Kirkland Lake, Newmarket unveil $1B merger

VANCOUVER — Ontario-based Kirkland Lake Gold (TSX: KLG; US-OTC: KGILF) has reached across the globe in a bid to become the next intermediate gold producer. On Sept. 29, the company unveiled a merger with Australia-focused Newmarket Gold (TSX: CRK; US-OTC: NMKTF) that would create a mid-tier miner with a $2.4-billion market capitalization and annual 500,000 oz. gold production.

The deal is a reverse takeover, wherein Kirkland Lake shares would be exchanged for 2.1053 Newmarket shares. The ratio equates to $5.28 per Newmarket share based on the closing prices at the time of the deal, and implies a $1-billion equity value. Kirkland Lake shareholders would own 57% of the combined company.

Ball mills spinning at Kirkland Lake Gold’s Macassa gold-processing facility in northern Ontario. Credit: Kirkland Lake Gold.

The new Kirkland Lake would have seven mines and five mills, and crank out 510,000 equivalent oz. gold this year at all-in sustaining US$1,000 per oz. cash costs. Production would continue from Kirkland Lake’s Macassa and Taylor gold mines in northern Ontario, and Newmarket’s Fosterville gold mine in Australia’s Victoria state.

“We’re combining a portfolio of underground assets in two safe jurisdictions that are profitable and cash-flow generating,” Kirkland Lake president and CEO Tony Makuch said during a conference call.

“In both cases we’re in countries where we understand how to do business and we have district-scale land positions in established gold camps. Behind the producing assets we have a strong pipeline of growth, and feel that with the existing reserve-resource base and exploration upside, we can demonstrate growth at low costs,” he continued.

Newmarket burst onto the scene in mid-2015 after a $185-million deal for Crocodile Gold, which resulted in the acquistion of three underground mines in Australia, comprising the company’s crown jewel, Fosterville, as well as the Stawell mine in Victoria and the Cosmo mine in Northern Territory.

Newmarket has $92 million in cash and $4 million in debt, and could produce between 225,000 and 235,000 oz. gold at all-in sustaining cash costs ranging from US$900 to US$975 per oz. gold.

Fosterville hosts 1.1 million proven and probable tonnes grading 7 grams gold per tonne for 244,000 contained oz., which would equal two years of production at current mining rates. The project has 15 million measured and indicated tonnes grading 4.4 grams gold for 2.1 million oz., and Newmarket has had recent exploration success at the Harrier South and Lower Phoenix gold systems.

“We see significant upside here from a valuation standpoint. This is just a starting point and there’s  re-rating potential for the combined company,” Newmarket president and CEO Douglas Forster said. “That’s really one of the motivations for us, and there will be significant gains ahead as we become an intermediate gold producer. Our plan since the company’s inception has focused on growth, and we’d been looking at assets in Canada and Australia.”

Meanwhile, Kirkland Lake’s flagship asset is the 1,000-tonne-per-day Macassa underground mine complex in the Abitibi greenstone belt in Ontario. The mine could produce 180,000 oz. in 2017 at cash costs of US$582 per oz. gold. The company acquired junior St Andrew Goldfields in late 2015 for $178 million, which added the East Timmins complex and 109,000 oz. in annual production.

Most management from Kirkland Lake are set to take up similar roles in the new company, with the exception of Darren Hall from Newmarket serving as president of Australian operations. Canadian financier Eric Sprott would be non-executive chairman of the merged company, similar to his current role at Kirkland Lake.

“I don’t think this takes away the intention to regionally consolidate along the Porcupine-Destor fault in Ontario,” Makuch said. “That’s a business opportunity, and we have a strong presence and team in the region. They know what they’re doing, so this business combination doesn’t take away from that focus at all. What we see with Newmarket in Australia are similar underground mines, with strong people doing the same things we’re doing in Canada. Maybe some things are a little bit better or different, but you get the feeling the cultures are very close.”

Scotiabank analyst Craig Johnson noted there had been “a lot of speculation” that Kirkland Lake was looking for consolidation, but the move into Australia “comes as a surprise.” He added that “on the surface” the merits of the transaction are headlined by an 82% boost in 2016 pro-forma gold production. Scotiabank has a $14-per-share, one-year price target on Kirkland Lake.

Kirkland Lake has traded within a 52-week range of $4.51 to $12.39 per share, and lost nearly 10% on the merger news before closing at $9.96 per share at press time. The company has 117.4 million shares outstanding for a $1-billion market capitalization.

Newmarket has moved within an annual range of $1.27 to $5.07, and closed relatively flat on the news at $4.67 per share. The company has 178 million shares outstanding for an $866-million market capitalization. New York-based Luxor Capital holds 15.7 million shares — or 12% — of Newmarket and has agreed vote in favour of the transaction.