Gold is what's known as an unproductive asset -- it doesn't contribute to any kind of economic growth on its own, and its price barely keeps pace with inflation. Buying gold is also cumbersome. Where to store it? How to keep it safe? Should you buy coins or jewelry or gold bars? And then there is the cost. Right now, an ounce will set you back $1,514.
There's a lot to think about when dealing with the precious metal itself, but investors looking to diversify their portfolios don't necessarily need to acquire physical gold to do so. Although gold is often a top choice for people who are worried about the economy, more optimistic investors looking for company stability and a history of greater returns can strike it rich(er) by investing in Kirkland Lake Gold Ltd. (NYSE:KL), a company that mines this precious metal instead.
Record production is only increasing
Kirkland Lake is a growing company with highly productive yet low-cost mining operations in Canada and Australia. Although investing in Kirkland Lake is not completely without risk, its CEO has over 35 years' experience in the gold mining industry, which should appease conservative investors looking for company leaders with deep knowledge in their industry. Across all operations, Kirkland Lake will produce as much as one million ounces of gold in 2019 alone. The company's Macassa mine, located in Kirkland Lake, Ontario and operating since 2002, is one of the highest gold grade mines in the world, and its Fosterville mine is the largest gold producer in Victoria, Australia.
On October 9, Kirkland Lake announced record production for its third quarter of 2019: nearly 250,000 ounces in Q3 and almost 695,000 ounces year-to-date (YTD). Record quarterly production totaling almost 160,000 ounces from the Fosterville mine, which has increased its production every quarter of 2019, was the primary driver. In all of 2018, Fosterville produced over 356,000 ounces, so producing 44% of this amount in just three months is a significant feat. This increase in production resulted in a cash position increase of 31% ($146 million) during Q3, bringing KL's total cash and equivalents to $615 million. YTD, this represents an increase of 85%, or $283 million.
Cash is king in the gold mine, too
Kirkland Lake also employs its capital effectively. Just five years ago, the company's debt to equity ratio was 46.3%. Today it is debt-free and doesn't need to be covered by operating cash flow nor does it need to cover interest payments on outstanding debt. The company's trailing twelve month (TTM) gross profit margin is a whopping 73% compared to the sector median of 26%, In June 2019, revenue topped $1.09 billion, growing almost 36% year over year (YoY) -- more than 1,170% of the sector median.
There's also been a steady increase in the number of large funds buying into Kirkland Lake (780 as of June 2019, up from 369 one year before), signaling that prominent investors are getting more bullish on the stock.
Who needs a crystal ball when you have a gold one?
Kirkland Lake's forecasted earnings form a nice steep diagonal up. From 60.8% growth by October 2020, it future earnings just one year later are estimated to be up 121.4% -- more than doubling in that 12-month period. By October 2024, earnings could be up 302%, or five times the October 2020 baseline. A yellow brick road, indeed.
As we look forward to Kirkland Lake's next earnings report on October 29 and a consensus EPS forecast for the quarter of $0.79 (up from $0.28 one year ago), the future looks, well...golden.