What happened
Shares of Kirkland Lake Gold (KL) slipped 10.2% in the month of November, according to data provided by S&P Global Market Intelligence.
While the gold stock kicked off the month on a positive note, it started to fall right after Kirkland released its third-quarter numbers on Nov. 5. The slump in gold price soon after put further pressure on Kirkland shares.
So what
Kirkland's shares fell despite the company delivering strong third-quarter numbers. There could be two reasons: its earnings lagged analysts' estimates, and its costs reflected what investors feared. Before I explain that, here are the positive highlights from the quarter (all numbers year over year).
- Revenue jumped 66% to $632.8 million, thanks largely to Kirkland's acquisition of Detour Gold in early 2020.
- Gold sales volume and average realized price were up 30% and 29%, respectively.
- Net earnings grew 14.4% to $202 million.
- Operating cash flow surged 36%.
Image source: Getty Images.
So far, so good, but Kirkland's all-in-sustaining cost (AISC) jumped to $886 per ounce of gold sold from only $562 an ounce in Q3 2019, driven by higher costs at the Detour Lake mine. Detour Lake is a high-cost mine, which is why investors weren't impressed when Kirkland first announced its intention to acquire Detour in late 2019. Kirkland's operations, in comparison, are far more cost-effective. For perspective, Kirkland's AISC in Q3 was only $622 per ounce, excluding Detour Lake.
To make matters worse, gold price reversed its uptrend after two drugmakers Pfizer and BioNTech announced high efficacy for their coronavirus vaccine candidate on Nov. 9. The news sent the stock market soaring even as precious metal stocks got hammered. Precious metals like silver and gold typically move in the opposite direction to equities. Gold price dropped 5.4% in November.
With gold prices falling at a time when Kirkland's costs are rising, investors are worried the miner's profit margins will shrink going forward.
Now what
For the full year, Kirkland expects AISC to range between $790 per ounce and $810 an ounce. That might be high, but it still translates into strong margins for Kirkland at the current spot gold price. Moreover, Kirkland continues to boast a strong balance sheet -- it remains debt-free and its cash balance soared to $848.5 million as of Sept. 30, from $311.1 million as of June 30. That should convince long-term investors to remain bullish about the gold stock.
