Building a ‘Canadian mining Champion’

Whatever one thinks of the logic behind the ‘merger of equals’ announced this week between Agnico Eagle Mines and Kirkland Lake Gold, one thing is abundantly clear: The business combination will indeed create a ‘Canadian mining Champion’ in the words of Agnico Eagle’s long-time CEO Sean Boyd. So we thought we’d dedicate this space to Boyd and his opening comments in a conference call with Kirkland Lake Gold CEO Tony Makuch on September 28.

“Tony and I are very happy to be here to talk about our merger of equals, which puts two of the best gold mining businesses together to create an outstanding high quality senior gold producer. … We think this makes a lot of sense for all of our stakeholders … not just the shareholders but also our collective employees and also the communities in which we operate and we partner with, and our partners in those communities. This is all about making sure that we’ve created a business that continues to deliver at a high level for all these stakeholders.

We’ve had a sense as you’ve heard us talk about it, that the industry will likely consolidate and consolidate over the next two years and what we’ve been saying is, what’s critical to that is how this happens. How this consolidation happens will determine how successful the industry will be over the next ten to twenty years and how much value the industry will create, and I think the industry has demonstrated a lot of discipline and a lot of focus over the last several years, and we think going through this consolidation phase that we will continue to see discipline from the industry.

We have consistently said that if consolidation is to be successful it has to focus on taking advantage of regional consolidation opportunities that drive significant synergies and that also result in the best assets ending up in the strongest hands and keeping the risks low and the business high quality. We believe that we have accomplished all of those goals with the announced merger this morning.

I think you know that Agnico in its 60-plus year history — we haven’t wanted to be everywhere in the world, we’ve chosen those regions where we could see tremendous mineral potential and ability to do business — and with this combination we keep that favourable jurisdiction profile, and that low political risk profile. This will also be the lowest cost and the lowest risk growth. This will also continue to be driven by leadership and ESG. …

The risk level is important. The industry is in a period right now where a lot of investors are indifferent about gold, and investors are looking for those high quality, low risk businesses that are generating significant free cash flow and this does that.

One of the key things that drove us to continue to discuss possibilities, which started two to three years ago, was the potential for significant synergies by putting these two businesses together, particularly synergies in the Abitibi Greenstone Belts. And if you go from the Detour mine south to Kirkland Lake and across to Val d’Or, this company will combine the best assets, have the best cost structure, have the opportunity to drive even more synergies from those assets, not just from an operational standpoint but also from a mine building standpoint when you think about the Upper Beaver project in Kirkland Lake and some of the other growth projects that we have. The synergy number is $2 billion over ten years and we actually think we can do better than that as we get into these assets in more detail.

So that is what was driving the discussions, which we’ve talked off and on over the last two to three years, looking at what the synergies could be, and how by putting these companies together, we could realize on those synergies and put together the lowest risk, highest quality gold business.

One of the keys that I think you’ve seen from both companies over the last year or so is the exploration value-add, whether it’s the recent results coming out of Detour, or Fosterville, or also with our exploration update in July where we talked about our ability to grow our mineral resource and grow our  reserves at several of our producing assets, which is driving brownfield opportunities within this business. So this, although it will be a bigger producer, it’s still very much an exploration story, where exploration success at any one of these large producers can move the needle in terms of value creation. …

In terms of balance sheet strength, this company is extremely strong, and will have one of the best balance sheets in the industry. In fact Agnico has an investment grade credit rating, which we would expect there’s a strong possibility that that credit rating can be upgraded on a successful completion of this transaction.

So what we’ve really done here is we’ve built from a Canadian perspective, a Canadian mining champion that has a solid base of high quality assets; it has an experienced management team that has proven its ability to drive per share value over time; and it’s a company that’s well-positioned to take advantage of additional opportunities that present themselves at the right time with the right value proposition. So that’s why we’re extremely excited about this transaction.”