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CEO Says Kirkland Can Cut Costs Even After $3.7 Billion Deal

Joe Deaux

(Bloomberg) -- Kirkland Lake Gold Ltd. Chief Executive Officer Tony Makuch was quick to assuage investors that the planned C$4.9 billion ($3.7 billion) acquisition of Detour Gold Corp. won’t boost the company’s cost after shares tumbled.

Shares of Canada’s Kirkland Lake slumped 17% Monday, the worst since mid-July 2015, after announcing an all-share deal to buy Detour Gold, which operates the Detour Lake mine in Ontario. Detour Lake is expected to produce for more than 20 years and can generate 600,000 ounces a year.

Gold mining acquisitions have surged since 2018 after Barrick Gold Corp.’s takeover of Randgold Resources Ltd., and Newmont Mining Corp.’s purchase of Goldcorp Inc. Consolidating the projects after the mergers hasn’t been easy for Newmont, which inherited a company saddled by growing pains as it integrates Goldcorp assets.

In the case of Kirkland’s deal, the company will take on Detour Lake, whose cost is double that of the acquiring miner.

“There’s significant benefit in terms of maintaining or reducing costs from current levels,” Makuch said in a telephone interview. “This is definitely a long-life asset that has potential to grow production and continue to be a long-life asset.”

Kirkland has managed to cut its all-in sustaining cost or the cost to keep its mines in business by almost half to $562 an ounce in the third quarter, from three years earlier. That compares with a 15% gain in Detour’s cost of $1,198.

Kirkland’s stock price has surged in the three years through Friday, climbing eight-fold, as profits soared. The shares have outstripped a 36% rise in the BI Global Senior Gold Valuation Peers index, and a 21% climb in gold prices over that same period.

That has put the company in a strong position to expand. The Detour Lake gold mine is about the same size as Kirkland’s biggest project, the Fosterville mine in Australia.

Bull Run

In the decade-long bull run that took prices of the precious metal to a record in 2011, companies bought assets in their rush to ramp up output to meet rising demand for the metal, accumulating debt to close those deals. As prices reversed and the metal languished in a bear market for years, investors hit the exit, leaving many miners unable to service their obligations and forcing them to cut cost to survive.

A group of investors including the hedge fund founded by billionaire John Paulson and Egyptian billionaire Naguib Sawiris’s La Mancha had called on gold companies to unlock $13 billion in value through mergers and cost cuts.

The group called the Shareholders’ Gold Council of 18 investors urged the mid-tier companies to pursue no-premium mergers to cut duplicate corporate structures and achieve economies of scale.

The acquisition of Detour Gold “will increase Kirkland Lake’s overall cost profile,” Fahad Tariq, an analyst at Credit Suisse Group AG said in a note before trading started Monday. “It also raises concerns about potentially weaker exploration updates coming at Fosterville.”

Slipping Value

Detour shareholders will receive 0.4343 share of Kirkland, according to the statement. After the deal is completed, existing Kirkland shareholders will own 73% of the new company, with Detour owners holding the rest. The agreement values Detour at C$27.50 a share, a 24% premium to the closing price on Friday, Kirkland said in a statement.

After Kirkland shares plunged Monday, the value of the offer has fallen to C$22.75. Detour shares advanced 1.8% to C$22.61 in Toronto.

Detour shares have almost doubled this year to become this year’s best performer on the Bloomberg Americas Mining Index, helped by a rally in gold prices. Paulson & Co. led an overthrow of the board in 2018 after a bitter proxy battle, in which he called for the company to put itself up for sale.

The new entity would have gold production of about 1.5 million ounces in 2019 and free cash flow of $700 million, Kirkland said.

(Closes shares in second and 14th paragraphs.)

--With assistance from Thomas Biesheuvel.

To contact the reporter on this story: Joe Deaux in New York at jdeaux@bloomberg.net

To contact the editors responsible for this story: Luzi Ann Javier at ljavier@bloomberg.net, Joe Richter

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