Kirkland Lake Gold in Newmont Goldcorp alliance

Kirkland Lake Gold’s Taylor Mine at Matheson, northeast Ontario. Source: Kirkland Lake Gold Ltd.

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Kirkland Lake Gold Ltd. [KL-TSX, NYSE; KLA-ASX] agreed to form a strategic alliance with a Canadian unit of Newmont Goldcorp Corp. [NGT-TSX; NEM-NYSE] to explore and develop opportunities around certain properties in Timmins, Ontario.

Those properties include Kirkland Lake’s Holt Complex comprising three mines (Holt, Holloway and Taylor) as well as Newmont’s properties in the Timmins camp. A key component of the deal includes royalty obligations for production from the Holt mine, which were retained by Newmont when it sold the Holt Complex to St. Andrews Goldfields, a company that was acquired by Kirkland Lake in 2016.

The NSR rate on the royalty is equal to 0.013% multiplied by the quarterly average gold price and has no cap. As a result, at a spot gold price of US$1,985/oz, the royalty rate is 26%, payable to precious metals stream and royalty company Royal Gold Inc. [RGLD-NASDAQ].

Additionally, Franco Nevada Mining Corp. [FNV-TSX, NYSE] owns a sliding scale NSR royalty on the Holt mine with an effective 10% rate, which is not part of this deal. Franco also has a 1% NSR royalty on the Taylor mine and a 3% royalty on the Holloway mine, which are both part of the Holt Complex. In 2019, Franco Nevada agreed to significantly reduce the Holloway royalty from a much higher sliding scale rate, which would have been 14% at current spot prices.

Under the agreement, Kirkland Lake has the option to take on Newmont’s royalty obligations in exchange for US$75 million of unconditional, upfront cash. The option becomes exercisable if Kirkland Lake decides to restart the Holt mine. But it can also be terminated by the company upon the assumption of certain liabilities related to the Holt Mine property. As a result, it is expected that the next step for Kirkland Lake will be to re-negotiate the high Holt royalties with Royal Gold and Franco Nevada to improve the economics for a potential re-start of the mine in the future.

Kirkland Lake Gold is a mid-tier gold producer with operations in Canada and Australia that produced 974,615 oz gold in 2019. All of its Canadian operations are near Kirkland Lake, 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 in June, 2017.

Combined production from the assets of both Kirkland Lake and Detour Gold was expected to be around 1.35 million and 1.4 million ounces in 2020 at a forecast all-in-sustaining cost of US$790-US$8.10/oz.

On Tuesday August 18, Kirkland Lake shares rose 0.63% or 0.44 cents to $70.70 on volume of 519,138.

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