On October13,2016 both Kirkland Lake Gold and Newmarket Gold came out with their quarterly report.Both showed improvement over the previous quarter.Newmarket (NMI) showed production of 56,000 ounces for the quarter and 175,000 ounces for the year to date.Kirkland Lake (KLG) showed production of 77,300 ounces and 208,000 for 3 and 9 months.Both have robust cash balances and improving grades of gold being mined.But in a press release in September Kirkland Lake wants to merge with Newmarket Gold.On the surface this seems to make little sense as there appear to be few synergies here.Most of Kirkland Lake's assets are in Northern Ontario and most of Newmarket's assets are in Australia.But there is a common interest these two share- the huge Fosterville mine assets.
Increased Production
The Fosterville mine showed production this quarter of 37,000 ounces which is 1% below the last quarter.This has allowed 9 month production of only 175,000 ounces for Newmarket Gold and 2016 guidance of only 225,000 to 235,000 ounces.This is a very slight increase over 2015.But in 2015 and 2016 Newmarket has found much more ore at the Fosterville site.Recently they found a new discovery at the Lower Phoenix Gold System in the west lode and in the Eagle Fault System.No new assessment of the size of the deposit has been given but this blog has estimated that the total deposit may be as high as 4 to 5 million ounces with all extensions counted.But production from the mine has not gone above 37,000 ounces for a quarter or 160,000 ounces for a year.This is the problem and Kirkland Lake has seen it and made their bid.
Kirkland Lake Gold looks good
At first blush this looks like a good takeover.Kirkland Lake has offered $2 billion and will get 57% of the new merged company.NMI shareholders will get $5.28 a share for shares now trading at about $3.75 a share.But will shareholders get the maximum value for their shares?There can be no doubt that NMI management is not getting sufficient production from the Fosterville mine and new management might help here.But there are no apparent synergies between the two companies.Can shareholder value be maximized by allowing KLG to take a minority position with their approval?The problem is that NMI at this point does not know how much additional gold is in the extensions from both the Fosterville and the Cosmo mine.So how can NMI management put a true value on Newmarket Gold?It is very difficult at this time according to this blog.
Other Options
Don't get me wrong; I know that this is a "bona fide" offer but NMI has other options as discussed in my post on Blogdaleupsome of September30,2016 see details of options for NMI.Newmarket Gold could approve of a minority position by Kirkland Lake Gold and start to work more diligently to increase it's production at both mines.One possibility is to put a second mine entrance to the large Fosterville mine and increase production.If legal problems exist with the old owner of the Victoria State mines then resurrect Crocodile Gold and put all assets not formerly owned by Aurico Gold into Crocodile Gold and Newmarket would own 100% .However first NMI management must deal with a pretty good offer from Kirkland Lake.This blog notes that no date has been yet set to give approval to the KLG offer.Maybe there will be no shareholder vote if enough substantial changes can be made in the NMI operation. use Workathon for the valuation of resource stocks
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