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Analyst Downgrades Gold Producer After It Agrees to Acquire Midsized Miner
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The perceived pros and cons of the transaction are provided in a CIBC report.

In a Nov. 25 research note, analyst Cosmos Chiu reported that CIBC downgraded its rating to Neutral and lowered its target price to CA$60 per share from CA$73 (current share price CA$55.79) on Kirkland Lake Gold Inc. (KL:TSX; KL:NYSE) due to the increased risk associated with the miner's agreement to acquire Detour Gold Corp. (DGC:TSX). The transaction is expected to close in Q1/20.

Chiu pointed out that another potential downside to the deal is that it could cause a slowdown in Kirkland Lake's current efforts to optimize its operations, the Fosterville and Macassa projects, and hamper progress with its Macassa mine.

The major benefit of the transaction, Chiu noted, however, is it will expand Kirkland Lake's project portfolio. "Long term, we see the merits of this acquisition, by adding a third cornerstone [open-pit] mine to the asset base and potentially creating a Canadian champion," he added.

With the acquisition, Kirkland Lake's reserve base will jump to 21 million ounces (20 Moz) from 5.75 Moz. Its production will increase in 2020 to 1.621 Moz from 1 Moz. However, the all-in sustaining cost will rise in tandem, to CA$773 per ounce from CA$564 per ounce.

Merging the two companies is estimated to result in about CA$75–100 million of pre-tax synergies per year.

The analyst reviewed the terms of the acquisition agreement. All outstanding Detour Gold shares will be exchanged for Kirkland Lake shares at a ratio of 0.4343 Kirkland share to 1 Detour share. Accordingly, when the deal closes, existing Kirkland Lake shareholders will own about 73% of the company, and Detour Gold shareholders will own about 27%.

Chiu concluded that "while the proposed acquisition of Detour Lake is a change from Kirkland Lake's previous focus on high-grade underground operations, it adds a long-life Canadian producing asset that should help the company deliver continued free cash flow growth in the future."

Next, Kirkland Lake will announce results from its exploratory drilling at Fosterville. Those are expected by year-end 2019.


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Disclosures from CIBC, Kirkland Lake Gold Ltd., Ratings Change, November 25, 2019

Analyst Certification:
Each CIBC World Markets Corp./Inc. research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report.

Analysts employed outside the U.S. are not registered as research analysts with FINRA. These analysts may not be associated persons of CIBC World Markets Corp. and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Potential Conflicts of Interest:
Equity research analysts employed by CIBC World Markets Corp./Inc. are compensated from revenues generated by various CIBC World Markets Corp./Inc. businesses, including the CIBC World Markets Investment Banking Department. Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets Corp./Inc. generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets Corp./Inc. generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers.

In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, CIBC World Markets Corp./Inc. may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon.

Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.

Important Disclosure Footnotes for Kirkland Lake Gold Ltd. (KL)
• 2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from these companies in the next 3 months: Kirkland Lake Gold Ltd.
• 7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by these companies: Kirkland Lake Gold Ltd.

For important disclosure footnotes for companies mentioned in this report that are covered by CIBC World Markets Inc., click here: Disclaimers & Disclosures.

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