Turnaround picks up steam for Kirkland Lake Gold

Kirkland Lake Gold (TSX: KGI; US-OTC: KGILF) has come quite a way since its board set up a special committee in January to launch a strategic review of the company that included a potential sale.

On Sept. 8, the company reported its first net profit in the last five quarters for the three months ended July 31, and its Toronto-listed shares have surged from $3.79 on July 31 to their current level of $5.28.

Net income in the first quarter of fiscal 2015 totalled CDN$5 million, or 7¢ per share, compared with a net loss of $1.2 million in the fourth quarter of fiscal 2014. Kirkland Lake Gold also reported free cash flow in the quarter of $5 million, compared with nothing in the previous quarter.

Cash-operating costs per ounce produced came in at $788 per oz. (down from $1,000 in the fourth quarter of fiscal 2014), and all-in sustaining costs reached $1,250 per oz., down from $1,774 per oz. A total of 40,528 oz. gold were recovered at an average head grade of 0.45 oz. per ton.

“Obviously we’re pleased with the turnaround at the company,” president and CEO George Ogilvie said on a conference call with analysts and investors. “We do recognize, however, that it’s early, and one quarter does not make a company. But we are confident that we are absolutely on the right track. We have the right business plan for this gold-price environment, and over time, we can produce more consistent results and better results than what we’ve seen in the first quarter.”

Ogilvie joined the company in November 2013 and has implemented a higher-grade, lower-tonnage strategy, which has helped Kirkland Lake Gold trim costs while increasing production and head grade.

Kirkland Lake Gold is on track to achieve its production guidance for fiscal 2015 of between 140,000 and 155,000 oz. gold, Ogilvie said. Guidance for fiscal 2016 and fiscal 2017 remain unchanged at 150,000 to 170,000 oz. and 160,000 to 180,000 oz.

Analysts Michael Siperco and Valeriy Dolgopolov of Macquarie Securities raised their target price on the stock from $5.50 per share to $6.50 after the company’s financial results were released. “Management’s strategy of focusing on higher-grade production rather than maximizing tonnage is starting to pay off,” they write. “While it will take time to optimize operations, we believe the re-rating of the stock under new management and the new operating plan has begun [with a +100% return since June 1], and we see further upside as Macassa’s potential is proven out.”

In terms of optimization, a mining horizon on the 5,400-foot (1,646-metre) level in the higher-grade South Mine Complex (SMC) has been developed and the first stope (5,417), came into production during the first quarter. The 5,400 level provides a third mining horizon in the SMC for the company, which says it expects to mine five stopes from this area in fiscal 2015.

During the quarter 71% of the tons and 74% of the ounces were generated from the SMC, compared to 60% of the tons and 66% of the ounces in the fourth quarter of fiscal 2014. The company forecasts that output from the SMC will fluctuate on a quarterly basis due to grade variability and stope availability. But over time, with more stopes on the 5,400 level and in fiscal 2016 on the 5,600 ((1,709-metre) level, the company says it should have the flexibility to smooth the grade and be selective about which stopes it mines.

The company sent two new electric and hydraulic single boom jumbo drills underground at the SMC during the quarter. One jumbo is focusing on developing the 5,400-foot level and pushing the main decline ramp down to the 5,600 level, and the other is dedicated to an ore complex within the 5,300 (1,615-metre) level.

Ogilvie noted on the conference call that if the jumbo drills work well over the next six to nine months, they could be added to other areas. He said that the company “is still looking for efficiency gains and cost-cuttings on-site.”

At the end of July, Kirkland Lake Gold had $40 million in cash and $120 million of convertible debentures made up of two debentures: one at $55 million with a 6% coupon that is due in June 2017, and the other at $65 million with a 7.5% coupon due in November 2017.   

“The good news is that those convertibles only have to be dealt with in the second half of calendar 2017, which is some three years away, and between now and then we’re going to see a major turnaround in the company, and we can generate significant cash from this property. If we are successful in operating our plan we can buy out those convertibles at the appropriate point in time,” Ogilvie said on the conference call.

“What’s nice to see is that the converts are now trading at 90¢ on the dollar, up substantially from the sub-70¢ we were seeing four months ago or so. This is yet another good indicator for the company.”

Meanwhile, the company is exploring its near-surface resources 1.5 km from the mill. In August, the company reported drill results that expanded the mineralization associated with the SMC on both the South Claims and the HM claim. The near-surface drill program intersected high-grade lenses within 360 feet (110 metres) of surface, with highlights of 442.3 grams gold per tonne over 1 foot (0.3 metre) in a new footwall zone, and 594.5 grams gold over a 1.7-foot (0.5-metre) length in a deeper, unrelated footwall zone.

“With spare nameplate capacity at the Macassa mill, eventual delineation of a near-surface reserve has the potential to provide a supplemental feed source for the operation,” analysts Hunter Hillcoat and Marc Elliott of London-based Investec Securities commented in a research note.

Siperco and Dolgopolov of Macquarie Securities note that management is taking advantage of a decline in drilling costs that are down 20–30% year-on-year to $16 to $18 per foot, to focus on material above 1,000 feet (305 metres) and expand mineralization.

“Given the shallow depth of the potential mine, the use of a ramp rather than a new shaft, and the use of the existing mill facilities, management believes that the unit costs could be half of Macassa, or roughly $150/ton,” the analysts write. “At that cost, a resource grading in the order of 0.35 opt could have very attractive economics.”