Kirkland Lake, Short & Sweet

I just tweeted this on Kirkland‪ Lake:

”#Stocks go up 2x, 3x, sometimes 10x. #gold supply ltd & only true #currency w/o #fiat money erosion. Fundamentals support 2x to 3000, 3x, more. $KL + #Detour will one day produce 2 million oz. Avg cost say $800. Profits? Billions. MV today 8 billion. PE say 18. A true 10 bagger.‬”

In the interest of brevity in my tweet I used MV, but it is actually Kirkland‘s enterprise value which is $8 billion. The stock today is $43 and the market worries about eighths and quarters when in point of fact this company is in the midst of a powerful and dramatic re-rating. This analysis assumes that the deal with Detour closes giving Kirkland Lake a long term gold cash flow.

In my judgment, Kirkland is a remarkable opportunity trading at a present value of 8 billion for all of this gold in the ground and the current production profiles of the two companies. That’s not a lot of money in the scheme of the world for the combined gold production today, approximately 1.6 million ounces, along with the massive reserves in the ground and the infrastructure that is already in place including the excellent management of Tony Makuch.

I do think of this mine as a gold bond. The company produces gold every year at a low-cost selling it at the market and creating the annual coupon. Although Detour’s costs are north of $1000 I do believe Tony will be able to rationalize those expenses down to the projected $900. As with any bond one discounts back cash flows out into the future. The residual at the end date are the reserves in the ground. Even out into the distant future at today’s low interest rates the present value of that residual, those reserves, is still quite high.

In the meantime, whatever happens to the price of gold, there is still a significant coupon inherent in the combination of the two companies. I thus look at the combination as a conservative bond instrument even though there is no specific contract for the coupon or the principal, other than the contract of good mining to produce the annual profits.

But this is not just a bond. It’s an enormous cash flow machine leveraged to the price of a commodity that I believe for fundamental reasons will trade dramatically higher. 

I do think that when this deal is finalized at the end of January, with a little bit of time, the market will arrive at the understanding that the combination should result in Kirkland trading at a premium not at the discount that occurred at the time of the announcement. But even if another suitor comes in to buy Detour, Kirkland, in my judgment will likely trade higher in part a function of the break up fee but more due to the market’s preference for Kirkland as a low-cost producer without regard to the certainty of production longevity, a position that I obviously think is misguided.

I of course like this deal and hope it closes but either way I have faith in Tony Makuch and his ability to make good use of the high cash flow Kirkland is currently generating, at today’s gold price let alone the much higher gold prices that I anticipate.

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