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Thursday, October 22, 2020

KIRKLAND LAKE GOLD COM NPV (OTCMKTS:KGILF) a Shift in Paradigm

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KIRKLAND LAKE GOLD COM NPV (OTCMKTS:KGILF) is a small cap stock in the gold space that we covered a few weeks ago. We left off with the following view: “We think that ultimately the shift to fiscal stimulus rather than QE is likely going to be a far more important bullish catalyst for gold down the line. But the market is going through a shift in paradigm and the positioning situation needs to be ironed out.” The code on that was: Hold on, this is going to be a great pick, but not quite yet.

Part of that picture has to do with the bullish near-term picture for the US dollar. When you are dealing with a gold play, the gold market is the key ingredient, and everything else is a distant second place. And, when you are dealing with the gold market, the global forex market, along with monetary policy at the major developed market central banks, is the key ingredient.

KIRKLAND LAKE GOLD COM NPV (OTCMKTS:KGILF) frames itself as a company that operates as a gold producer and explorer with assets in the Kirkland Lake gold camp located in the Lower Abitibi Greenstone belt of northeastern Ontario, Canada.

It operates the Macassa Mine and Mill, as well as four contiguous gold mining properties.

The company was formerly known as Foxpoint Resources Ltd. and changed its name to Kirkland Lake Gold Inc. in October 2002. Kirkland Lake Gold Inc. was founded in 1983 and is headquartered in Toronto, Canada.

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One of the keys to this story in terms of proximal catalysts is the fact that the Company recently announced that they have entered into a definitive agreement to merge with Newmarket Gold (TSX:NMI), creating “an exciting new mid-tier gold company.” The combined company will have a market capitalization of approximately C$2.4 billion and produce over 500 koz of gold annually. Existing Kirkland Lake Gold and Newmarket shareholders will own approximately 57% and 43% of the combined company, respectively, on a fully-diluted in-the-money basis.

Beyond that, we need to consider the current drivers for gold. The biggest is likely to be the action in the US dollar, as a market in the forex space.

The main driver for the dollar is clearly the December 14 meeting of the US Federal Reserve. Currently, expectations are for a hike in policy rates of 25 basis points. That is probably priced in.

But traders need to realize that the action in the dollar, itself, tends to shape the market for gold. And the largest component of the US Dollar index is the euro. On December 8, a week ahead of the Fed, the European Central Bank will meet and set its own policy agenda.

Given recent data, including data on inflation out of Germany, the stage is possibly set for a major announcement at that meeting by Mario Draghi, head of the ECB, that could start the process of tapering ECB QE operations. If we get that announcement, the move higher in the dollar could be curtailed.

In such a case, the frame of reference for global traders of gold could shift meaningfully. In addition, the US Presidential elections on November 8 will have a major impact on the Fed’s decision-making. Many experts agree that an upset victory for Donald Trump would like hold the Fed at current levels and introduce many new variables, including financial market volatility.

In other words, while the current context for gold is tepid, there are many possible scenarios that might offer a major boost in the short term.

On a larger timeframe, we are still looking for a likely shift in emphasis that sees monetary policy hand off to fiscal policy for stimulus in the developed markets of the world. However, there are several major elections that will bear on that process, including the US election, the French election in May and June of 2017 and the German election later in the year in 2017. Fiscal stimulus is not a central bank phenomenon and the timing is much more difficult to predict.

Now commanding a market cap of $426.6M, KGILF has a significant war chest ($117.95M) of cash on the books, which stands against an appreciable load ($96.80M) of total accumulated debt.

Our sense is we are nearing a bullish inflection in gold and the gold mining stocks, and the stocks may well start to run ahead of the metal, particularly if energy costs stay low. But traders should avoid impatience with plays like this for the time being if you are going to be involved. For continuing coverage on shares of $KGILF stock, as well as our other hot stock picks, sign up for our free newsletter today and get our next hot stock pick!

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