Kirkland shines as a multi-asset gold producer in Ontario

Kirkland Lake Gold’s (TSX: KGI; US-OTC: KGILF) vision of becoming an intermediate, multi-asset gold producer after an operational turnaround at its high-grade Macassa gold mine in northeastern Ontario is turning into reality.

In November 2013, Kirkland re-focused on mining better grades instead of higher tonnage at Macassa. This drove up the mine’s head grades and gold production, and helped the firm get back into the black.

As it amassed cash, Kirkland explored ways to move away from the risk of being a single-asset producer. It announced a US$178-million, all-share takeover of St Andrew Goldfields last November, giving it three gold mines — Holt, Holloway and Taylor — collectively known as the East Timmins operations, as well as a mill and a large land package. The acquisition closed on Jan. 26, 2016.

Since the end of 2015, the company’s share price has jumped 76% to finish April 15 at $8.52, and up 154% and 232% since exiting 2014 and 2013.

In an interview CEO George Ogilvie says the operational turnaround at the Macassa mine and the St Andrew Goldfields deal, among other factors, led to the share-price appreciation.

The headframe at the Holloway gold mine in Ontario, part of Kirkland Lake Gold’s East Timmins operations, which it acquired with St Andrew Goldfields. Credit: Kirkland Lake Gold

“As a company with a single producing asset, with a mine in a camp that is prone to seismicity, that mine will always inherently carry a little more risk than your typical underground gold mine,” Ogilvie says. “By doing the St Andrew deal, it helped de-risk the company while adding as an accretive deal on all metrics … we’re seeing the cash balance within the company rise quite dramatically.”

The East Timmins operations are 70 km away from Kirkland Lake, offering operational synergies — lowering costs and improving margins — as well as exploration opportunities.

The acquired land package covers 120 km of strike length on the Porcupine-Destor fault that runs from Val’d-Or, Que., to Timmins, Ont.

“As we know, on that stope system, there have been in excess of 100 million oz. gold found and mined there over the last 100 years,” Ogilvie says. “We saw a lot of potential for more exploration and finding mines.”

On April 14, Kirkland reported its first-quarter production from the Macassa and East Timmins operations. It produced 69,464 oz., with the Macassa mine complex delivering 41,054 oz. at a head grade of 15.4 grams gold per tonne. East Timmins churned out 7,189 oz. during the first 25 days of January before the Kirkland acquisition closed, and another 21,221 oz. averaging 5.1 grams per tonne afterwards.

Kirkland has guided 2016 production of between 270,000 and 290,000 oz., of which Macassa should deliver up to 170,000 and East Timmins up to 120,000 oz.

In comparison, the Macassa mine yielded 153,957 oz. for the fiscal year ended April 2015, and 102,597 oz. for the eight-month stub year ended in December 2015. All-in sustaining costs per oz. gold sold were US$1,067 for the 12 months ended in April. (Kirkland’s 2016 fiscal year will now match the calendar year.)

For 2016, Kirkland forecasts cash-operating costs of US$600 to US$650 per oz., and all-in sustaining costs of US$1,000 to US$1,050 per oz.

It anticipates capital expenses of $120 million this year, with $70 million going towards Macassa and $50 million to the East Timmins operations.

St Andrew previously spent $40 million a year on development and sustaining capital at East Timmins, Ogilvie says, adding that his firm will invest another $10 million. “We recognized over the last few years they were a little bit behind in capital development in some areas and in some of the equipment, which is older and needs to be replaced.”

Kirkland intends to spend at least $20 million on property, plant and equipment, and $30 million on opening areas at the Holloway and Taylor mines.

At Macassa, Kirkland will focus most of its funds on the South Mine Complex (SMC). That part contains almost 1 million oz. gold in reserves grading 22 grams per tonne, with the company extending the ramp from the 5,600-foot level down to the 5,700-foot level. It expects to spend $20 million on new property, plant and equipment.

On the exploration front, Kirkland has set aside $10 million for Macassa and $8 million for the East Timmins operations.

Roughly $7.5 million at Macassa is budgeted for a regional drilling program that will test eastwards of the SMC and the Main Break at depth. The remaining $2.5 million is for underground drilling at the SMC and on the ’04 Break above the 3,400-foot level, the company’s director of investor relations Suzette Ramcharan notes.

The objective of the exploration program at East Timmins is to increase the reserves and resources. Based on the production profile, the estimated mine life is seven years for Holt, five years for Taylor and two years for Holloway.

“At Taylor and Holloway, we would like to see if we can have some exploration success and extend the known orebodies, and try to increase the life-of-mine,” Ogilvie says.

Meanwhile, Kirkland is working out the kinks of a merger. It intends to improve and implement the SAP software St Andrew previously used over the consolidated company by 2017. This will help in sharing data across its business units.

Ogilvie notes the first-quarter financials due in mid-May should show lower operating costs and all-in sustaining costs, as well as improved margins.

“This is a big year for us to deleverage the company,” Ogilvie says. Kirkland aims to repay $90 million of its $140-million debt this year, while growing its treasury. Its cash balance at the end of March was $130.5 million, up from $93.7 million at the end of 2015.

If the company delivers on its operational plans and has exploration success, Ogilvie says Kirkland could further grow its production profile and strengthen its balance sheet.

“We believe the company is undervalued. And if the management team and our employees can execute over the next two years on the operational plans in the same manner we’ve seen over the last two years, we believe there is more value to add,” Ogilvie says.

BMO analyst Brian Quast writes that the company’s annual production and cost guidance is in line with his forecast, but that the capital expense and exploration budgets are higher than expected, reducing his 2016 cash flow-per-share estimate.

“We view the increased spend as a necessary evil, given the East Timmins assets were capital-starved under previous ownership. Assuming an exploration program at East Timmins, production should become less hand-to-mouth, as reserve life becomes more defined, which is a long-term positive.” Quast has lowered his $10.50 target to $9.75 per share, and has a “market perform” rating.