Kirkland Lake acquiring Detour Gold for $4.9 billion

The Detour Lake Mine in northern Ontario.

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Kirkland Lake Gold Ltd. [KL-TSX, NYSE; KLA-ASX] on Monday November 25 announced the acquisition of Detour Gold Corp. [DGC-TSX] in an all-share transaction worth $4.9 billion.

The exchange ratio is 0.4343 Kirkland Lake shares for each Detour Gold share, implying a total consideration of $27.50 or a premium of 24%.

News of the deal supports the view, expressed recently by Franco Nevada Mining Corp. [FNV-TSX, NYSE] Chairman Pierre Lassonde. He said he expects most of the near-term merger and acquisition action in the gold mining industry to occur at the so-called mid-tier level as key players aim for growth.

Detour Gold is an intermediate gold producer in Canada. It operates the large-scale Detour Lake mine in northern Ontario about 300 km northeast of the Timmins. It is expected to produce 600,000 ounces of gold this year at an all-in-sustaining cost of US$1,100 an ounce. Detour Lake is estimated to host 15.4 million ounces of gold reserves, sufficient metal to support a mining operation for 20 years.

Over the life-of-mine, Detour Lake is expected to generate average annual production of 650,000 ounces as an AISC of US$984 an ounce.

Kirkland Lake Gold is a mid-tier gold producer with operations in Canada and Australia. The company said it is on track to produce between 950,000 ounces and one million ounces of gold in 2019. In Canada, its portfolio includes the Macassa Mine and the Holt Complex, which consists of three mines (Holt, Holloway and Taylor). All of its Canadian operations are located near Kirkland Lake, northeast Ontario.

The Australian portfolio includes the Fosterville Mine in Victoria State, and the Northern Territory operation, including the Cosmo Mine and Union Reefs mill. Cosmo was placed on care and maintenance on June 30, 2017.

As a result, combined production from the assets of both companies is expected to be around 1.5 million ounces in 2020.

“The acquisition of Detour Gold is an excellent fit for Kirkland Lake Gold,” said Kirkland Lake President and CEO Tony Makuch. “We have already taken two mining operations, Macassa and Fosterville, and transformed them into high quality assets that generate industry-leading earnings and cash flow,” he said.

“The addition of Detour Lake provides an opportunity to add a third cornerstone asset that is located in our back yard in Northern Ontario.”

Shareholder meetings for both companies are planned in January, 2020 with closing expected shortly thereafter. Post-closing, Kirkland Lake shareholders would own 73% of the combined company with Detour shareholders owning the balance.

Assuming the deal closes, it is expected to deliver pre-tax synergies of US$75-US$100 million annually.

Detour Gold shares advanced on the news, rising 3.5% or 77 cents to $22.98 on volume of 5.4 million. The shares have been trading in a 52-week range of $9.55 and $25.45.

Kirkland Lake Gold shares eased 16% or $10.17 to $53.15 on volume of 3.4 million. Kirkland Lake shares have been trading in a 52-week range of $25.23 and $67.87.

Makuch said Kirkland Lake is planning an extensive drilling program at highly prospective exploration within the 1,040 km2 Detour Lake land position, where it believes there is considerable potential for new discoveries to support future mineral resource growth.

Prior to the release of the 2019 third quarter results, Detour had been expected to produce between 570,000 and 605,000 ounces of gold this year at an all-in sustaining cost of between US$1,175 and US$1,250 an ounce.

However, the production guidance range has been tightened with the low end raised to 590,000 ounces and the top end staying steady at 605,000 ounces. Cash costs and all-in-sustaining cost guidance has been reduced by 5% and 6% respectively.

The revised guidance comes after Detour reported third quarter production of 137,670 ounces, compared to 151,402 ounces in the third quarter of 2018.

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