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Hydraulic excavators scoop the broken rock into 100- or 150-tonne haul trucks at Agnico-Eagle's Meadowbank mine in Nunavut in June, 2011.Euan Rocha/Reuters

Canada’s Kirkland Lake Gold Corp. has pulled off the near impossible, morphing from an afterthought in the gold sector into a merger partner with Agnico-Eagle Mines Ltd., one of the world’s most respected miners.

To do it, Kirkland defied the odds. It proved miracle deposit discoveries are still possible, and it offered investors something extremely rare in the gold sector: solid cash flows earned from mixing high-grade ore with low-cost operations.

The cherry on top: Kirkland has one of the cleanest balance sheets in the industry, with no debt on its books.

Agnico Eagle deal to buy Kirkland Lake Gold in $13-billion all-stock deal criticized

Much of Kirkland’s transformation can be traced back to Eric Sprott, who was once a star mining industry money manager, but who had lost his shine when the sector nosedived after the 2012 commodity supercycle crash.

Before Mr. Sprott disclosed his 11-per-cent stake in Kirkland and became board chair in 2015, the company was struggling to survive. It had booted its former management team in 2013 and initiated a strategic review a year later that included investigating a possible sale. Ultimately, the review went nowhere.

After taking control and installing a new CEO, Tony Makuch, Mr. Sprott helped engineer the acquisition of another miner, Newmarket Gold, for $1-billion in 2016. Mr. Sprott also held a 15-per-cent stake in the target and became chair of the merged company.

The deal proved to be transformational. Before acquiring Newmarket, Kirkland largely relied on its Macassa project in northeastern Ontario. Macassa churned out high-grade gold, but its production wasn’t stellar enough to win back investors running from the sector among tens of billions of dollars worth of postcrash asset writedowns.

Newmarket’s main asset was the Fosterville project in Australia, which had been around for years but didn’t seem like anything all that special. Everything started changing in 2017 when Kirkland made significant discoveries in what is now known as the project’s Swan zone. In 2018, Fosterville’s reserves had jumped 60 per cent, boosting companywide reserves by 24 per cent – and it was high-grade ore.

The discovery bucked the conventional wisdom in gold mining that all of the good gold had already been found. Not only was this fresh gold, it was of the highest quality. And with gold prices rising again, Kirkland’s operating margins were tantalizing.

By mid-2019, Kirkland’s shares had popped 546 per cent. Over the same period, the VanEck Gold Miners ETF returned only 9 per cent.

Yet Kirkland’s stature has diminished over the two years since. In late 2019, the miner bought Detour Gold for $4.9-billion in an all-stock transaction. The deal surprised investors because Detour, based in northern Ontario, had struggled for years. Also, Detour was an open pit mine, unlike Kirkland’s two major underground mines, and its cost to mine an ounce of gold was roughly double that of Kirkland’s.

Kirkland’s shares traded around $63 a piece at the time of the Detour deal announcement. The day before the Agnico-Eagle merger was announced, they were trading 12 per cent lower, while the VanEck Gold Miners ETF had climbed 10 per cent over the same period.

Agnico-Eagle, meanwhile, does not seem all that worried about Detour’s prospects. The hope is that the merged company will be big enough to attract investment dollars beyond mining specialists. “The new Agnico-Eagle would become another attractive alternative to Barrick and Newmont for generalist investors,” Bank of Nova Scotia research analyst Tanya Jakusconek wrote in a note to clients Tuesday.

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