For many investors, gold represents a convenient way to protect themselves from market volatility. But that doesn't mean gold mining stocks are free of risk. Plenty of factors pose threats to these companies. Since all gold stocks are far from equal considerations, let's dig into one of the more intriguing options so far in 2019, Kirkland Lake Gold (NYSE:KL), to evaluate the associated risks.

Stating the obvious

Clearly, one of the greatest risks facing Kirkland Lake's success is volatility in the price of gold. Because it relies solely on gold production to keep the lights on, this obvious risk factor is more pronounced than with its peers, which also benefit from the production of other metals. By diversifying their portfolios with exposure to several metals, these companies mitigate the risk of steep downturns in the market prices of any one commodity.

One of Kirkland Lake's peers, Yamana Gold (NYSE:AUY), for example, estimates that in 2020, gold and silver production will account for 85% and 15% of revenue, respectively. Moreover, Yamana, which recently sold its copper-producing asset in Brazil, may return to production of the metal with the development of its Agua Rica asset in Argentina.

A risk dial points at minimum.

Image source: Getty Images.

Further distinguishing itself from peers, Kirkland Lake doesn't have a precious metals hedging program to protect itself from volatility in the price of gold. In its Q1 2019 earnings report, management nonetheless contends that the company remains "well positioned to benefit from potential increases in the price of gold while continuing to focus on cost management, mine efficiencies, and low-cost gold production from its existing mines in order to mitigate against gold price decrease."

For Kirkland Lake, drops in the price of gold will hurt less severely than for its gold mining peers. In 2018, for example, it reported all-in sustaining costs (AISC) of $685 per gold ounce, providing the company a nice margin, since it reported an average gold price of $1,267 for the year. The company forecasts 2019 AISC of approximately $540 per gold ounce, which suggests the year may be a lucrative one since the average price of gold for the first half of 2019 has been about $1,307.

Growing pains

Operating three mines in Canada and two mines in Australia, Kirkland Lake reported gold production of more than 723,000 ounces in 2018, and it forecasts approximately 975,000 ounces in 2019. Management, evidently, knows where the company can mine at the moment, but to ensure future success, it must replenish the resources that it depletes as it digs the metal out of the ground.

To achieve this, Kirkland can either identify gold targets on its own, growing organically, or grow through acquisition. Both options carry a fair degree of risk. Pursuing expansion of its mineral resources, the company committed $98 million of its capital expenditures to exploratory activities in 2018, and it expects this to rise to about $110 million in 2019.

Gold nuggets on a trowel beside exploring tools.

Image source: Getty Images.

While the company was successful last year, growing its mineral reserves about 24% to 5.8 million ounces, there's no guarantee that it will continue to enjoy the same success.

Moreover, the identification of a promising deposit doesn't mean that it will be a profitable endeavor for the company to develop, since it largely depends on the price of gold at the time.

In terms of acquisitions, the company doesn't have an extensive history of purchasing assets or companies. Nonetheless, if it does go shopping, investors must remember the company's ever-present sensitivity to the price of gold. A mining asset that may be profitable to develop with gold at $1,400 per ounce may be less than lucrative if gold plummets to $1,100 per ounce.

Digging into debt 

To perform one's due diligence, any investor considering a mining stock must pay careful attention to the balance sheet, since these companies often rely heavily on debt to finance their extensive capital expenditures. In the case of Kirkland Lake, this doesn't currently pose a problem because the company is free of debt -- something far from common among mining companies -- and had a net cash position of $416 million at the end of Q1 2019. Presumably, its strong cash flow will help fortify its financial position even further. In 2018, for example, Kirkland Lake converted 28% of its revenue into free cash flow, according to Morningstar, and it generated free cash flow of $93 million in the recently completed quarter.

To further illustrate Kirkland Lake's glittering position, let's consider two of its peers by market cap, Agnico-Eagle Mines (NYSE:AEM) and AngloGold Ashanti (NYSE:AU).

Company 2018 Free Cash Flow/Sales 2018 Net Debt 
Kirkland Lake 28% N/A
Agnico-Eagle (22.1%) $1.3 billion
AngloGold Ashanti 5.2% $1.7 billion

Data source: Morningstar.

Although all of these companies dig up the yellow metal, Kirkland Lake excels in its ability to turn it into green for shareholders. Outshining these two peers, it clearly represents a considerably lower risk than some of the other options available to investors.

The golden takeaway

Like all gold-oriented stocks, Kirkland Lake faces a fair degree of risk because it's subject to the volatility in the market price of the commodity. The high margin at which the company produces gold, though, leaves it in a better position than its competitors. This and the fact that the company generates strong cash flow while maintaining a strong balance sheet suggest that the company is in a less precarious position than its peers, making it one of the more compelling gold mining stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.