What happened

Shares of Kirkland Lake Gold (NYSE:KL) tumbled more than 15% by 10:30 a.m. EST on Monday. Driving down the gold mining stock was the announcement that it's buying fellow Canadian gold miner Detour Gold (OTC:DRGDF). That news, on the other hand, sent Detour's shares up almost 10% at one point this morning.

So what

Kirkland Lake Gold has agreed to acquire Detour Gold in an all-stock deal valuing its rival at 4.9 billion Canadian dollars ($3.7 billion). Investors in Detour will receive 0.4343 shares of Kirkland Lake Gold for every share they currently own. That ratio implies a deal value of CA$27.50 per share ($20.66 per share), which is a 24% premium to Detour's closing price on Friday.

Gold nuggets on a flat surface.

Image source: Getty Images.

The transaction will create a larger-scale gold mining company. The combined company will produce more than 1.5 million ounces per year by adding Detour Gold's 600,000 ounces per year from its Detour Lake mine to Kirkland's existing output at its Macassa and Fosterville mines. Further, it will improve the combined company's cash flow, as the merger should enable it to reduce costs by $75 million to $100 million per year. Meanwhile, it adds meaningful growth potential via the future expansion of Detour Lake as well as additional upside opportunities from its exploration prospects.

Kirkland Lake Gold, however, is paying a hefty price to boost its scale and upside potential, given the 24% merger premium. That's why its shares are slumping today. It's also why Detour's stock is currently up less than 5% on the day, as Kirkland's plunge is holding back Detour's rise.

Now what

This deal is a continuation of the merger wave in the gold mining sector. Kirkland Lake, however, is paying a higher premium than some of the sector's most recent deals. Because of that, there's some concern that this acquisition might not pay off over the long run, since Kirkland only expects the combination to generate about $100 million in annual cost savings.

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