What happened

Kirkland Lake Gold (KL -1.15% ) announced on Tuesday its merger with Agnico Eagle Mines (AEM -1.37% ), and the shareholders of the gold stock are not happy. While Kirkland shares were down 7.8% as of 3:00 p.m. EDT, shares of Agnico Eagle were down about 1.1% by 3:00 p.m. EDT.

So what

In an agreement announced on September 28, Kirkland Lake Gold will partner with Agnico Eagle Mines in a “merger of equals”, with Kirkland Lake shareholders to receive 0.7935 Agnico Eagle shares for each Kirkland Lake share held. That values ​​the deal at around $ 11 billion.

Kirkland Lake investors are unhappy as it appears Agnico Eagle is in the process of acquiring Kirkland Lake with the share exchange ratio only representing a premium of around 1% over the weighted average price in Based on Kirkland’s 10-day volume on the Toronto Stock Exchange in Canada as of September 24. closing.

Investors believe Kirkland Lake is worth much more given its proven reserves and strong cash flow. For example, Kirkland Lake delivered a record number in 2020 and generated operating cash flow of $ 1.3 billion versus cash flow of $ 1.2 billion for Agnico Eagle in 2020. .

Additionally, Kirkland Lake is among the cheapest gold producers, projecting an all-inclusive cost (AISC) of just $ 790 to $ 810 per ounce sold for 2021. Agnico Eagle expects its 2021 AISC to be $ 950 to $ 1,000 per ounce.

Now what

The deal appears to undervalue Kirkland Lake, but there is a good chance that Agnico Eagle, with its expertise and scale, could unlock better value from the assets of Kirkland Lake, especially Detour Lake, which it acquired. Last year. As it stands, Agnico Eagle projects gold production growth of 24% between 2020 and 2024, and the addition of Kirkland is expected to give it a strong rise in Canada and help it significantly reduce costs. .

Both companies are also committed to increasing the “distribution of capital” to shareholders in the form of dividends and share buybacks, so this is another thing Kirkland shareholders can expect. Agnico Eagle has a pretty impressive dividend trajectory, having increased its dividends at a compound annual rate of 20% since 2010 and a yield of 2.8%.

Indeed, Kirkland Lake remained one of the cheapest gold stocks for quite a long time despite its low cost and growth potential, and its merger with Agnico Eagle could help increase shareholder returns over the long term.