Kirkland Lake Gold boosts production forecast 2019–2021

A jump in the reserve grade and tonnage at Fosterville in Australia — already one of the highest grade and most profitable gold mines in the world — will help increase Kirkland Lake Gold’s (TSX: KL; NYSE: KL) total gold production this year to between 920,000 and 1 million oz., up from its previous guidance of 740,000 to 800,000 oz. in December.

The company revised its consolidated production guidance for 2019 after finishing reserve and resource estimates as of Dec. 31, 2018. Fosterville’s reserve increased 1.02 million oz., or 60%, to 2.72 million oz. from 1.7 million oz. gold. The average reserve grade jumped 34% to 31 grams gold per tonne from 23.1 grams gold per tonne, and the number of tonnes rose 19% to 2.72 million, from 2.29 million.

Kirkland Lake Gold expects Fosterville will produce between 550,000 and 610,000 oz. gold this year, up from its previous guidance of between 390,000 and 430,000 oz. gold.

The latest guidance for Fosterville was also driven by changes to the mine plan that will allow Kirkland Lake Gold to access the mine’s high-grade Swan Zone stopes earlier than expected. (The company doubled the Swan reserve from 1.16 million oz. gold to 2.34 million oz. gold through exploration and definition drilling programs throughout 2018.)

Contributing to the increase in consolidated guidance for the year is the company’s decision to resume operations at its Holloway mine in Matheson, Ont., which it says could produce 20,000 oz. gold this year.

Meanwhile, reserves at its Macassa mine in northeastern Ontario increased 11%, after the depletion of 244,000 oz. gold. The mine’s reserves grew to 2.25 million oz. at an average grade of 21.9 grams gold, compared with 2.03 million oz. at an average grade of 21 grams gold as of Dec. 31, 2017.

Improvements in consolidated unit costs have also been forecast for 2019. The company expects operating cash costs this year of US$300-US$320 per oz., down from its guidance in December of US$360 to US$380, with all-in sustaining costs per oz. sold of US$520 to US$560, compared to previous guidance of US$630-US$680 per oz. (At Fosterville, operating costs per oz. sold are expected to improve to US$170 to US$190 per oz. from US$200 to US$220 per oz. previously.)

Looking ahead, Kirkland Lake Gold forecast consolidated gold production in 2020 of between 930,000 oz. and 1.01 million oz., and a range of 995,000 and 1.06 million oz. in 2021.

After news of the guidance revisions, analysts at Macquarie Research raised their target price on the company from $50 per share to $60 per share, and noted that Kirkland Lake Gold is still growing, and remains one of its top picks.

“The consistent, positive reconciliation, the very high-grade drill results, and the multiple upward revisions to guidance give us confidence that understanding of the mine is evolving, and there is still more to come at Fosterville,” the bank says in a research note to clients.

At spot gold and exchange rates, Macquarie forecasts Kirkland Lake Gold’s free cash flow from 2019 to 2021 will come in at US$1.4 billion, peaking at over US$700 million in 2023, which it says is “one of the best free cash flow generation profiles in the sector, with ample room for substantial dividend increases, other cash return, or mergers and acquisitions.”

In addition to revising its guidance, the company reported full-year 2018 results, with record production of 724,000 oz. gold, up 21% year-on-year.

Cash costs improved 25% year-on-year to US$362 an oz., while all-in sustaining costs improved 16% to US$685 per oz. gold.

Revenues jumped 23% year-on-year from US$747.5 million to US$915.9 million, and net earnings grew 107% to US$273.9 million from US$132.4 million. Earnings before interest, taxes, depreciation and amortization jumped 49% to US$531.6 million, up from US$356.9 million the previous year.

On a conference call, president and CEO Tony Makuch noted that the company’s cash costs in 2018 were “probably industry leading,” adding that “definitely very few companies can match that.”

“This is perfect growth. It’s more units, at lower cost,” Makuch said. “We are price takers in this industry, but we’re producing more gold at lower costs, and the price of gold is going up, too, and we think we’re in a really strong gold environment. So there will be lots of excitement and lots of value creation in Kirkland Lake in 2019.”

He also highlighted the company’s “industry-leading earnings and cash low” — US$1 a share in earnings, and US$250 million free cash flow.

“What I really want to point out in terms of 2018,” he told analysts and investors on the call, is that “operating cash flow was up almost 75%, over US$0.5 billion in the year. Free cash flow was up 40% year-over-year. And that resulted in a quarter-billion of cash flow in 2018.”

Makuch points out that the strong financial results came at the same time as the company ramped up its growth capital expenses in developing the new No. 4 shaft at Macassa and increased investments at Fosterville, and in exploration in Canada and Australia.

The mining executive also said the company made strategic investments during the year, bought back its own stock and increased its dividend.

On the exploration front in Australia, the company noted that its current mine leases at Fosterville, which are 17 sq. km, represent less than 1% of its total land package around the mine.

“We don’t believe Swan is a one-off occurrence, and we are very excited to be testing this target,” John Landmark, the company’s vice-president of human resources and exploration, Australia, said on the conference call, adding that there are four active underground drills.

“Exploration in Australia in 2018 has been very successful,” he said. “Going forward, we currently have an outstanding portfolio of advanced targets to aggressively chase, with over US$100 million being spent on exploration this year, and some 300 km of drilling planned.”

At press time, Kirkland Lake Gold was trading at $45.79 per share within a 52-week trading range of $19.01 to $48.16.

The company has 275 million shares outstanding for a $9.6-billion market capitalization.