My Favorite Gold Play

Gold has historically been one of the best lower-risk investments available. It’s been used, quite rightly, as a hedge against market volatility, inflation, and falling interest rates. As an investment in its own right, gold tends to enjoy favor when consumer demand for the yellow metal increases – such as during Indian wedding and festival seasons – when geopolitical stress rises, and when the U.S. dollar weakens in value.

In recent months, gold has been on a tear. From the late-2018 bottom near $1,170 per ounce, gold rallied over $900 for a 78% gain when it peaked on August 7. Currently, the price of gold has settled into a nice-looking base above $1,925 and appears to be set to resume its rally with fresh legs.

Given that both inflation and interest rates are at historic lows (they can only go up from here), given the ever-present threat of rising geopolitical tensions, and given recent volatility in stocks as they approach all-time highs, this is a prudent time to take a look at gold stocks. Even Warren Buffett, a long-time gold sceptic, recently purchased a big chunk of a gold miner Barrick Gold (GOLD). If he’s interested in gold, maybe we should be too!

I’m not a “gold bug” but I do invest in plays related to the shiny metal. Like Buffett, I prefer to invest in money-making enterprises rather than a static commodity. The problem is that there are 64 publicly traded gold mining companies, so how do we know which one is best?

To find the best of the breed, I ran a proprietary valuation, safety, and growth scan among all the gold mining operations. One company rose to the top of the list: Kirkland Lake Gold (KL).

Shares of Kirkland Lake trade at a price-to-earnings ratio of 17.6 – that’s the eighth-lowest of all gold mining companies – and sport a near perfect 98 (out of 99) score for earnings and sales growth from Investor’s Business Daily. IBD ranks Kirkland #1 in the gold mining group — ahead of larger peers such as Newmont Corporation (NEM) and Buffett’s Barrick — on strength in its sales growth (up 107% last quarter), EPS growth (up 52% last quarter), three-year EPS historical growth (+90%), and rising EPS estimates for both this year and next. Add in safety or “moat” factors such as Kirkland’s whopping 59% profit margin, 33.5% free cash-flow-to-revenue ratio (the largest by far among the big miners), 37% return on equity, and a super strong balance sheet that sports a $537 million cash position and zero debt, and you can quickly see that this is a well-managed machine primed for long-term stability.

Kirkland operates mines in Canada and Australia, and is targeting over 1 million ounces of gold production by the end of the year. This will be bolstered by the company’s January purchase of Canadian miner Detour Gold. A report on Wednesday indicated that new drilling on this property – particularly in an area where little mining had been done previously — confirmed what Kirkland company management was betting on: that there is a rich deposit of both gold and other minerals on the property. Kirkland Lake CEO Tony Makuch said the drilling results “…have included numerous intersections containing attractive grades over substantial widths, which highlight the potential for significant growth.”

On August 18, Kirkland entered a strategic partnership with Newmont Mining, the largest gold mining operation in the world, with terms very favorable to Kirkland. Through this deal, Newmont agreed to purchase from Kirkland mining rights to one of its currently dormant properties (the Canada-based Holt Complex) in exchange for $75 million in cash. This is money Kirkland wants to use to purchase new operations elsewhere, just as it did with the Detour purchase. Moreover, Kirkland retains the right to terminate this option at any time.

Kirkland Lake is not exactly a well-kept secret, even though it’s not as popular among analysts as its two larger, aforementioned peers. Kirkland has attracted a dozen analysts who follow the company closely, half of whom carry the coveted “5-star” rating on analyst-ranking service TipRanks for accuracy and one-year return. Ten of the 12 currently have a “buy” or better rating on shares. Because these are some of the sharpest analysts in the business, Kirkland ranks as a “strong buy” on TipRanks.

Action to Take: Consider buying shares of KL up to a price of $57. With a time horizon of 18 months or longer, I see shares of KL rising to $100 or more.