🕐29.10.13 - 10:27 Uhr

INVESTEC: KIRKLAND LAKE GOLD : REVENUE ROYALTY RAISES US$50M - BUY



Kirkland Lake Gold (Price: 238p | Target: 353p | Rec: Buy) Kirkland Lake’s 2.5% revenue royalty deal with Franco-Nevada (FNV) is a positive outcome for the company, we believe, as it alleviates concerns over the group’s current tight cash position and should enable it to complete its expansion plans.

While the royalty will add cUS$35/oz to Kirkland Lake’s costs (on our long term gold price of US$1,400/oz), we believe that this is a relatively small and affordable figure, and that Franco-Nevada has paid a fair price for its gold.

We reiterate our Buy recommendation. * 2.5% revenue royalty: Kirkland Lake Gold has sold a 2.5% net smelter return royalty (NSR) on its Macassa mine in Ontario to Canadian royalty group FNV, raising US$50m.

Kirkland Lake has the option to ‘buy back 1% of the NSR for US$36m less the royalty proceeds attributable to the buy-back portion of the NSR that has been paid to FNV prior to the date of the buy-back’.

FNV has the right of first refusal on any future royalty stream from the company’s properties. * Our view: We believe that FNV has paid a fair price for the 2.5% revenue royalty, which equates to an additional modest cost to Kirkland Lake of US$35/oz on our long term gold price (US$1,400/oz).

We estimate FY14E gold production of 154,000oz, equating to c.US$5.2m revenue to FNV.

On our fully expanded gold production estimates of 237,000oz, FNV would receive c.US$8.3m/year at our long term gold prices, from Kirkland Lake.

We view today’s news as positive as it alleviates recent concerns on the group’s tight cash position.

Kirkland Lake is on the cusp of realising its expansion potential, and these funds should enable it to complete this work and secure its future. * Recommendation and target price: We reiterate our Buy recommendation although we reduce our target price from 377p to 353p to reflect today’s news and our updated near term gold price assumptions.

Our target price is derived from a blend of NPV and forward earnings multiples.
To access the full note please click here Analyst: Hunter Hillcoat
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