(Bloomberg) -- Kirkland Lake Gold Ltd. Chief Executive Officer Tony Makuch faces an uphill battle convincing investors and analysts that he made the right decision in buying higher cost producer Detour Gold Corp.
Toronto-based Makuch traveled to New York Tuesday to meet with investors as shares plummeted, wiping about $2 billion off his company’s market value so far this week. The cost to operate and sustain the Detour Lake mine was more than double that of Kirkland’s projects in the third quarter.
Kirkland was the third-best performer on the Bloomberg Americas Mining Index this year through Friday, with shares climbing more than 80%, as the company cut costs and improved margins. That advantage, which sent shares to a record in September, withered away as the deal with Detour Gold fueled a sell-off while analysts downgraded the stock.
“The acquisition adds to the near-term risk profile of the company” CIBC analysts including Cosmos Chiu said in a note, as they downgraded the Kirkland’s stock to neutral from outperform. Detour “is only about half way through the optimization of its operations (including cost savings), and we see risk of a potential slowdown in progress at the mine.”
Kirkland can cut the project’s all-in sustaining cost down to as low as $800 an ounce, from $1,198 in the third quarter, according to the CEO. Output at Detour Lake will rise by half to 900,000 ounces a year, from its current level, Makuch said in an interview at the Bloomberg headquarters in New York Tuesday.
“When you increase the amount, the margin goes up,” Makuch said in a separate Bloomberg Television interview. “When we talk about what you do with M&A, you are looking for value other people did not see. We have to do work to create that value but we see opportunity to create value not recognized yet.”
While CIBC analysts saw the long-term merits of the acquisition which could add a third “cornerstone mine” to Kirkland’s asset base, the market is still awaiting “confirmation of KL’s ability to operate an open pit asset,” they said, referring to the company by its exchange ticker.
Kirkland shares fell 2.7% at 12:55 p.m. in New York, taking the company’s market value to about $8 billion. That shrank from $10 billion on Friday, the last trading day before the Detour deal was announced.
--With assistance from Alix Steel and Steven Frank.
To contact the reporters on this story: Joe Deaux in New York at jdeaux@bloomberg.net;Aoyon Ashraf in Toronto at aashraf7@bloomberg.net;Yvonne Yue Li in New York at yli1490@bloomberg.net
To contact the editors responsible for this story: Luzi Ann Javier at ljavier@bloomberg.net, Joe Richter
©2019 Bloomberg L.P.
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