The Gold Space Is Heating Up

Written by Gerardo Del Real
Posted November 25, 2019

Just last week, I told you there were signs everywhere that 2020 could finally be a breakout year for the precious metals space and the beaten-down juniors that are in position to be active.

I also told you that money was finally starting to trickle back into the sector.

M&A in the gold space is heating up and this morning’s news should bring more attention to a mining sector that is seeing an increase in activity.

This morning, Kirkland Lake announced it was buying Detour Gold for approximately C$4.89 billion in an all-stock deal with an implied premium of 24%.

The acquisition is meant to leverage Kirkland’s excellent share price performance (up over 800% over the past three years) to boost Kirkland’s reserves.

The deal is interesting because though it does address Kirkland’s need for reserves, it also dilutes the high-grade, low-cost story that has allowed Kirkland to leverage the rising gold price into an 800%-plus share price increase over the past three years.

In the third quarter, Kirkland’s all-in sustaining cost averaged approximately $562 an ounce, compared with Detour Gold’s $1,198/oz.

That point is not lost on Kirkland shareholders as the stock declined 16% after the announcement.

The combination is expected to generate pre-tax savings of about $75 to $100 million per year, the company said in a statement.

The deal will add to Kirkland’s portfolio the Detour Lake gold mine, which is expected to produce for more than 20 years and can generate 600,000 ounces a year.

Chief Executive Officer Tony Makuch said cost cuts will be achieved within 24 months, with a focus on supply chain and other general and administrative expenses.

The point is an interesting one considering Paulson & Co’s proxy war with the Detour board, which led to an overhaul designed to address those exact issues.

The deal reinforces a couple of points.

The first is that there are simply not enough good gold projects to go around.

The second is that even a higher-cost, lower-grade asset like the Detour Lake Mine can command a premium because of the ever-increasing attractiveness of assets (even lower-margin ones) with scalability and in safe jurisdictions.

It looks like 2020 will be a breakout year in the precious metals space. One that rewards those of us who have weathered the resource bear storm.

Discoveries are declining, high-margin assets in safe jurisdictions are scarce, and commodity stocks are near historic lows relative to the major U.S. indices.

Make a list, check it twice, and take advantage of the early Christmas that is tax-loss selling season by buying yourself some quality juniors.

To your wealth,

gerardo-sig

Gerardo Del Real
Editor, Junior Mining Monthly and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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