Kirkland Lake Gold mounts a comeback in the Southern Abitibi

VANCOUVER — The past two years have been a story of redemption for producer Kirkland Lake Gold (TSX: KGI; US-OTC: KGILF) at its Macassa mine and South Mine Complex in the prolific the Southern Abitibi gold belt, 46 km southeast of Timmins, Ont. The company just tabled its third quarter of positive earnings and free cash flow, and it looks poised to hit the upper end of its annual production guidance.

On March 11 Kirkland reported that it sold 39,700 oz. gold last quarter at an average realized price of US$1,371 per oz., which resulted in cash flow from operations of $23.7 million. Over the past nine months the company has cranked out 162,000 oz. gold at all-in sustaining cash costs of US$1,289 per oz., which marks an improvement over the 131,000 oz. it produced in 2014 at all-in costs of US$2,054 per oz.

Kirkland has encountered higher grades at the South Mine Complex (SMC), which has also improved throughput rates at the Macassa mill.

Average production rates last quarter were 934 tonnes per day, which marks a 3% quarter-on-quarter increase. The good news for Kirkland is that it improved in January, when throughput averaged 1,107 tonnes per day, delivering 34,500 tonnes of ore to the mill.

The increase was attributed to better-than-anticipated worker productivity and higher stope availability throughout the mine due to better transitions in the mining cycle from ore production to paste-filling back to ore production cycles. Head grades averaged 15.1 grams gold per tonne, which is a 9% increase over the previous quarter. Roughly 60% of quarterly tonnes and 67% of the ounces were generated from the SMC.

The SMC has been labelled an entirely new mineralized system in the Kirkland Lake mining camp that is characterized by shallow-dipping, structurally controlled zones of finely disseminated pyrite, visible gold and tellurides. The SMC contrasts with the steeply dipping, quartz vein-hosted gold of the Main and ’04 Break zones that put Kirkland Lake on the map.

“The positive change in our operating cost is driven by improving head grades and cost reduction strategies that we continue to implement and reinforce within our operation,” vice-president of operations Chris Stewart noted during a conference call. “We expect the head grade will continue to increase [this year]. We currently have three stopes in production at the [SMC], and expect a fourth stope to come online by the end of April.”

A third stope was opened on the SMC’s 5,400 level in early December, while the fourth stope should ensure more consistent ore production from the zone, which boasts an average reserve grade of 19.5 grams gold.

As a result Kirkland boosted its annual production guidance from between 140,000 and 155,000 oz. to between 153,000 and 157,000 oz. gold. Cash flow from operations is expected to total $57 million, which will result in free cash-flow generation of $22.4 million. All-in sustaining costs estimates remain unchanged, and are expected to range from US$1,250 to US$1,350 per oz.

“We’re positioned for success in these challenging markets, and I believe the picture continues to look better,” CEO George Ogilvie said. “We’ve now posted three quarters of improving results, and remain confident in further improvements as we execute our plans. I would, however, like to say that we are not going to be resting on our laurels. There’s still a lot more to do with this company as far as efficiency gains, increases in production, further cost containment and ultimately debt repayment, but we are certainly on the right track.”

Kirkland’s turnaround has attracted the attention of renowned mine financier Eric Sprott, who became the company’s chairman in late February. 

The high-profile appointment followed a $35-million bought deal financing wherein Kirkland issued 7.9 million shares at $4.35 per share. The financing included the full exercise of an over-allotment option by underwriters to buy another 1 million shares.

“The financing was successful, oversubscribed and completed in a short period of time. I believe that these factors signal that the market understands and agrees with the new business plan,” Ogilvie continued. “Eric’s appointment will add to an already reinvigorated and strengthened board, and I believe the company is winning back its credibility and reputation.”

Kirkland has conducted drill programs in a bid to boost average life-of-mine grades, and take advantage of 900 tonnes per day of excess capacity at its mill. The first initiative has involved underground drilling aimed at expanding the SMC, which remains open to the east and at depth.

The company released drill results from the New South zone in January that extended mineralization 55 metres down-dip from previous intersections. Highlights include 63.4 grams gold over 3.5 metres true width in drill hole 53-2593, and 12.3 grams gold over 4.5 metres true width in drill hole 53-2597. The average grade and width of reported intersections was 52 grams gold over 2.3 metres.

As it stands the Kirkland complex boasts reserves of 2.5 million tonnes grading 17.1 grams gold for 1.4 million oz. Measured and indicated resources total 3.8 million tonnes averaging 16.8 grams gold for 2.1 million oz. The company estimates it has a 14-year mine life.

BMO Capital Markets analyst Brian Quast has a “market perform” rating on Kirkland along with a $5.50-per-share price target. BMO Research is forecasting a slow increase in tonnage, but is “comfortable waiting given the significant increase in grade and restored profitability.”

In a March 11 research note, he added that “there have been some recent indications of better performance, but it will likely be some time before enough stopes are opened up to enable a sustainable increase. With good control of dilution now and the associated increase in grade, the only component falling below target is tonnage.”

Kirkland has traded within a 52-week window of $2.51 to $6.19, and jumped 11%, or 49¢, after its quarterly results en route to a $5.13-per-share close. It has 80 million shares outstanding for a $400-million market capitalization. 

The company reported $77 million in cash at the end of February.