Investors punished Kirkland Lake Gold Ltd. after the underground mining company said it will acquire struggling open pit specialist Detour Gold Corp. in an all-stock deal valued at about $4.9-billion.
Toronto-based Kirkland Lake is paying 0.4343 Kirkland shares for each Detour Gold share, a 24-per-cent premium to Friday’s closing price.
But that premium all but vanished in trading Monday on the Toronto Stock Exchange. Kirkland Lake closed down 17.3 per cent on the Toronto Stock Exchange to $52.38 apiece. Detour closed up 1.8 per cent to $22.61 apiece.
Kirkland Lake has been the gold industry’s best-performing senior gold miner over the past three years, thanks in part to the spectacular performance of its high-grade Fosterville mine in Australia.
By contrast, Detour, also based in Toronto, has struggled for most of its existence. Its low-grade open pit mine in Detour Lake in Northern Ontario went into production in 2013 and, until recently, was known as a poorly managed, high-cost operation.
Fahad Tariq, analyst with Credit Suisse, wrote in a note to clients that the acquisition “increases Kirkland Lake’s overall cost profile, and importantly raises concerns about potentially weaker exploration updates coming at Fosterville.”
During a conference call with Kirkland Lake’s management team, John Tumazos, independent analyst with Very Independent Research, expressed concern that the deal means that Kirkland Lake will now have to settle for “mortal,” as opposed to “superhuman,” returns on investment.
Kirkland Lake’s second biggest shareholder, Eric Sprott, says he was “shocked” and “disappointed” when he first heard about the acquisition, although he says it will prove to be a success in the long run.
“[Eric’s] probably shocked and disappointed at the drop in the share price on the day. Definitely all of our shareholders are. We all are disappointed,” said Tony Makuch, chief executive of Kirkland Lake. “That’s what we’re going to have to do here. Demonstrate to the market how we see this as a valuable asset, and a good deal for shareholders.”
Last year, a proxy fight led by New York-based hedge fund Paulson & Co. Inc. culminated in a top-to-bottom overhaul at Detour Gold, and the ejection of much of its legacy management team and board members. This year, Detour had been showing signs of a turnaround with its costs falling.
Despite those efforts, Detour’s costs to mine an ounce of gold are roughly double that of Kirkland Lake. Detour Gold’s 2019 all-in sustaining cost (AISC) guidance for this year is between US$1,100 and US$1,175 an ounce compared to Kirkland’s US$520 to US$560.
For Kirkland, the acquisition adds a mine in a safe jurisdiction and significantly increases its reserves, which was an Achilles heel for the company. The Detour Lake mine has 22 years’ worth of reserves, compared to just nine years for the Fosterville mine. Detour Lake is among the biggest producers in Canada, with yearly production of around 600,000 ounces a year.
Mr. Sprott has been encouraged that the miner has been able to boost the performance of its mill at the mine site, which has resulted in increased production without a significant outlay of capital. He says the company’s plan to eventually get its costs down to US$850 an ounce is achievable.
“It’s shocking everybody, as it was to me,” Mr. Sprott said of the acquisition of Detour by Kirkland Lake. “But I’ve always been a great believer in the statement that you have to steal value. The value at Detour is that the production and grade can increase markedly.”
Kirkland Lake has also reinvented itself over the past few years. After a successful turnaround at its high-grade Macassa mine in Ontario, and later the success of Fosterville, now one of the world’s highest-grade underground gold mines, its shares have gone up eightfold in the past three years.
In an open pit operation, miners dig out millions of tonnes of rock that is subsequently crushed to extract only minute amounts of gold. Underground mining consists of the mining of much lower amounts of rock that yields dramatically higher amounts of metal per ounce – often 20 or 30 times as much. Grades at Fosterville have typically run at least 25 grams per tonne, compared with below one gram per tonne for Detour.
When asked if there is a skills mismatch in an underground high-grade miner acquiring an open pit specialist, Mr. Makuch said he was confident Kirkland has the expertise to do both.
“Mining is mining. You just use larger equipment in an open pit versus underground. But for the most part there’s a lot of similar execution,” he said.
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