"Amid long lead times for large-scale mining equipment, high fuel prices and ever-increasing capital costs, we contend that investors can find some shelter in high-grade underground mines in established mining camps," he wrote in a note to clients. It would be hard to find a more established camp than Ontario's Kirkland Lake, which has produced more than 40 million ounces of gold.

Mr. Lostritto initiated coverage of Kirkland Lake Gold with a "buy" rating and a bullish target of $10.00 a share. He noted the company still has great exploration potential, though its operational results so far "do not do justice" to the existing ore body.

He wrote that the company's installed mining capacity could generate EBITDA of $150 million a year, which would justify an enterprise value of more than $1.2 billion. That is 250% above the current level. However, Kirkland Lake has been struggling with a labour shortage and less than a third of its milling capacity is being utilized, Mr. Lostritto wrote.

"Kirkland Lake Gold continues to be a 'show me' story as operational challenges arising from poor equipment availability and a lack of skilled miners continue to negatively impact operating performance," he added.

All the same, he thinks the company has great potential with the discovery of the new "South Zone," which could yield more than five million ounces of gold. And the existing infrastructure makes for "higher valued ounces" than you'd get with most greenfield gold operations.

He also pointed out that Goldcorp Inc.'s recently announced $1.5-billion takeover of Gold Eagle Mines Ltd. establishes a starting valuation for this type of deposit. Even though Kirkland Lake's market value is far less than Gold Eagle, it has better infrastructure and an actual resource estimate, Mr. Lostritto noted.

Peter Koven National Post

Almost every point Peter makes could be a directed at SAN!

RUF