Shares in Kirkland Lake Gold Ltd. closed down 17 per cent or $10.94 at $52.38 on Monday after it announced an acquisition deal that it said valued smaller Canadian rival Detour Gold Corp. at $4.9 billion.
In contrast, Detour shares closed 1.8 per cent higher at $22.61 after jumping by almost 10 per cent just after the Toronto Stock Exchange opened on Monday.
Kirkland Lake said its purchase of Detour Gold, which owns the Detour Lake open pit gold mine in northeastern Ontario, would add a key component to its portfolio anchored by two gold mines, the Macassa mine in northern Ontario and Fosterville mine in Australia.
“The addition of Detour Lake provides an opportunity to add a third cornerstone asset that is located in our backyard in northern Ontario,” said Kirkland Lake CEO Tony Makuch.
“Detour Lake will provide the pro forma company with a 20-plus year mine life which provides unparalleled optionality and excellent growth potential for the benefit of all shareholders.”
Under the agreement, Detour Gold shareholders will receive 0.4343 of a Kirkland Lake share for each Detour Gold share they hold.
The exchange ratio implies a value of $27.50 per Detour Gold share — or a total of $4.9 billion — based on the closing price of Kirkland Lake shares on Friday. That’s a 24 per cent premium to Detour Gold’s closing price that day.
At Monday’s closing price, however, the deal values Detour at $4.03 billion.
The deal to buy Detour Lake, when added to the company’s plan to restart Kirkland Lake’s Cosmo mine in Australia, dilutes the significance of Kirkland Lake’s “extremely high-grade” Fosterville mine in Australia, said analyst Mike Parkin of National Bank in a report.
He warned that could lead to its premium valuation falling more in line with the average of other well-regarded miners.
The acquisition will add an asset with potential for growth above its current production of about 600,000 ounces per year, gives the company combined net cash of US$630 million and grows mineral reserves by 15.41 million ounces and reserve life by eight years, said Kirkland Lake.
It said it expects to realize cost saving synergies of US$75 million to $100 million per year.
Kirkland Lake produced 723,701 ounces of gold in 2018 and has set a goal for 950,000 to one million ounces this year.
The deal requires approval by a two-thirds majority vote by Detour Gold shareholders and a majority vote by Kirkland Lake Gold shareholders, in addition to regulatory and court approvals.
If completed, existing Kirkland Lake shareholders will own about 73 per cent of the combined company, while Detour Gold shareholders will hold about 27 per cent.