Kirkland shares fall after Canadian miner offers $3 billion for Detour Gold

(Reuters) - Canadian miner Kirkland Lake Gold Ltd’s shares fell as much as 16% in Toronto on Monday after investors reacted negatively to the hefty premium it agreed to pay to buy smaller rival Detour Gold Corp in an all-stock deal.

FILE PHOTO: A gold bar is displayed to celebrate Kirkland Lake Gold's listing on the floor of the New York Stock Exchange, (NYSE) New York, U.S., August 16, 2017. REUTERS/Brendan McDermid/File Photo

The latest deal in a raft of gold sector consolidation adds a third major asset to Kirkland’s portfolio, adding annual production of around 600,000 ounces.

Kirkland offered 0.4343 share for each Detour Gold share, implying a value for Detour of about C$4.01 billion ($3.01 billion). Detour shares were up 3.4% at C$23.17 at midday.

Major gold miners Barrick Gold Corp and Newmont Goldcorp Corp have also bulked up to boost growth and replace shrinking reserves, stoking expectations of more deals among a dwindling group of mid-tier players.

Kirkland, which is paying a 23.8% premium to Detour’s Friday close, expects to generate pre-tax savings of about $75 million to $100 million per year, the companies said in a statement.

“It fundamentally changes the business,” said one top Kirkland investor who declined to be identified. “They have two underground, high-grade mines and they’ve just bought a low-grade open-pit mine which now they’re talking about expanding.

“It’s a lot of new, moving parts being introduced. To me, it is risky.”

Any mine expansions would be self-financed, Chief Executive Officer Tony Makuch said. He defended the transaction premium and cited potential to boost annual exploration spending to $40 million per year.

“We think there’s opportunity to find significantly more deposits here,” he told Reuters.

Kirkland operates Macassa, also in Ontario, and Fosterville in Australia.

Cost cuts will be achieved within 24 months, with a focus on supply chain and other general and administrative expenses, Makuch said on a conference call on Monday.

Credit Suisse analyst Fahad Tariq said the deal adds to Kirkland’s overall cost profile, and raises concerns about potentially weaker exploration updates coming at Fosterville.

Shareholders will vote on the deal in January. On completion, Kirkland Lake Gold and Detour Gold shareholders will own about 73% and 27%, respectively, of the merged company.

Detour Gold last year had faced pressure from billionaire hedge fund manager John Paulson. Paulson’s Shareholder Gold Council has urged consolidation for mid-tier miners.

“I think it’s a good tie up and you’ll probably see more like this,” said David Neuhauser, managing director at Livermore Partners, which owns Detour shares.

RBC Capital Markets was financial adviser to Kirkland and BMO Capital Markets to Detour.

Reporting by Jeff Lewis in Toronto and Shradha Singh in Bengaluru; Editing by Nick Zieminski and Lisa Shumaker