Kirkland Lake Gold (Price: 260p | Target: 380p | Rec: Buy) KGI’s FY13A result reflected the delays through the year in installing the service cage, which resulted in less ore being delivered and at lower grades.

This service cage is now operational, freeing up the main production hoist to dedicated extraction of ore and waste.

The resultant lift in volume in FY14E should not only result in greater production (Investec forecast of 155koz vs.

91koz in FY13A), but significantly reduced unit operating costs (Investec forecast of $881/oz vs.

$1,119/oz in FY13A). * KGI reported FY13A gross profit of $27.7m and a net loss of $3.6m (vs.

our forecast of a profit of $1.6m), well down from the FY12A profit of $41.2m.

It ended the period with cash resources of $77.0m, after investing $91.1m in infrastructure and equipment and $17.1m on exploration.

Borrowings stand at $102.7m, the carrying value of the $126.5m of convertible bonds (6.8% coupon, 5yr term).

The cash position is now $40.8m, after paying the $30.6m that was still owed on the Queenston acquisition. * Completion of the service cage was the pivotal point of KGI’s expansion plans and the Q413 report already showed evidence of higher production rates at better grades.

Output should continue to lift through the year as other elements of the expansion programme are completed (plant upgrade, additional fleet and workforce).

KGI’s cash position is adequate, but will need close monitoring through the initial half of FY14E, particularly in light of the volatile gold price. * Our target price is based on an equal blend of NPV (using a long-term gold price of US$1,400/oz, risked to 70% to reflect outstanding development risk) and forward earnings multiples (10x PER, 6x EV/EBITDA, 6x FCFPS).

This has reduced slightly, from 396p per share to 380p per share, after incorporating the FY13A results.

Maintain Buy.
To access the full note please click here Analyst: Hunter Hillcoat
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