While I am still processing it, my initial reaction is similar to that of the market: I’m not a big fan of it as of now and need to be convinced otherwise.
For one, the premium valuation to NAV KL enjoyed previously is now gone, and won’t return, until such time they can prove the value creation they have suggested at Detour. This won’t resolve itself overnight and there is no guarantee that premium valuation will ever return.
Second, the market is now skittish on how much ultra high grade KL can hit at Fosterville. While they will increase reserves and resources there, the verdict that it will be on much lower grade than they are mining today is cemented until such time we get information on the contrary. Therefore, this deal hedges the potential for peak Fosterville outcome beyond 2022 and gives them enough time to turnaround Detour before the best of Fosterville is mined out. If this is the rationale for why this deal was done, then the decision was the right one. Fosterville ultra high grade was inevitably going to run out, just many folks, including myself, didn’t want to believe it. KL made the difficult decision to do this while it still had a premium ticket.
In my mind, KL is now a “market perform” no more “alpha to peers” until uncertainties get sorted out. Even then, it’ll take a few quarters at the least before KL can demonstrate any material value creation. Any hiccups along the way will not be taken lightly. As a result, the company is no longer the low cost darling it once was. For the time being, it has a different costume on, one that will be more correlated to the price of gold and looks more like the rest of its peers. With this will come a rotation from the shareholder base given the different value proposition. Coincidentally, Kirkland is now trading more in line with PNAVs closer to Barrick, Newmont, et al.
It is plausible that KL can continue the momentum at Detour and further turn Detour around as they think they can. That there is more high grade gold at Fosterville. But while KL was given the benefit of the doubt in the past, it now has to prove it can actually demonstrate this. This will take time. Time some folks will forgo and use to harvest gains and invest elsewhere. Especially those who have enjoyed the run from the single digits. This is now a new KL, much bigger than it ever has been but at a higher cost with a “show me discount” applied and incognito to be “just like the rest of the pack” for the time being. I am giving Tony the benefit of the doubt, because he has earned it. But I’ll be doing so at an even smaller financial capacity watching to see how the new KL unfolds and whether they can resolve the uncertainties mentioned above. A KL Macro Tourists of sorts. Very hard thing for me to do.