Kirkland Lake Gold (KL) announced on Tuesday it will merge with Agnico Eagle Mines (AEM 2.60%), and shareholders in the gold stock aren't happy. While Kirkland shares were tanking 7.8% as of 3 p.m. EDT, Agnico Eagle shares were down about 1.1% as of 3 p.m.
In a deal announced on Sept. 28, Kirkland Lake Gold will combine with Agnico Eagle Mines in a "merger of equals," with Kirkland Lake shareholders set to receive 0.7935 of Agnico Eagle shares for each Kirkland Lake stock held. That values the deal at roughly $11 billion.
Investors in Kirkland Lake are unhappy, though, as it appears Agnico Eagle is acquiring Kirkland Lake, with the share exchange ratio representing only about a 1% premium to Kirkland's 10-day volume weighted average price on Canada's Toronto Stock Exchange as of Sept. 24 closing.
Investors believe Kirkland Lake is worth a lot more given its proven reserves and strong cash flows. For example, Kirkland Lake delivered record numbers in 2020 and generated operating cash flows worth $1.3 billion versus Agnico Eagle's 2020 cash flows of $1.2 billion.
Morever, Kirkland Lake is among the lowest-cost gold producers, projecting an all-in-sustaining-cost (AISC) of only $790 per ounce to $810 per ounce sold for 2021. Agnico Eagle expects its 2021 AISC to be $950 to $1,000 per ounce.
The deal does appear to undervalue Kirkland Lake, but there's a fair chance Agnico Eagle, with its expertise and scale, might be able to unlock better value from Kirkland Lake's assets, especially Detour Lake, which it acquired last year. As it is, Agnico Eagle expects to grow gold production by 24% between 2020 and 2024, and Kirkland's addition should give it a strong headway in Canada and help it significantly lower costs.
The two companies also committed to increase "capital distribution" to shareholders in the form of dividends and share repurchases, so that's another thing Kirkland shareholders can look forward to. Agnico Eagle has a pretty impressive dividend track, having increased its dividends at a compound annual rate of 20% since 2010 and yielding 2.8%.
For that matter, Kirkland Lake has remained one of the cheapest gold stocks for a pretty long time despite its low cost and growth potential, and its merger with Agnico Eagle might help boost shareholder returns in the long term.