Canada’s Kirkland Lake Gold Corp. has pulled off an afterthought in the gold sector from an afterthought in the gold sector as a merger partner with Agnico-Eagle Mines Ltd., one of the world’s most respected miners.
To do so, Kirkland defied the odds. It proved that the discovery of wondrous deposits was still possible, and it offered investors something very rare in the gold sector: solid cash flow earned by 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 criticized for buying Kirkland Lake Gold in $13 billion all-stock deal
Much of Kirkland’s transformation can be traced to Eric Sprot, once a star mining industry money manager, but lost his luster when the sector collapsed following the 2012 commodity supercycle crash.
Before Mr. Sprot disclosed his 11-percent stake in Kirkland and became chairman of the board in 2015, the company was struggling to survive. It booted its former management team in 2013 and a year later launched a strategic review that included investigating a potential sale. At the end, The review didn’t go anywhere.
After taking over and installing a new CEO, Tony Makuch, Mr. Sprot helped engineer the acquisition of another miner, Newmarket Gold, in 2016 for $1 billion. Mr. Sprout also held a 15-percent stake in Lakshya and became the chairman of the merged company.
The deal proved transformative. Prior to its acquisition of Newmarket, Kirkland relied largely on its Macassa project in northeastern Ontario. MACASA churned out high-grade gold, but its output was not high enough to win back investors running from the sector amid a postcrash asset writedown of tens of billions of dollars.
Newmarket’s main asset was the Fosterville project in Australia, which had been going on for years but didn’t seem to be anything special. Everything started to change in 2017 when Kirkland made a significant discovery of what became known as the project’s swan area. In 2018, Fosterville’s reserves increased by 60 percent, increasing the company’s reserves by 24 percent — and it was high-grade ore.
This discovery undermined the conventional wisdom in gold mining that all good gold had already been found. Not only was it fresh gold, but it was of the highest quality. And with gold prices rising again, Kirkland’s operating margin was tantalizing.
By mid-2019, Kirkland shares had gained 546 per cent. Over the same period, the VanEck Gold Miners ETF returned only 9 percent.
Yet Kirkland’s stature has waned in two years. At the end of 2019, miners bought Detour Gold for $4.9 billion in all stock transactions. The deal stunned investors as Detours, based in northern Ontario, struggled for years. Furthermore, unlike Kirkland’s two major underground mines, Detour was an open pit mine, and the cost of an ounce of gold to mine was almost twice that of Kirkland.
Kirkland’s shares were trading at 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 percent lower, while the VanEck Gold Miners ETF climbed 10 percent in the same period.
Agnico-Eagle, meanwhile, isn’t worried about Detour’s prospects. The merged company is expected to be large enough to attract investment dollars beyond mining specialists. “The new Agnico-Eagle will become a more attractive alternative to Barrick & Newmont for general investors,” Tanya Jakuskonek, research analyst at the Bank of Nova Scotia, wrote in a note to clients on Tuesday.
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