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Kirkland Lake Gold

Acquires Detour Gold, Buy KL,
Despite Recent Drop in Price, Average In, David Morgan

David Morgan, editor of The Morgan Report, issued the following Alert to his members on the acquisition of Detour Gold Corporation (TSX: DGC) by Kirkland Lake Gold Ltd. (TSX: KL):

“On November 26, Kirkland Lake Gold announced the acquisition of Detour Gold. This deal adds the third cornerstone asset, which increases average annual production for the company to 1.5m oz/yr. This is substantial in the gold business! Detour Lake is currently Canada's second-largest producing mine in terms of output and largest mine reserves (with a mine life >20yrs).

The implied equity value of this deal is roughly C$4.9b (US $3.8b). Upon completion of this transaction, existing Kirkland Lake and Detour Gold shareholders will own approx. 73% and 27%. This will be an all-stock deal, leaving the new Pro-Forma Kirkland Lake net cash balance of $630m.

There is significant expansion potential at Detour Lake in terms of mine life and average annual output. The current management of Detour Lake has done a poor job managing costs, though things seem to be improving. All in sustain costs (AISC) at Detour Lake are currently at $1,198/oz. To be objective, this was part of mine plan as lower grades were mined during the quarter (Q3). As it stands currently, AISC, on average, should be in the range of $1,050-$1,125/oz. Over time we believe Kirkland Lake will realize synergies (projected at $75-$100m/yr.) and operational improvements that will drive down AISC. Longer-term should Kirkland Lake successfully expand the mine such that it produces 800-900k oz. p.a., this will likely drive down costs.

We like this deal (not love) solely because it is perfect timing with gold prices moving higher such that margins are acceptable on this asset of scale, and we now know this asset is in the hands of a very capable management team. There have been a lot of frustrated Detour Gold shareholders over recent years, so we currently see a sell-off in Kirkland Lake immediately and/or once the deal is complete.

At the time of this writing, Kirkland Lake Gold is down 16%, and prices could stay depressed until the deal closes, and Kirkland Lake can show it will be a more competent operator of the Detour Lake asset. This is typical when companies announce big deals such as this. For those who remember, Kirkland Lake was also hit hard when it acquired Newmarket gold, after which time, it appreciated nearly 10-fold. Kirkland Lake Gold is now the only senior gold producer of scale with assets solely in tier-1 mining jurisdictions (Australia and Canada).

In our view it would be a time to acquire shares in one of the best miners in existence. Should you purchase today with a drop of 16%? Best to purchase over the next few weeks and average in, there is no telling how the market may react short term, but for serious long term investors this is a gift, in our opinion.”

Editor’s Note: David Morgan is a widely recognized analyst in the resource sector and consults for hedge funds, investors, mining companies and bullion dealers. He is publisher of The Morgan Report, a monthly report that covers Money, Metals, and Mining. The website has the most comprehensive collection of information on the silver market.
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