Eric Sprott explains what investors are getting wrong about Kirkland’s all-stock Detour Gold deal – by Gabriel Friedman (Financial Post – November 25, 2019)

Toronto-based Kirkland Lake Gold Ltd. on Monday announced a multibillion dollar acquisition of Detour Gold Corp., a deal that would elevate it into a major gold miner and could attract new institutional investors. But investors weren’t impressed, with the stock declining 16 per cent by mid-afternoon to $40 on the Toronto Stock Exchange. Detour rose 3.6 per cent to $23.

The combination marries two near opposites: Kirkland Lake operates two high grade underground mines at some of the lowest cash costs in the sector, whereas Detour operates a single, low grade bulk tonnage open pit mine at comparatively higher costs.

The acquisition would boost Kirkland’s annual gold production by about one-third to more than 1.5 million announces per year, but its costs are also expected to rise.

The value of the all-stock deal was somewhat uncertain as of Monday, initially pegged at $4.9 billion but falling with Kirkland’s stock. If some investors expressed initial skepticism, one of the biggest and perhaps most important investors in Kirkland, billionaire Eric Sprott, who stepped down as chairman earlier this year, said he would support the deal.

“The more I reflect on Detour, I think we’re ‘stealing value’ — value that the market’s not seeing,” Sprott told the Financial Post. Detour reported all-in sustaining costs of $1,198 in the third quarter whereas Kirkland reported all-in sustaining costs of $562, about half of that.

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