Kirkland Lake Gold, St Andrew Goldfields join forces

The friendly combination of Kirkland Lake Gold (TSX: KGI; US-OTC: KGILF) and St Andrew Goldfields (TSX: SAS; US-OTC: STADF) will create an intermediate gold producer with four mines and two mills in the Timmins and Kirkland Lake gold camps in Ontario’s portion of the  Abitibi greenstone belt. 

The $178-million deal — described as “visionary” by one analyst on a recent conference call — will create a mining company that makes between 260,000 and 310,000 oz. gold next year, at cash costs of between US$600 and US$690 per oz. 

The combined production “puts us in a unique peer group with attractive cash costs,” Duncan Middlemiss, St Andrew Goldfields’ president and CEO, said on the conference call. “To be part of a new company with tremendous torque and growth potential is compelling.” 

The transaction, which has already received support from 35% of St Andrew Goldfields’ common shareholders, will create a company with a balance sheet of more than $100 million in cash, along with a sustainable production platform, and exploration upside. For shareholders of Kirkland Lake Gold, the arrangement will lift proven and probable gold reserves more than 50% to 2.3 million oz. in a mining-friendly jurisdiction.

St Andrew Goldfields has three producing mines — Holt, Holloway and Taylor — and the junior controls a chunk of exploration ground along the Porcupine-Destor fault zone.

“The combined land positions of both companies position us well for discoveries in two of Canada’s most prolific mining camps,” George Ogilvie, Kirkland Lake Gold’s president and CEO, said on the conference call. “It gives a substantial boost to our level of resources and reserves, and gives us access to a 120 km strike length of under-explored land along the Porcupine-Destor fault.” 

St Andrew Goldfields’ Middlemiss — who worked as mine manager at Kirkland Lake Gold’s Macassa mine before joining St Andrew Goldfields in 2008 — said the transaction “feels right to me for a number of reasons.” The offer price is at a significant premium, he explained, and St Andrew Goldfields’ shareholders will retain exposure to the company’s assets while gaining exposure to Kirkland Lake Gold’s high-grade Macassa mine. The business combination also brings greater trading liquidity, more analyst coverage, combined cash flow and improved access to debt markets. 

“St Andrew Goldfields has been around for over 30 years, and some of our employees have been with us for quite a while,” Middlemiss said. “They’ve seen many ups and downs, and I’m sure they will agree with me that over the past five or six years, we’ve been extremely proud of our accomplishments. This company has operated profitably, generated cash and recently brought Ontario’s newest gold mine [Taylor] into production, and on schedule.”

Kirkland Lake Gold’s Ogilvie pointed to synergies at the corporate and operational level, and said the economies of scale will create opportunities with the companies’ suppliers of common materials, among others, and said the plan of action over the next couple of months will be to focus on the integration plan, and give details in early 2016. 

“The transaction is accretive not only on a net asset value basis, but on a cash flow and production basis as well,” he said. “This combination will add three producing mines close to our operations. We see a number of potential cost-saving synergies, not just in corporate general and administrative expenses — but when we look at economies of scale and a shared labour pool, there’s a lot of upside left.” 

Under the agreement, shareholders of St Andrew Goldfields will receive 0.0906 of one common share of Kirkland Lake Gold, which is a 46% premium based on both companies’ 20-day, volume-weighted average prices, and a 25% premium to St Andrew Goldfields’ closing price on Nov. 16. 

After the deal Kirkland Lake Gold will own 71% of the company and St Andrew Goldfields will own 29%. Kirkland Lake Gold’s assets are in the Kirkland Lake gold camp in the lower Abitibi greenstone belt of northeastern Ontario. The company owns five former high-grade gold mines that have produced more than 22 million oz., at an average grade of 15.1 grams gold per tonne. 

The company only operates one of the five: the Macassa mine complex. The operation includes the new South mine complex, and produces 150,000 oz. gold a year. St Andrew Goldfields’ Taylor mine, 68 km west of the company’s Holt mill and 53 km east of Timmins, started commercial production in November. Its Holloway and Holt mines — which are 1 km apart — straddle the Destor-Porcupine deformation zone, 45 km northeast of Kirkland Lake. 

Holt, built by Barrick Gold (TSX: ABX; NYSE: ABX), is St Andrew Goldfields’ flagship asset, with a 1,300-tonne-per-day production rate and a remaining mine life of eight years, based on reserves. Holloway was built by Noranda, and at a production rate of 600 tonnes per day, could produce gold until well into 2017. Ore from both mines is processed at the Holt Mill, which has a 3,000-tonne-per-day capacity. In addition, St Andrew Goldfields owns the Hislop mine, 85 km west of the Holt mill, which is on care and maintenance. It also has a number of exploration properties, including Aquarius, Clavos, Ludgate and Canamax.

The largest shareholders in St Andrew Goldfields are the Abramson family and Trapeze Asset Management. Kirkland Lake Gold’s major shareholders include Resolute Funds (10%); Eric Sprott (9%); Columbia Wanger Asset Management LLC (8%); Equinox Partners (7%); Van Eck Associates (5%); Harry Dobson (4%); Sprott Asset Management (4%); and ABC Funds (2%). Kirkland Lake Gold has $88.5 million in cash and $119.5 million in debt. 

The merger plan was conceived in April at the European Gold Forum in Zurich, Ogilvie says in a telephone interview after the conference call. That was when he and Middlemiss struck up a conversation. Ogilvie approached his board and the two companies signed a confidentiality agreement on July 4. 

“We looked at this not so much as an acquisition but as a partnership, so St Andrew allowed us to access their database and visit their site, and we also gave them reciprocal due diligence on ourselves … they came to our site, so we got comfortable with one another.” Kirkland Lake then had the opportunity to make a corporate presentation to their board and to Herb Abramson.

“We made a good business case that pro forma, together as a company, we were much stronger, provided we could satisfy everyone that there were no major showstoppers, and that we could come out with a fair evaluation for both parties.” The due diligence continued until the companies were in a position to negotiate a non-binding letter of intent in early October, which gave each three weeks of exclusivity for greater due diligence.

Ogilvie says that in the current gold price environment, “this should be the point and time that you should at least consider mergers and acquisitons (M&A) … I don’t necessarily know if we are at the bottom of the commodity cycle for gold, but it certainly feels like we’re in the bottom 5%, so if there is ever the time to buy something accretive, now is the time to look. And if you can act on M&A, and make a deal, in two or three or four years’ time, when the gold price runs, you can look back and say that it was a transformational deal.”