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Thursday, September 29, 2016 Derek Macpherson

KLG & NMI to Merge, Creating a Mid-Tier Producer


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This morning Kirkland Lake Gold (TSX:KLG) and Newmarket Gold (TSX:NMI) announced they have entered into an agreement to merge the two companies. As consideration for the transaction, each Kirkland Lake shareholder would receive 2.1053 Newmarket shares, implying a 9.3% premium for Newmarket in the transaction. We view the merger positively, for both KLG and NMI shareholders as the companies increased scale is likely to warrant a premium valuation. It is also likely to be beneficial for other junior producers as the merger continues to highlight the scarcity of quality assets in good jurisdictions.


Merged company should warrant a premium valuation. Based on 2016 guidance, the combined company is expected to have a run-rate of ~500k oz Au annually at cash costs of ~US$650/oz and based on consensus estimates, assuming zero synergies, generate ~C$922 million in revenue, ~C$349 million in OCF and ~C$407 million in EBITDA in 2017. Current multiples suggest that the combined company should have a market cap of between C$2.5-3 billion and trade between C$5.75-7.00 per pre-consolidation Newmarket share (C$12.10-14.74/share post-consolidation), based on the valuation uplift alone. Considering, the support of both company’s boards and existing shareholders, we expect the transaction to be completed. In addition, since Newmarket is trading at a slight discount (~1%) to the implied deal price, it is currently an attractive way to gain exposure to the merged entity.
 
Newmarket garners a modest premium in this merger of equals. As consideration for the transaction, each Kirkland Lake shareholder would receive 2.1053 Newmarket shares, implying a 9.3% premium for Newmarket in the transaction. The merger is expected to close in Q4 2016 and the transaction requires the approval of 66.67% of both company’s shareholders. As well, following the transaction, the surviving entity will complete at 0.475 to 1 share consolidation.

Transaction highlights scarcity of quality assets. As suggested in our 3 Themes and 10 Companies for a New Bull Market in Gold post from June of this year, quality assets in good jurisdictions are becoming scarce. In our view, the merger of these two companies not only highlights that theme but increases scarcity by combining these five operations with a mid-tier producer.
 
Derek Macpherson | VP Mining Analysis
Victoria Ellis Hayes | Associate

Red Cloud Klondike Strike Inc.
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Toronto ON., M5K 1H1
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