Agnico Eagle, Kirkland Lake create new gold giant in US$10B merger

Canadian gold miners Agnico Eagle Mines (TSX: AEM; NYSE: AEM) and Kirkland Lake Gold (TSX: KL; NYSE: KL; ASX: KLA) announced today that they are combining their businesses in a stock deal valued at $13.5 billion (US$10.7 billion). 

As part of the transaction, Kirkland Lake Gold shareholders will receive 0.7935 of an Agnico Eagle common share for each stock they hold. The deal values each Kirkland share at US$50.63, or a discount of 9% to the stock’s Monday close. 

Rumours of an imminent M&A deal involving Kirkland pushed its shares as much as 8.5% on Monday, closing 3.36% higher than Friday’s closing price. 

The combined miner will have a market capitalization of approximately US$24 billion. Once closed, the merger would also leave Agnico with US$2.3 billion of available liquidity, a mineral reserve base of 48 million ounces of gold (969 million tonnes at 1.53 grams gold per tonne) and a pipeline of development and exploration projects. 

The global gold miner is expected to generate 3.4 million ounces of gold this year and could herald more consolidation in the gold industry where investors look for deals that unlock value, Agnico Eagle’s CEO Sean Boyd said during a conference call on Tuesday.

Agnico Eagle shareholders will own about 54% of the combined company, while those of Kirkland Lake will have a 46% ownership. 

“Both companies don’t have to do this,” Boyd said on the conference call. But “strategic rationale makes sense and the industrial logic is there,” with a synergy of US$2 billion over the next ten years.

The new Agnico Eagle will be led by a combined board and management team. Boyd, its current boss, will become executive chairman, while Kirkland Lake CEO Tony Makuch will be the combined company’s CEO.

Toronto-based Agnico has mines in Canada, Finland and Mexico as well as exploration and development activities in those countries and the United States and Colombia.

Kirkland Lake Gold has the Macassa mine and Detour Lake mine, both in northern Ontario, and the Fosterville mine in Australia.

“This deal is more about a number of mines and location of mines in terms of manageability, rather than an overall ounce number,” Boyd said.

Agnico shares trading in Toronto fell 0.7% to $63.34 by mid-day, while Kirkland Lake shares dropped 7.7% to $51.17 — the biggest intraday decline since November, as their merger offered investors a lower deal premium than other gold combinations.

Carey MacRury of Canaccord Genuity described the transaction as “positive” and said he views the merger “as making the most strategic sense relative to potential suitors.”

“Agnico and Kirkland are high-quality senior gold producers of similar size and valuation multiples, and have complementary and low-political-risk geographic overlap,” he commented in a research note to clients. “Overall we see the transaction as largely neutral on most financial metrics, given similar trading multiples,” adding that he sees “the probability of an interloper as low.”

In terms of the benefits to Kirkland Lake’s shareholders, MacRury outlined a “stronger, more diversified platform and operating experience” and “lower risk profile.”

“While Kirkland Lake has strong growth potential, Agnico has a long history of technical excellence and continuous improvement,” he wrote. “Kirkland would gain access to a deeper technical team, in addition to gaining a more balanced production platform (Detour represents ~65% of our standalone NAV for Kirkland).”

New Wave of M&A

As travel restrictions gradually begin to loosen, BMO analysts believe merger activity will likely heat up. They think that future transactions will develop around three key themes: stepping up a tier, jurisdictional synergies and growth generation.

In a report about M&A in the precious metals sector, BMO says a few majors may consider tying up to increase their relevance among investors seeking large and liquid investment options. The companies, which include AngloGold Ashanti, Goldfields, Kinross and Newcrest, could also possibly purchase a smaller senior producer or larger mid-sized peer for growth, the bank says. 

The recent Northern Star merger and the formation of the Nevada Gold Mines JV, are examples of opportunities for operational and regulatory synergies where assets are in close proximity, the report notes.

“With tier 1 jurisdictions currently in vogue, there are some single jurisdiction companies active in Canada, USA, and Australia which may become tuck-in acquisitions to drive cash flows / production growth profiles and improve acquirers’ geopolitical risk profiles,” BMO says.

Companies that could follow this path, according to the bank, are Pretium, Victoria Gold, New Gold, Hycroft, Superior Gold, Wesdome and K92.

The analysts believe that as several new projects are struggling for valuation and financing, there is an opportunity for producers to buy developers to deliver growth. BMO’s favoured developers include Artemis Gold, Ascot Resources, Great Bear Resources, Orla Mining, Probe Metals, Rupert Resources and Wallbridge.