Eric Sprott, out $140-million on Kirkland Lake Gold, undecided on deal with Detour Gold

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Kirkland Lake Gold Ltd.'s plan to acquire Detour Gold Corp. has been costly for Eric Sprott.

How costly?

“I think my loss is $140-million,” the maverick gold investor said of the drop in value of his investment in Kirkland Lake in the two days since it announced its all-stock deal to acquire Detour. Mr. Sprott, who is Kirkland’s second-biggest shareholder, said this is also the biggest investment loss of his career, in such a short time period.

On Monday, Toronto-based Kirkland, one of the world’s most profitable gold companies, shocked the market by announcing it planned to buy struggling low-grade miner Detour Gold Corp. for $4.9-billion.

Investors immediately soured on the deal. Kirkland Lake shares have lost about 16 per cent of their value since Monday.

Shareholders will vote on the deal in January. A majority is needed for the deal to be approved.

At the moment, Mr. Sprott says he isn’t sure which way he’s going to vote. He says he has to do a lot more homework to see if management is correct in its thesis that Detour can eventually be very profitable.

But he’s convinced Kirkland would lose the vote if it was held today, based on the market’s reaction.

“If you had a vote of shareholders today, they’d vote it down, said Mr. Sprott, owner of more than 13 million shares in Kirkland Lake.

Kirkland had been the industry’s golden child. Its stock had gone up eightfold in the past three years, thanks in large part to the spectacular success of its high-grade Fosterville mine in Australia, which it acquired in 2016.

Detour Gold, by contrast, has struggled for much of its existence. The Toronto-based miner operates the high-cost, low-grade Detour Lake mine in Northern Ontario. While there have been signs of a turnaround over the past nine months, Detour’s costs to mine an ounce of gold are roughly double that of Kirkland.

Kirkland Lake Gold chief executive officer Tony Makuch points out the acquisition will boost its reserves significantly and offers the potential for future cost cutting at Detour. He also raises the possibility of new exploration success at Detour Lake.

“The market’s not going there yet,” Mr. Sprott said. “It’s too busy panicking.”

In an interview, Mr. Makuch said that after speaking to a number of shareholders since Monday, including New York asset manager VanEck and Toronto-based Resolute Funds, some have recognized the merits of the deal. But he’s also encountered some pushback.

"Nobody likes the fact that the share price has dropped,” he said. “We have a lot of work ahead of us.”

Joe Foster, portfolio manager with VanEck, declined an interview. Resolute Funds did not respond to a request for an interview.

Canaccord Genuity Group Inc. analyst Tom Gallo called the acquisition a “head scratcher” in a note to clients.

“In addition to operational turbulence in the past, margins remain tight at Detour and will significantly increase Kirkland Lake’s consolidated cash costs and all-in sustaining costs (AISC) in the near term,” he said.

The deal also appears to go against recent messaging from the company.

Just last month, Mr. Makuch told The Northern Miner that Kirkland Lake’s priority was profit, and not production growth.

By buying Detour, the company adds significantly to its production, but its earnings per share will take a hit.

Mr. Sprott says he is comforted by knowing if the deal gets voted down, the share price is likely to rebound to where it was before the acquisition was announced.

“He probably is correct” Mr. Makuch said.

Despite the hostile reaction so far, Mr. Makuch is convinced he can persuade his shareholders to vote for the acquisition.

Kirkland has no intention of calling off the deal, he said, or renegotiating the terms lower, but he said he might have changed the company’s messaging had he known the response was going to be this negative.

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