Capital 10X Top Pick Detour Gold to Be Acquired by Kirkland Lake

Detour Gold [stock_market_widget type="inline" template="generic" color="default" assets="DGC.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"], a Canadian miner with assets in Ontario, is being acquired in an all-stock $4.9 billion deal by Kirkland Lake [stock_market_widget type="inline" template="generic" color="default" assets="KL.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"]. Kirkland Lake will pay 0.4343 KL shares for each DGC share, or a 29% premium to Friday’s closing prices.

Earlier in the year, we had highlighted the upside in Detour Gold in our 2019 Market Outlook video as one our top picks. Thomas George has banged the table on DGC as the best deep value play in the gold sector.

At the beginning of 2019 Detour Gold traded at a Price to Net-Asset-Value (P/NAV) of 0.50x while equivalent peers traded north of 1.25x P/NAV. We’ve always been attracted to undervalued, long-life assets in safe mining jurisdictions — no other gold company met all these criteria better than DGC. Detour’s reserve life towers over its peers at 21 years — we always believed that reserve life should trade at a premium.

Detour Gold has been the stand out performer in gold mining for 2019 — up 100% YTD, it has outperformed the gold price by 85%, the VanEck Vectors Gold Miners ETF [stock_market_widget type="inline" template="generic" color="default" assets="GDX" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] by 74%, and the VanEck Junior Gold Miners ETF [stock_market_widget type="inline" template="generic" color="default" assets="GDXJ" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] by 79%.

Stock Price of DGC vs. Comparables

Moving forward, we will be sharpening our pencils to identify what we believe will be the next top takeout targets.

Gold Reserves Wanted

The main driver behind this deal was the need for Kirkland Lake to increase its reserves.

They have been the best performing gold stock over the past few years, increasing 8X in the past three alone. Their two mining operations in Canada and Australia made KL the industry leader in free cash flow generation.

Recently, however, analysts have been concerned about the dwindling reserves for the company and have been urging them to do something.

Enter Detour Gold.

The answer to Kirkland Lake’s issues is DGC, a gold miner with a 1,040 square kilometre land package in Northern Ontario and one of the largest yearly production outputs at 600,000 ounces of gold. They will add 8 years to KL reserve life index.

While its stock has largely been struggling since 2016, Detour Gold has turned things around in 2019 substantially. DGC stock has almost doubled from the beginning of the year.

Previously, Detour has been known as a company with lower grade resources and challenging mine economics. So this year’s run-up in gold price, along with some cost-cutting measures, has helped the company increase financial performance.

Last year they also worked their way through a proxy battle that saw substantial management and board changes.

In the end, these challenges may have paved the way for the company to appear undervalued and ripe for an acquisition.

Accretive and Expansion Opportunities Aplenty

Kirkland Lake is already highlighting the desire to continue optimization efforts and conduct extensive drilling campaigns at highly prospective exploration targets within Detour’s substantial land position.

Both companies will also realize expected pre-tax synergies of USD$75-100 million per year, along with a strengthened balance sheet that holds USD$630 million of net cash.

2019 Pro-forma numbers are also expected to be substantial with 1.5 Moz of production and analyst consensus free cash flow of approximately USD$700 million.

This is a deal that appears very favourable for both Kirkland Lake and Detour Gold shareholders.

While there is still substantial paperwork to be completed, it seems unlikely there will be any hiccups. The termination is expected to close by the end of January 2020 after shareholder information has been circulated and meetings conducted.

There is also the potential of a competing bid from another gold miner who lacks the depth of reserves.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Evan Veryard
Evan Veryard has a Bachelor's of Chemical Engineering from McGill University and a MaSc. of Chemical Engineering from RMC. He has over 6 years of research experience focusing on industrial materials. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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