Agnico Eagle Mines Merger Announcement: 1+1 = 3

Summary

• Agnico Eagle Mines and Kirkland Lake have announced plans to combine in a merger of equals, making the company arguably the most attractive gold producer in the sector.
• Not only would the combined entity have the largest reserve base in Tier-1 jurisdictions, but it would have industry-leading margins, and an impressive growth profile.
• Notably, there would be significant operational synergies in the Kirkland Lake camp, and Kirkland Lake Gold would benefit from Agnico's multiple decades of underground mining expertise.
• Assuming the deal goes through, Agnico Eagle 2.0 will become a must-own name in the gold sector, and I would expect the combined entity to command a premium valuation relative to peers.

tracielouise/E+ via Getty Images

After a relatively quiet few months from an M&A standpoint, a massive transaction was announced this week with Agnico Eagle Mines (NYSE:AEM) and Kirkland Lake Gold (KL). The plan is to combine in a merger of equals to create the highest-quality senior gold producer, close to 54 million ounces of reserves based on FY2022 estimates, more than 95% of its production from Tier-1 jurisdictions, and industry-leading costs below $925/oz. While some have expressed their dislike for the deal, I see the transaction as a clear case of 1+1 = 3, with this deal filling in any weaknesses in each company's portfolio, and creating a Tier-1 jurisdiction juggernaut. Assuming the deal goes through, Agnico Eagle 2.0 will become a must-own name in the gold sector. I would expect the combined entity to command a premium valuation relative to peers.

Throughout the article, I will refer to the potential combined entity as Agnico 2.0 (short for Agnico Eagle 2.0)

Detour Lake Mine

Kirkland Lake Gold

Agnico Eagle and Kirkland Lake Gold have announced plans to join forces, creating a new senior gold producer with 12 operating mines, annual production of ~3.4 million ounces of gold, and growth to ~4.0 million ounces of gold in 2025. This is expected to be achieved through increased output at Hope Bay, Detour Lake, Macassa, Kittila, and Meliadine. Notably, it does not include upside from the Agnico Eagle's massive development pipeline, which includes Upper Beaver, Santa Gertrudis, and Hammond Reef, which are capable of producing a combined ~600,000 ounces per annum by later this decade, if approved. Let's take a closer look at the deal below:

Beginning with reserves, Agnico 2.0 is expected to become a powerhouse, with total reserves of ~45 million ounces as of December 2020 levels and over 48 million ounces of gold with the inclusion of Agnico's recent Hope Bay acquisition (~3.55 million ounces at 6.5 grams per tonne gold). This reserve base should increase materially in Q2 2022, with Detour Lake likely to add more than 5 million ounces of reserves based on its recent resource update. This would push Agnico 2.0's total reserve base to ~53 million ounces of gold, giving it the third-largest reserve base in the sector, just behind Barrick at ~70 million ounces, and Newmont, which sits just shy of ~100 million ounces. However, the differentiator for Agnico is the jurisdictional profile. As the chart below shows, Agnico 2.0 will be an outlier in its peer group, with ~95% of production from Tier-1 jurisdictions, and also a multi-million-ounce producer, compared to Barrick (GOLD) at ~50%, and Newmont (NEM) near ~60%, respectively.

Gold Reserves By Jurisdiction

Company Filings, Author's Chart

From a jurisdiction standpoint, it's important to note that Agnico does not degrade Kirkland Lake's superior Tier-1 jurisdiction profile, with more than 92% of its production coming from Tier-1 jurisdictions (Canada, Finland). In fact, Finland is ranked #2 and ahead of most Canadian provinces for investment attractiveness. So, Kirkland Lake will benefit from a #2 ranked jurisdiction among over 70 total mining jurisdictions vs. a previous rank of #16/70 based on the Fraser Institute's recent survey. This is great news because if Kirkland Lake were merging with any other producer in the sector, investors would have to make a difficult decision, given that their investment thesis of a high-margin, solely Tier-1 jurisdiction gold producer would be in jeopardy.

Agnico Eagle Potential Future Production

Company Filings, Author's Chart

Meanwhile, from a diversification standpoint, Kirkland Lake Gold gets a massive boost, with the company previously having a difficult time justifying a premium multiple since its Detour Lake Mine acquisition. This is because while Detour Lake is arguably Canada's most impressive mine (next to Canadian Malartic), it would have made up nearly 55% of the company's annual production as of 2024. This is a very high figure relative to companies like Agnico, which receive the highest multiples sector-wide, given that no single asset makes up more than 25% of company-wide gold production.

The benefit to this is that if there's ever an issue at a single mine, it is not magnified across the portfolio. Looking ahead, as the above production profile shows, Agnico 2.0 will own Canada's two largest gold mines (Canadian Malartic and Detour Lake), as well as several ~300,000-ounce mines, including LaRonde, Meadowbank, Meliadine, Macassa, and Fosterville. I would expect this to help Kirkland Lake achieve its true valuation potential, and I would argue that the combined entity should fetch a higher valuation than Agnico Eagle 1.0, given that each company brings different strengths to the table and complements each other.

In Kirkland Lake Gold's case, the company was the clear industry leader on costs and jurisdictional profile, with all-in sustaining costs below $820/oz. and 100% of production coming from safe jurisdictions (Australia and Canada). However, Detour Lake was so large that it did not allow Kirkland Lake to be as diversified as the larger million-ounce producers, especially if the mine ramps up to its goal of 800,000 ounces per annum. The other negative for Kirkland Lake was that it did not have a development pipeline, with several projects in the wings that could be moved forward to help deliver high double-digit organic growth. This made it difficult for the stock to command a premium valuation like Agnico Eagle.

In Agnico Eagle's case, the company had diversification down to a tee (9 mines) and was also the industry leader from a jurisdictional standpoint. In addition, Agnico had one of the most attractive organic growth profiles, in a period (2022-2024) where Kirkland Lake would struggle to grow production meaningfully. This is because the increased output from Detour Lake and Macassa was being partially offset by a right-sizing of Fosterville. Notably, Agnico Eagle also benefits from one of the highest reserve grades in the sector (~2.6 grams per tonne gold) vs. Kirkland Lake Gold's reserve grade of ~1.0 grams per tonne gold. Finally, Agnico Eagle brings a massive development pipeline to the table, with Upper Beaver, Santa Gertrudis, Hope Bay (in production), which is excluded from guidance, and Hammond Reef. Importantly, three out of four of these projects are also in Tier-1 jurisdictions.

Agnico Eagle Production

Agnico Eagle Mines

As we can see, Kirkland Lake helps Agnico pull down its costs, Agnico helps Kirkland add organic growth through the development pipeline, Agnico helps Kirkland boost its reserve grade, and Agnico helps Kirkland with diversification. The end result? A massive gold producer that checks every single box for investors looking for safety, growth, a healthy dividend yield (2.8% vs. 1.8% Kirkland Lake), and one of the highest reserves per 1,000 share figures in the sector. It's worth noting that with a massive boost expected at Detour Lake, Kirkland Lake Gold should head closer to the #1 spot next to Newmont in the below chart.

Agnico Eagle Metrics

Agnico Eagle Presentation

So, why merge at all? What is the benefit?

As stated above, the benefits are clear by combining two exceptional businesses that complement each other. Both companies have noted that they expect to deliver ~$800 million in synergies over five years and $2 billion in synergies over 10 years, and both companies will also benefit from the consolidation of an established mining camp and complementary skill sets, with the cross-pollination of best practices. This should help speed up technological improvements across the asset base, making all of Agnico 2.0's mines leaner and meaner. However, there are also meaningful synergies from an operational standpoint that cannot be understated. Let's dig into the major one below:

Agnico Kirkland Mines

Agnico Eagle

As the chart above shows, Agnico 2.0 will now have five mills within a ~225-kilometer radius of each other (Holt, Macassa, LaRonde, Goldex, and Canadian Malartic), and a total of six mills in Ontario/Quebec. The one thing that some investors complaining about the deal may be missing is that this potentially adds a 13th operation to Agnico 2.0's arsenal in the medium-term and increases the value of two assets immediately. As it stands, Kirkland Lake Gold is getting next to zero recognition in its valuation for its ~3,000-tonne per day Holt Mill and tailings facility, given that it's currently in care & maintenance. Unfortunately, Franco-Nevada (FNV) has massive royalties on mines surrounding the processing facility, driving up Kirkland Lake's costs at this operation. This is based on a sliding scale royalty of 2.0% to 10% at the Holt mine, a 1% NSR at the Taylor mine, a 3% NSR at the Holloway Mine, and a 4% NSR on the Hislop Mine. Unfortunately, this makes it more difficult to justify exploration at these properties, given that these are very high net smelter return royalties by industry standards.

Holt Royalties

Franco Nevada Gold

Meanwhile, Agnico Eagle is getting little benefit for its high-grade Upper Beaver Project, which is home to ~1.4 million ounces of gold at 5.4 grams per tonne gold, and another ~1.8 million ounces of resources at ~4.0+ grams per tonne gold. Conveniently, Upper Beaver sits barely 60 kilometers from Holt, which has 3,000 tonnes per day of capacity sitting idle, a tailings facility, and only minor refurbishments/permits required to potentially process ore from Upper Beaver. By adding a flotation circuit and receiving permits for deposition into the Holt tailings facility, Agnico Eagle could recover copper and begin producing more than 150,000 ounces of gold per annum from Upper Beaver and potentially north of 200,000 ounces per annum. This is based on assumptions of filling the Holt mill with ~5.0 gram per tonne material at a ~90% plus recovery rate. In the 2012 Upper Beaver PEA, copper recovery was estimated at 90%, with gold recovery closer to 95%, so the recovery assumption is likely conservative.

Before moving on from Upper Beaver, it's worth noting that recent results from Upper Beaver have been incredible, with a new intercept hitting 14.8 meters of 21.2 grams per tonne gold and 0.67% copper, with these grades mirroring the reserve grade at the Macassa Mine. Obviously, the reserve grade at Upper Beaver will not double based on these figures (11.0+ grams per tonne gold) based on a couple of solid drill holes. Still, the recent higher-grade results are quite encouraging and could lift the reserve grade slightly. Additional intercepts drilled by Agnico recently included 4.5 meters of 10.2 grams per tonne gold, 33.2 meters of 27.7 grams per tonne gold plus 0.63% copper, and 4.8 meters of 13.8 grams per tonne gold and 0.97% copper from the Porphyry Zone.

Kirkland Lake Gold Camp

Queenston Mining

As shown in the above map, Kirkland Lake Gold previously held a small land position at Macassa and has been focused on mine production from the South Mine Complex and 04' Break/Main Break over the past two decades. A merger between the two companies would add another ~7.0 million ounces of resources in the vicinity of the Macassa Mill (~2,000 tonnes per day) and less than 70 kilometers from the idle Holt Mill. This is based on Anoki McBean, Alamgamated Kirkland, and Upper Canada, with these three deposits having resources of 670,000 ounces at ~5.7 grams per tonne gold, 700,000 ounces at ~4.8 grams per tonne gold, and ~2.4 million ounces at ~3.0 grams per tonne gold, respectively.

Combined with ~3.2 million ounces of reserves/resources at Upper Beaver, this is a massive boost to the resource base in close proximity to two mills. This is a huge benefit to Agnico 2.0 since it should translate to fast-tracking production and capex savings. This is because capex will not need to be spent on constructing a new mill for Upper Beaver ore if it can be trucked to Holt. Meanwhile, capex will be saved on a tailings facility, and permitting should be relatively straightforward, given that it will be for mine development and tailings deposition vs. a stand-alone project. So, the combination of both companies delivers a massive upgrade to two assets that are being valued at next to nothing in each company's portfolio currently. This is a clear example of 1+1 = 3.

Amalgamated Kirkland Property

Queenston Mining Technical Report

In addition to a boost in the production profile, the other major benefit is exploration. Notably, the addition of the AK Project (Amalgamated Kirkland) not only adds high-grade material right next door to Macassa that was previously orphaned but also potentially a down-plunge extension of the South Mine Complex onto Agnico's land. With Macassa being the highest-grade gold mine globally and some of these bonanza-grade deposits only getting better at depth, this opens up massive exploration potential. Notably, it also gives Kirkland Lake Gold (under Agnico 2.0) access to ~670,000 ounces of high-grade material to process that couldn't have been accessed without some type of agreement between the two parties.

Finally, both teams can now share geological data in the area, with the aim of making a new major discovery in this massive camp. As the below image shows, Agnico Eagle clearly held the bulk of this camp's landholdings along the Larder Lake Break, and this could become a major new mining area for the company down the road, given that it's already home to over 6 million ounces of resources (ex-Macassa) within relatively close proximity to two mills (one idle). If the camp were to grow large enough, Agnico 2.0 could even look at increasing the size of the Macassa Mill to ~2,500 to ~3,000 tonnes per day, focusing on high-grade material in the region in an aim to boost Macassa's production profile to more than 450,000 ounces per annum. Given the amount of displeasure voiced towards the deal from some commenters on this site, I imagine they have not looked at the synergies here and how beneficial this is mutually to consolidate the Kirkland Lake Gold Camp. Blue shaded land is shown as owned by Queenston Mining, but this is currently land held by Agnico Eagle.

Kirkland Lake Gold Camp

Queenston Mining

As noted earlier, some have expressed their displeasure with the deal, and what I find most surprising is how quickly investors have forgotten just how much value Kirkland Lake Gold's CEO Tony Makuch has generated for shareholders. Since 2016, the leader and the brilliant team he's assembled has increased its market cap from less than $2 billion to more than $10 billion at its peak, helped by two of the most transformational acquisitions the sector has seen this century. The first, Fosterville, helped shareholders enjoy a more than ~700% return in a stagnant period for the Gold Miners Index (GDX). The second was also prescient, scooping up a high-cost mine less than a year before the gold price would go on to hit a new all-time high and proving out his concept that Detour Lake could be a much larger and lower-cost asset with him at the helm.

Detour Lake Life Of Mine Plan

Kirkland Lake Gold

With a track record like this, I have complete faith in his decision-making, and I believe that the deal is a genius move, given that it will help Kirkland Lake to finally receive the premium multiple it deserves under Agnico 2.0. In fact, I would argue that this deal could push much more investment dollars towards Agnico 2.0, given that the new company checks all the boxes, with one of the highest reserve grades, production profiles, growth profiles, margins, and reserves per share among million-ounce producers. This should translate to a premium valuation with an earnings multiple above 20 and a P/NAV multiple of ~1.50, translating to a conservative fair value well above $70.00 per share. It's important to note that Agnico brings the bulk of this NAV to the table, which is why the ~0.80 ratio makes sense, given that it has a 30% higher NAV, even if it does have slightly higher costs. Notably, there is a material upside to the combined entity's NAV if more excess capacity than expected can be utilized at Canadian Malartic (beginning in 2026) or if we see the gaps (dips in production) filled in during 2026-2030 at Detour Lake (shown above).

Agnico Eagle Returns

Agnico Eagle Mines

Agnico Eagle Metrics

Agnico Eagle Mines

Finally, while some Kirkland Lake shareholders may not be convinced Agnico Eagle is a quality company, a simple look at the stock's returns would help to dispel any doubts. As shown above, Agnico Eagle Mines has enjoyed nearly 13% compound annual returns since 1998, beating the S&P 500 (SPY), the gold price, and the PHLX Gold/Silver Sector Index. These returns are nearly as good as Franco-Nevada's since its IPO (~14%), which is incredible, given that Franco-Nevada is one of the best performers sector-wide. This exceptional performance has been achieved by shrewd investments over the past few decades. Highlights included scooping up Goldex in 1993; (which still has a mine life looking out to 2030); acquiring Kittila in 2005; (which continues to grow output), and picking up Cumberland Resources in 2007 for less than ~$600 million, a mine (Meadowbank) that currently produces nearly 400,000 ounces of gold per annum.

Canadian Malartic

Agnico Eagle Mines

In a sector that's known for poorly-timed deals and value destruction, we have begun to see a trend towards deals that make a lot of sense, beginning with Barrick's (GOLD) merger with Randgold nearly three years ago this week. The current proposed deal with Agnico and Kirkland has continued this trend, but the difference is that it potentially vaults Agnico 2.0 into the top spot for production growth, margins, reserve grade, and jurisdictional profile among the 3.0+ million-ounce producers. This makes Agnico 2.0 the most attractive bet in the sector, and I believe the current pullback offers a very low-risk buying opportunity, with more than 45% upside to conservative fair value, a dividend yield of ~2.80%, and a project pipeline that could catapult Agnico to near ~4.5 million-ounce producer status by 2026. Given the clear synergies and combination of two exceptional teams into one high-margin mining champion, I plan to vote in favor of the deal, given that I see a much quicker and clearer path to a re-rating for Kirkland Lake Gold and Agnico under the combined entity.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of AEM, KL, NEM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.