The Metals Complex May Surprise
As we head into the seasonally weak summer months, it is best to look for, initiate, or accumulate positions with sound fundamentals, trading with valuation disconnects due to exogenous factors, notes David Morgan, editor of The Morgan Report, www.TheMorganReport.com. Further, the adage “Sell in May and come back after Labor Day” may apply. This is the most common occurrence in the summer months; however, with the ongoing “Trade War” the metals complex may surprise us. Build cash and/or buy carefully, advises Morgan.
Kirkland Lake Gold Continues
To Meet and Beat Expectations
Kirkland Lake Gold (TSX: KL; NYSE: KL): Morgan’s best performing pick over the last two-plus years continues to meet and beat expectations, a rare feat to accomplish, especially in the mining industry.
“Before delving into a record quarter for the company in terms of earnings and free cash flow, this cash-rich, debt-free company looks ripe for asset consolidation in either/and Canada and Australia. While it does have a relatively capital-intensive expansion project over the next two to two-and-a-half years at Macassa, this is easily serviceable from the monster free-cash-flow generation, which seems to never abate. One potential target could very well be Pretium Resources. While Pretium does have a market cap pushing $1.5B-$1.6B, Kirkland could potentially finance this deal with relatively little dilution via a combination of debt, cash on hand, stream and royalty financing, and equity, something which Kirkland Lake has a significant advantage over, relative to other mining operators as it is trading at roughly 2-2.2x NAV and therefore its cost of equity is extremely low.
“Kirkland Lake increased its cash position by $84m in Q1 2019 to $416m at quarter end. Operating cash flow jumped 95% (!) from Q1 2018 to $175m vs. $90m in Q1 2018 and $204m in Q4 2018. Free cash flow, the ultimate measure of true profitability, saw an 85% increase from Q1 2018 and 8% relative to Q4 2018, totaling $93.1m. Kirkland Lake saw record gold sales of 233k oz., 58% higher year over year and 3% higher quarter over quarter. AISC improved 33% year over year and 1% over the previous quarter. Just as important, if not more so, was the increase in consolidated mineral reserves. Reserves at Fosterville increased 60% to 2.72m oz. @ 31 g/t, and Macassa reserves increased 11% to 2.25m oz. @ 22 g/t. Further, Kirkland hiked its dividend 34%. We don’t recommend adding to this position at the current valuation, and it may be prudent to take some profits. We do think there will be more opportunistic times to accumulate this company, especially in the event of an acquisition.
“When Kirkland Lake acquired Newmarket Gold, we were some of the only ones banging the drum on what a great buying opportunity this was, despite the stock dropping materially only to rally 400%+. Heading into the summer months, even if the metals buck the trend, we see writing covered calls as a low-risk approach to generate supplemental income.”
Editor’s Note: David Morgan, a precious metals aficionado with degrees in finance and engineering, he originated The Morgan Report, a monthly report that covers economic news, the global economy, and to make substantial capital gains by investing in the Resource Sector. The Model Portfolio covers top-tier, mid-tier, speculative and special situations. Take advantage of the Special Subscription Offer for The Morgan Report at www.TheMorganReport.com.
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