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Concern over the long term sustainability of free cash flow took the shine off an otherwise strong quarterly earnings report from Kirkland Lake Gold Inc., one of Canada’s best performing gold stocks.

On Wednesday, PI Financial Corp. analyst Phil Ker cut his rating to neutral from buy, on fears that hefty capital expenditure requirements at the intermediate mining company over the next few years could hinder free cash flow.

In the first quarter, Kirkland Lake beat estimates, reporting adjusted earnings per share of 25 cents, a penny better than consensus. On a net basis, the company posted a profit of $53.8-million, compared with $13.1-million in the same quarter in 2017. The miner also boosted its quarterly dividend to 3 cents a share from 2 cents, with free cash flow rising 30 per cent year-over-year to $50.2-million.

Free cash flow, a non-GAAP measure, is one of the most important metrics investors use to value mining companies. Kirkland Lake arrives at the figure by subtracting capital expenditures from operating cash flows.

Toronto-based Kirkland Lake has stood out among its peers specifically because of its strong and consistent free cash flow, with the stock roughly tripling in value over the past two years.

But a key part of the miner’s growth plan over the longer term is boosting production at its Macassa mine in Ontario, which will not come cheap. The company plans to spend $320-million over the next five years on a new mine shaft, with the goal of increasing production to more than 400,000 ounces a year – roughly double its current output.

Kirkland Lake is also investing heavily in exploration at its Fosterville high grade gold mine in Australia.

While it is well capitalized and holds a healthy $275-million in cash, with little or no debt, eventually things will come to a head, Mr. Ker predicts.

“At some point here, the free cash flow is going to hit a wall,” he said in an interview.

A big part of the reason Kirkland Lake’s free cash flow has been stellar over the years is a large and well timed acquisition that initially wasn’t popular among some investors. In 2016, the company bought Vancouver-based Newmarket Gold Inc. in an all-stock deal worth about $1-billion. As part of that deal, the company acquired the Fosterville mine, an asset that has since seen its reserves grow significantly.

Well known mining financier Eric Sprott, who has been chairman since late 2016, is the company’s second-biggest shareholder with a 10.3-per-cent stake.

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