks, MoneyShow’s free investing newsletter »


Now Eric Sprott, the eponymous billionaire investor behind those firms, has taken a liking to a fast-growing gold mining upstart with excellent properties in Canada and Australia—Kirkland Lake Gold (KL).

Over the past few years he accumulated nearly 10% of the company's stock, but on August 10, he purchased another 600,000 shares to push him over the top. He now owns directly or indirectly more than 21 million shares, representing 10.3% of the stock outstanding.

I can see why he's still buying. In a recent conversation with an acquaintance of mine, Sprott opined that Kirkland's Fosterville mine in Australia, could be a "generational mine." Sprott said that the drilling on the property is still in the early stages and he expects the high ore grades to continue.

All-in sustaining costs per ounce sold for the first half were very good at $794 per ounce, yet the second quarter improved markedly to $729, versus $873 in Q1 2017 and $991 in Q2 2016.

Average realized gold price for the six month period was $1240/oz, up 2% year-over-year. That should only get better in the second half. Kirkland currently has no hedging programs in place for its output.

Due to two recent acquisitions, revenues for Q2 and the past six months more than doubled, as did operating earnings, pre-tax earnings and net earnings.

The merger-related increase in the share count limited EPS growth for the six-month period to only 28% (only!), but Q2's 77% year-over-year rise to 16¢ per share may be a better indicator of the trend of future performance, especially with production as well as gold prices increasing.

Q2 earnings annualized, without any further growth in earnings for the next year, gives us a forward P/E of approximately 21-times. That's lower than the market, and with much better growth prospects.

Although I'm a P/E conservative who prefers price multiples of 16 or less, recall that early in this millennium gold miners looked expensive on a P/E basis until their earnings began to soar, along with their stock prices. I think we're now in the early stages of the second leg of that bullish trend.

Getting back to the books, operating cash flow for Q2 was $71.0 million, up from $68.6 million in Q1 and $40.3 million in Q2 2016. Free cash flow for Q2 was $44.8 million, a 20% increase from Q1 and 86% higher than Q2 2016.

As you may imagine from all of the above, the company's balance sheet is very solid. As of June 30, Kirkland had cash and cash equivalents of $267.4 million, an increase of $32.5 million from December 31, 2016.

The increase was after the repayment of $43.8 million related to the maturity of the company’s 6% Debentures due June 30, 2017. The payment was made from cash on hand, not by rolling over the debt.

Kirkland commenced a dividend policy in the second quarter. The amount is pretty trivial at slightly over 3¢ per share per year at current exchange rates, however, this step is important.

There are many funds that are not permitted to buy shares in companies that don't pay dividends. So, as gold prices rise, demand for the stock won't be hampered by such restrictions. Kirkland Lake is a buy up to $14.

Subscribe to Jack Adamo's Insiders Plus here…

Related Articles on COMMODITIES