DRGDF - Kirkland Lake to Spend C$4.9 Billion in Detour Gold Acquisition
International miner Kirkland Lake Gold (TSX:KL,NYSE:KL,ASX:KLA) will fork over C$4.9 billion to acquire Canadian producer Detour Gold’s (TSX:DGC,OTC Pink:DRGDF) cornerstone asset the Detour Lake mine in Ontario.
The merger will help Kirkland retain its position asone of the largest gold producers globally with annual output of 1.5 millionounces per year.
Kirkland will spend just under C$5 billion in the all-share deal that will add the “long life asset” to its Ontario project roster, which also includes the Macassa and Fosterville mines.
Despite being low grade, Detour Lake is one of Canada’s most prolific producers, with annual output hitting 621,000 ounces in 2018.
“We have already taken two mining operations, Macassa and Fosterville, and transformed them into high-quality assets that generate industry-leading earnings and free cash flow,” said Tony Makuch, CEO and president of Kirkland Gold. “The addition of Detour Lake provides an opportunity to add a third cornerstone asset that is located in our back yard in Northern Ontario.”
Aside from the long-life mine and the favorable jurisdiction,Makuch also noted the exploration potential offered by the acquisition. Detour’sland package covers 1,040square kilometers within Ontario’s Abitibi gold mining region.
“The dealleverages Kirkland’s excellent stock performance (it’s up over 800 percent inthe past three years) to acquire an asset that addresses Kirkland’s reserveconcerns,” Gerardo Del Real of the Outsiders Club told the Investing News Network.
Purchasing the Detour asset will also add 15.4 millionounces to Kirkland’s reserve base and extend the gold miner’s reserve lifeindex by eight years.
“For Detour shareholders the deal allows for cost cuts that could total approximately C$75 to C$100 million per year, according to the companies,” said Del Real. “That’s money that can be used in part for aggressive exploration of the extensive land package.”
Kirkland Lake will initiate a planned drill program, which will help to identify any new resource zones.
Detour shareholders will also gain access to Kirkland’sdiversified portfolio of assets in Canada and Australia.
“Oursignificant mineral resource base, exploration potential, and long-lifeproduction profile are a great addition to the Kirkland Lake Gold portfolio,” saidMick McMullen, Detour CEO. “Kirkland Lake Gold’s strong balance sheet andcash generating capabilities will support additional investment in theexploration of Detour Lake to help unlock further growth potential.”
Adrian Day of Adrian Day Asset Management pointed out that Detour had been “under siege for some time,” relating to underperformance, which ironically seemed to be on the turnaround according to the most recent quarterly report.
“For Detour, it ends the ongoing distraction of hostile shareholders, brings in proven operators, and puts it inside a company with a low cost structure. For Kirkland, it enables it to grow in a good jurisdiction, and acquire a large mine at a reasonable price,” said Day.
“It will, however, significantly increase Kirkland’s cost structure; Kirkland’s all in sustaining costs are under C$600, while Detour’s are over C$1,100.”
Lastyear, Detour was embroiled in a battle with Paulson and Co. to retaincontrol of the company’s board. The latter had argued that Detour’s managementteam was unable to realize the potential of the sole asset, Detour Lake mine.
If this move will signal the merger and acquisition activity the junior gold sector needs remains to be seen. However, Day did note, “I look for more (merger and acquisition) activity, primarily acquisitions of single-mine companies, like Detour. Targets might include, for example, Pretium (TSX:PVG).”
The C$4.9 billion deal prices Detour shares at C$27.50, a 24 percent premium to the TSX trading value of the miner’s stock at closing on Friday (November 22).
Shares of Kirkland Lake fell 15.8 percent Monday(November 25) morning, to trade at C$53.32.
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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.