Kirkland Lake Gold Takes a Detour

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.

5 thoughts on “Kirkland Lake Gold Takes a Detour

  1. Watch for all the good news which I expect will be announced between now and when the shareholders vote takes place. First off we already have drilling news from Kl re Fosterville with more to come from this mine. Then we will have decsion to start up the Northern Territory MIne which given the amount of cash has been spent in the last year on drilling should be very interesting reading. Then news re Maccassa development and (I expect) overall KL will announce production will exceed 1 milion oz for 2019. Novo, in which KL has a significant share is progressing towards being a big gold produceer in Australia with new announcments coming thick and fast and share price rsing to match.. At the end of the year I expect we will get news from Detour of good production levels and lowered costs with more potention cost reduction to come in 2020. The price of Kirkland Lake shares will increase and Detours will follow. Detour shareholders will be lapping up the idea of exchanging theri shares for KL even without a cash incentive. The no cash deal will mean that some of KL’s hard earned cash ca be put into getting Detour costs lowered and its resources increased.

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