Kirkland Lake buys Detour in major mining deal

TORONTO Kirkland Lake Gold Ltd. on Monday announced a multibillion-dollar acquisition of Detour Gold Corp., a deal that would elevate it into a major gold miner and could attract new institutional investors.

But investors weren’t impressed, with the stock declining 17.3 per cent to close at $52.38 on the Toronto Stock Exchange. Detour rose 1.8 per cent to $22.61.

The combination marries two near opposites: Kirkland Lake operates two high grade underground mines at some of the lowest cash costs in the sector, whereas Detour operates a single, low grade bulk tonnage open pit mine at comparatively higher costs.

The acquisition would boost Kirkland’s annual gold production by about one-third to more than 1.5 million announces per year, but its costs are also expected to rise.

The value of the all-stock deal was somewhat uncertain as of Monday, initially pegged at $4.9 billion but falling with Kirkland’s stock. If some investors expressed initial skepticism, one of the biggest and perhaps most important investors in Kirkland, billionaire Eric Sprott, who stepped down as chairman earlier this year, said he would support the deal.

“The more I reflect on Detour, I think we’re ‘stealing value’ — value that the market’s not seeing,” Sprott told the Financial Post.

Detour reported all-in sustaining costs of $1,198 in the third quarter whereas Kirkland reported all-in sustaining costs of $562, about half of that.

Nonetheless, Sprott said he had been studying Detour: With gold prices rising — about 15 per cent since June to US$1,467 per ounce — higher cost producers can catch momentum more quickly than lower cost producers because they’re starting from a lower profit base. For example, Detour reported revenue from mining operations of US$59.8 million in the third quarter — compared to about US$15 million in the same quarter one year earlier. It said in its report that it had sold its gold for US$222 per ounce more on average during the quarter than the prior period.

Sprott also said he was encouraged by signs that Detour looks like it’s bringing costs down to around US$1,100 per ounce, and that could increase its gold production beyond the 621,000 ounces produced in 2018.

“I think we’re on the cusp of something really special,” he said. “I think a lot of good things will happen at that property.”

Tony Makuch, chief executive of Kirkland Lake, said his company was attracted to Detour Lake by its sheer size. It provides the company with 15.4 million ounces of proven reserves, roughly triple what the company holds between its two underground mines, with Fosterville in Australia at about 2.7 million ounces, and Macassa in Ontario at 2.2 million ounces.

Plus, he said Detour is already lowering its costs, and its production has been rising on track to produce more than 600,000 ounces for a second straight year.

“You can see potential to get this up to well over 800,000 ounces per year production,” he said, adding that the company had spent only about $40 million on exploration during the past five years — which Kirkland will look to increase.

Makuch said his company had long been interested in the mine, dating back to 2018 when Detour investor, John Paulson, a billionaire, successfully ousted the board and replaced the management, citing poor performance.

A spokesman for Paulson & Co. declined to comment on the proposed merger. “It came together fairly quickly,” said Makuch.

Both Detour Lake’s mine and Kirkland’s Macassa underground mine are both on Ontario’s Abitibi Greenstone belt, about several hundred kilometres away from each other, and Kirkland Lake said it expects about $75 million to $100 million in pre-tax synergies.

The management of both firms declined Monday to provide any details of how that would be achieved.

Kerry Smith, an analyst at Haywood Securities who covers Detour, said he thinks the combined company, which would have a market valuation of around US$14 billion, could attract new institutional investors who want a gold stock in their portfolio, but who viewed Kirkland and Detour as too small or lacking in liquidity.

I think we’re on the cusp of something really special.