A ‘win-win’ deal for Kirkland, Queenston

In a move to secure future growth, Kirkland Lake Gold (KGI-T, KGI-L) is buying Queenston Mining’s (QMI-T) 50% stake in seven jointly held properties the two have in Ontario’s Kirkland Lake gold camp for $60 million in cash and a royalty.

“It’s a win-win situation for both companies,” comments Dundee Securities’ analyst Ron Stewart, who covers both juniors.

The acquisition makes good business sense as it allows Kirkland to develop resources near its existing properties and gives Queenston the funds to bring its nearby Upper Beaver deposit towards feasibility, Stewart says.

The joint-venture properties are located along trend and south of the Main Break, a major gold structure in the camp, which produced 24 million oz. gold over 86 years.

Kirkland operates the Macassa gold mine in that camp, which is expected to produce 100,000 oz. gold in fiscal 2012, ending April 30.

“Based on historic success and our belief of significant exploration potential, we believe this deal has secured long-term growth potential,” writes National Bank analyst, Paolo Lostritto, who covers Kirkland, in note.

The existing joint-venture resource amounts to 296,000 indicated and inferred gold oz., based on very limited drilling that has been done, says Lostritto, adding he believes Kirkland could soon add more ounces as it steps up exploration.

Of the seven properties, the ones that are currently active include the South Claims, HM and AK, notes Queenston in its recent management discussion and analysis, saying the three have the potential to host a part of the South Mine Complex (SMC), a multiple-zone gold system, located 500 metres south of the Main Break on Kirkland’s 100%-owned Macassa mine property.

Last April, Kirkland reported SMC had reserves of 1.46 million oz. gold from 2.4 million tonnes grading 18.9 grams gold per tonne, plus another 1.3 million oz. from 2.5 million tonnes at 16.5 grams gold.

The complex extends southwards onto the joint South Claims property that hosts 92,000 tonnes at 48.3 grams gold in measured and indicated, plus another 103,000 tonnes at 46.3 grams gold in inferred.

Kirkland says the acquisition will allow it to explore the South Claims, and move it closer to its long-term goal of developing a 5-million-plus-ounce high grade mineral inventory.

This transaction also bolsters its plans to expand production to 2,220 tons per day in fiscal 2014. As a result, annual production is estimated to grow to 250,000 oz. and then 300,000 oz. in fiscal 2016.

For Queenston, the sale of these properties, which are non-core assets, would provide it a source of non-dilutive funds to bring its Upper Beaver gold-copper project near Kirkland Lake to feasibility.

A recent preliminary economic assessment envisions Upper Beaver as a robust 2,000-tonne-per-day operation, producing 120,000 oz. gold and 5.3 million lbs. copper a year.

The study pegs the cost to build the project at $240 million.

With this acquisition, Queenston’s cash reserves will increase to $120 million, allowing it to fund exploration activities until 2014. The company has budgeted $35 million for exploration and development for 2012, and forecasts expenditures of $65-$75 million for next year.

The purchase price will be paid in three tranches, of which $10 million was paid on signing the agreement dated March 27. Kirkland will provide another $20 million on closing, which is expected to occur on Aug. 30, 2012 and $30 million on Dec. 3, 2012.

After Kirkland produces 1.3 million oz. gold from the joint-venture properties, Queenston will receive a $15 per oz. royalty for the next 1 million oz. gold produced, and then $20 per oz. thereafter.