Kirkland Lake Gold Ltd. (KL) shares have had a great run over the last year. It has grown by 150% since the beginning of 2019, and this doesn’t even include the dividend it pays out, which although isn’t very much, should still add up over time for long term shareholders. But how much higher can this gold company’s stock price climb? Well that would depend on a number of factors, but the most important one is probably the price of the underlying commodity it sells – gold.
Like many other gold producers, Kirkland Lake Gold operates in one segment consisting of a mining and milling operation. Its operations consist of the Macassa Mine and Mill, in Ontario, Canada, and four contiguous formerly producing gold mining properties. It has a 950,000 – 1,000,000 oz of gold target production for the current year between Canada and Australia. The principal product from the mining operations of the company is the sale of gold doré bars on the market. A doré bar is a semi-pure alloy made from gold and silver. These bars are usually created at the site of a mine and then brought to a refinery for additional purification. Doré bars are typically around 80% gold, but it can vary depending on the properties of the mine it comes from.
The fundamentals of Kirkland Lake Gold is quite strong. It’s a mature gold company that has been in business for decades, being incorporated in 1983. According to Thomson Reuters StockReports, the stock has a median rating of HOLD by analysts. One of the biggest risks to the stock is the possibility of being overvalued. Kirkland Lake Gold currently has a Relative Valuation Rating of 1, which is significantly below the S&P/TSX Composite index average rating of 4.8. The stock’s P/E ratio is perspective KL is 26 times, which is relatively high compared to past years. If the price of gold doesn’t change over the next year then the expected return on this stock will be in the low single digit range. Maybe that’s why KL has recently experienced a small sell off. In the latest trading session last week, KL closed at $47.33, marking a 2% move down from the previous day. This change lagged the S&P 500 which didn’t change. Meanwhile, the Dow gained a slight 0.3%.
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One thing going for precious metal companies around the world is the surging price of gold. The current spot price of gold is $1508/oz. Last week it went as high as $1550/oz, which was at a 6 year high. The precious metal has gained 21% so far this year on the back of a dovish Federal Reserve, concerns over the trade war between the United States and China, and political unrest in Hong Kong. Governments are also building up their gold reserves which is helping to add demand and boost prices. For example, Russia’s central bank bought 55.3 tons of gold between January and March of this year, bringing their total gold holdings up to 17% of their total reserves. And last year Russia bought a total of 274.3 tons, while “drastically reducing its US Treasury holdings as part of its ‘de-dollarization’ drive” according to the World Gold Council. Russia now holds just a tiny proportion of US debt at less than US$15 billion. But it also holds the worlds largest gold deposits and could arguably be in a position to use that as a tangible asset to generate support for currencies such as the Ruble and the RMB Yuan.” China has also followed suit and ramped up its net gold purchasing. “China bought nearly 10 tons of gold in July, adding to its eight-month buying streak and bringing its reserves to 62.26 million ounces — about 1,945 tons. The growing threat of a currency war in recent days could add to this momentum and prove an overall tailwind for gold,” a team said, led by Alain Bokobza, the head of Global Asset Allocation at Societe Generale.
According to a Morningstar Quantitative Equity Research Report, the fair market value of KL given what we know is $44.52/share. This means the stock is probably about 6% overvalued. It’s not a big deal because gold stocks tend to be quite volatile and a 6% swing in one direction or another is not unheard of. But unless the price of gold continues to climb higher, there is not much value left in Kirkland Gold shares.