On Friday, Kirkland Lake Gold (TSX:KLG), in response to rumors, announced that it had turned down a C$1.44 billion dollar combined offer from Silver
Standard Resources Inc. (TSX:SSO, NASDAQ:SSRI) and Goldfields Ltd. (JSE:GFI, NYSE:GFI). This offer represents more than a 50% premium to Thursday’s
close. Our understanding is that this proposed offer would stop the planned merger with Newmarket Gold (TSX:NMI). While this offer is a substantial
premium to Kirkland Lake’s current share price, Kirkland Lake’s board and financial advisors, see superior value in the merger with Newmarket being
completed. In our view there are three possible outcomes. First and most likely, considering board, management and shareholder support, is that the
merger between Kirkland Lake and Newmarket is completed as announced (~70% likelihood). The second is that because of a board conflict which supports
the planned merger, Silver Standard and Goldfields make a hostile offer for Kirkland Lake and are successful (~25% likelihood). The last and probably
least likely is that shareholders (of one or both companies) do not vote in favour of the merger (~5%). With these odds and that Newmarket is trading
at a ~13.6% discount to Kirkland Lake based on the exchange ratio, likely represents the most attractive value. However, should Silver Standard and
Goldfields continue to pursue Kirkland Lake it could provide higher near-term return, but with higher risk.
Market did not appear to view the merger favourably.
Since the merger was announced on September 29, 2016 (through November 10th) both
Newmarket and Kirkland Lake have underperformed peers, down 29.6% and 29.4%, respectively, while the GDX (Gold Miners ETF) was only down 15.5%. This
underperformance implies that the market disliked the merger. As we wrote previously
we believed the combined company would attract a higher multiple because of its increased size, and adjusting our estimate for the recent pullback
in gold stocks estimate, the combined company would trade between C$5.00-6.00 per pre-consolidation Newmarket share (C$10.53-12.63/share post-consolidation),
based on the valuation uplift alone. This implies a +49% premium to Newmarket’s close and a +31% premium to Kirkland Lake’s close.
New offer was turned down on a basis that it was not a “superior offer”. The most recent combined offer from Silver Standard and Goldfields
would notionally value Kirkland Lake at C$1.44 billion (~C$12.27 per share), more than a 50% premium to Thursday’s close (C$7.85) and just below the
52-week high of C$12.39 per share (July 2016). In the joint management circular, Kirkland Lake noted that two previous offers were made, ahead of this
third one, all of which were rejected by the board on the basis that it was not a “superior offer”. No additional details were provided (i.e. how much
cash, number of shares, ownership structure of the combined company, etc) and the term “superior offer” is also subjective such that while the notional
value could be higher; however, the company’s advisors and board may view this alternate combination as having lower value or potential than the planned
Kirkland Lake-Newmarket merger. We note that Kirkland Lake’s Chairman, Eric Sprott, is a significant shareholder of both Kirkland Lake (6.7%) and Newmarket
(13.5%) and is conflicted. Mr. Sprott had previously recused himself from the planned merger vote and it is our expectation that the same occurred
for the offer from Silver Standard and Goldfields.
What happens next? In our view, there are three possible outcomes:
1. Most likely, considering board, management and shareholder support, is that the merger between Kirkland Lake and Newmarket is completed as announced.
We estimate there is ~70% of this occurring.
2. Because of the noted conflicts, we believe the potential exists for Silver Standard and Goldfields to make a hostile offer for Kirkland Lake and
win. And while the mechanism is slightly different, Silver Standard and Goldfields could also successfully make a sweetened offer for Kirkland Lake
that is accepted. By either method, we estimate there is ~25% of Silver Standard and Goldfields successfully acquiring Kirkland Lake.
3. Considering both company’s share price underperformance since the merger was announced, there is a small chance the merger is voted down as proposed,
despite management, board and shareholder support from both companies. We view this as relatively unlikely, though more likely than when the deal was
first announced, and estimate there is a ~5% chance that this occurs.
We note that this is our view based on current information; however, as more information becomes known, it is likely that our estimates for the likelihood
of possible outcomes may change.
Planned merger ratio favours Newmarket; tough to ignore the potential for a hostile/higher offer for Kirkland Lake. Recall, that in this
merger, each Kirkland Lake shareholder is to receive 2.1053 Newmarket shares (before the stock is consolidated, and company renamed Kirkland Lake).
Based on Friday’s close, Newmarket is trading at a ~13.6% discount to Kirkland Lake based on the exchange ratio. This along with our estimate on the
likelihood of possible outcomes, it appears as Newmarket represents the most attractive value. While higher risk, Kirkland Lake has the potential to
provide higher near-term return, particularly if Silver Standard and Goldfields continue to pursue Kirkland Lake.
Second suitor highlights the 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, both the merger of these two companies and the fact there is a second suitor for some of them highlights that theme.
Derek Macpherson | VP Mining Analysis
Sunneva Bernhardsdottir | Associate, Mining Analysis
Victoria Ellis Hayes | Associate
Red Cloud Klondike Strike Inc.
79 Wellington St. W. Suite 1630, PO Box 148,
Toronto ON., M5K 1H1
Red Cloud Klondike Strike Inc. is registered as an Exempt Market Dealer in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick,
Nova Scotia, Prince Edward Island, Newfoundland & Labrador, and the Yukon. Part of Red Cloud Klondike Strike Inc.'s business is to connect mining
companies with suitable investors that qualify under available regulatory exemptions (the "Red Cloud KS Business"). Red Cloud Klondike
Strike Inc., its affiliates and associates, and their respective officers, directors, representatives, researchers and members of their families (collectively,
"Red Cloud KS") may hold positions in the companies mentioned in this publication and may buy or sell, or buy and sell their securities
or securities of the same class on the market or otherwise. Additionally, Red Cloud KS may have provided in the past, and may provide in the future,
certain advisory or corporate finance services and receive financial and other incentives from issuers as consideration for the provision of such services.
Red Cloud KS has prepared this publication for general information purposes only, NOT as part of the Red Cloud KS Business. This
document should not be considered a solicitation to purchase or sell securities or a recommendation to buy or sell securities. The information provided
by Red Cloud KS for the purposes of this publication has been derived from sources believed to be accurate, but cannot be guaranteed. Opinions or analysis
contained in this publication may be subject to change and Red Cloud KS does not undertake to advise the reader of such changes. This publication does
NOT take into account the particular investment objectives, financial situations, or needs of individual recipients and other
issues (e.g. prohibitions to investments due to law, jurisdiction issues, etc.) which may exist for certain persons. Recipients should rely on their
own investigations and take their own professional advice before investment. Red Cloud KS will not treat recipients of this publication as customers
or clients by virtue of having viewed this report.
Company Specific Disclosure Details Newmarket Gold Inc. - TSX:NMI - None
Kirkland Lake Gold Inc. - TSX:KLG - None
Silver Standard Resources Inc. - TSX:SSO, NASDAQ:SSRI - None
Goldfields Ltd. - JSE:GFI, NYSE:GFI - None
1) A member of Red Cloud KS team has visited/viewed material operations of the issuer.
2) In the last 12 months, Red Cloud KS has been retained under a service or advisory agreement by the subject issuer.
3) In the last 12 months, Red Cloud KS has received compensation for investment banking services.
4) Red Cloud KS or a member of the Red Cloud KS team or household, has a long position in the shares and/or the options of the subject issuer.
5) Red Cloud KS or a member of the Red Cloud KS team or household, has a short position in the shares and/or the options of the subject issuer.
6) Red Cloud KS or a member of the Red Cloud KS team own more than 1% of any class of common equity of the subject issuer.
7) A member of Red Cloud KS team or a member’s household serves as a Director or Officer or Advisory Board Member of the subject issuer.