Monday, 17 September 2012

Ocean Equities sees "more high grade ore to come" for Kirkland Lake Gold

Ocean Equities has issued a research note on Kirkland Lake Gold Inc. (TSE:KGI)(AIM:KGI) after the Ontario-based miner posted fiscal first-quarter earnings.
The company is focused on Kirkland Lake, Ontario in the Southern Abitibi gold belt. 
Earlier Thursday, Kirkland Lake said its revenues declined in the quarter as it was impacted by production challenges, but the Ontario-focused gold producer maintained its output guidance for the year. 
For the three months that ended in July, Kirkland's Macassa mine in Ontario produced 70,201 tons of ore at a head grade of 0.26 ounces of gold per ton. 
A gold recovery rate of 95.2 per cent gave the company 17,396 ounces of gold in the latest quarter, with Kirkland selling a total of 19,964 ounces in the period, versus 24,178 ounces a year earlier. 
"While today’s news may have a short term negative effect on the share price, we would argue that overall most of the positive news that Kirkland has put out recently, including the recent exploration success has not yet been priced into the share price and any weakness in the share price should be seen as an opportunity," Ocean Equities said in a note. 
"Clearly the road ahead for the company has become slightly bumpier given these operating figures, but today’s results should not obscure the overall potential of Kirkland and should be seen in context."
"From today’s announcement it would appear that Kirkland’s ability to meet its production target of at least 180,000 ounces gold in FY’13 is somewhat impaired; however there is still a great deal of high grade gold ore at the SMC that Kirkland can access once it has begun to ramp up hoisting capacity," Ocean Equities added. 
"It is still too early to say that the company cannot meet its production guidance and unforeseen events should be factored in when looking at today’s results."
"As with most expansion projects, certain items have slipped on the development timeline, which we do not think detracts from the investment thesis that Kirkland presents, at the heart of which is a low cost, $100 million expansion programme to lift production capacity to 300,000 ounces per annum."
"We suspect there may be more slippage in the timing of certain aspects of the expansion but in our view this is simply par for the course with mining," the speciality brokerage said in its note. 
"Kirkland has maintained its production guidance for the year. We believe this reflects the confidence of the company to meet this mark. The company has set itself a high bar and it should receive due credit if it meet its targets."
"However, we expect the production guidance to be reduced in the Q2’13 operating update should the ore grade at the SMC’s current workplaces not improve."
Ocean Equities analysts said that the head grade was negatively affected by the mining of low grade ores at the South Mine Complex (SMC) that are not included in the resource estimate and unforeseen events including a power outage and forest fire also had an effect.
The higher than budgeted gold price - $1,635 per ounce for its gold sales during the quarter - has given Kirkland "a great deal of room to manoeuvre" during this critical period for the nearly-complete Phase II expansion, and at present the mine expects to meet its fiscal year 2013 production guidance of 180,000-200,000 ounces of gold.
For London-based Ocean Equities, a specialist brokerage focused on the resources space, the standout factor of the latest operating results was the overall head grade of 0.26 ounces per ton for the first quarter, substantially lower than the average head grade of the mine. 
This, the brokerage said, is a function of several factors including the deferral of mining some high grade ore due to short term phasing issues and unexpected discontinuities in local ore structures decreasing head grade and increasing dilution.
Ocean Equities said that the main factor was mining large amounts of low grade ore that was not included in the reserve or resource estimate. This ore is encountered by the production geologists during development. 
These factors affected both the South Mine Complex and Main Break ore feeds but the greatest effect was seen at the SMC where the feed grade fell to 0.27 ounces/ton, well below its usual head grade of in excess of 0.4 ounces/ton, Ocean Equities said.
In a high gold price environment the lower grade ore blocks at Macassa can be mined profitably which benefits the company by improving access to higher grade ore blocks. 
Some of the lower grade ore blocks are also being mined "aggressively" so the voids can be filled with waste to both reduce seismic risk and reduce the amount of waste hoisted to surface. During the latest quarter Kirkland was able to dispose of 53 per cent of its mine waste as fill, Ocean Equities said. 
The company is confident that the ore grade will improve considerably over the remainder of the year based on sampling of the ore blocks that are soon to be mined. 
At the end of the period Kirkland had 35 active mining workplaces in the production cycle. Another 15 workplaces are in the development stage and a further 13 are available to be developed or be brought into immediate production. 
Some of these additional 13 workplaces contain high grade gold ore that could help improve the head grade over the remainder of FY’13. Currently there are 25 workplaces in the planning stage.
Kirkland has decided to change the ore skips at Macassa from the current 10 ton skips to 12.5 ton skips. This will further increase the ore hoisting capacity of the shaft with the change-over expected to take place in December this year. 
Kirkland expects the reconfiguration of the hoisting skips to enable it to make up for lower production rates experienced in the first quarter, Ocean Equities said.
Good progress was made by the company during the quarter to achieve an ore hoisting capacity of 2,200 tons/day by May 2013 and Kirkland believes it is on track to achieve this. There is more work that needs to be done on the shaft than anticipated by Kirkland however the company does not expect this to delay completion of the expansion.
During the latest quarter, operating costs rose to $316/ton ore, which equates to $1,276/oz gold recovered. This is a significant increase from the operating cost of $249/ton achieved in the preceding quarter and the increase has been attributed to the power outage experienced in May at the mine at which time costs were incurred with no gold production. 
Phasing of development projects and allocation of personnel also had a negative effect on operating costs. The lower head grade also had a negative effect on operating costs on a per ounce basis.
The financial highlight of the quarter was completion of a $57.5 million convertible debt deal. Funds are being used by Kirkland as part of the expansion programme. A portion of the funds will also be used to pay the outstanding balance on the Queenston acquisition deal, with $30 million due to be paid in December this year.

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