Kirkland Lake Gold Inc. and Newmarket Gold Inc. plan to merge to form a new mid-tier gold company with a market capitalization of about C$2.4 billion, with closing anticipated in the fourth quarter.
The definitive deal, announced Sept. 29, will see each Kirkland Lake Gold common share exchanged for 2.1053 Newmarket shares. The new company will also undertake a share consolidation concurrent to closing, subject to shareholder approval.
Existing Newmarket shareholders will receive 0.475 of a post-consolidation share of the combined entity for every 1 pre-consolidation share held, indicating consideration of C$5.28 per Newmarket share based on the closing price of Kirkland Lake Gold shares on the TSX on Sept. 28.
The exchange ratio represents a premium of 22.9%, based on Newmarket's 20-day volume-weighted average price on the Toronto Stock Exchange on Sept. 28, indicating equity value of C$1.01 billion.
Following closing, existing Kirkland Lake Gold and Newmarket shareholders will own about 57% and 43% of the combined company, respectively, on a fully diluted, in-the-money basis. The combined company will be named Kirkland Lake Gold and will trade on the TSX.
The agreement includes a right to match any superior proposal, a C$55.0 million termination fee payable to Newmarket under certain circumstances, and a C$42.5 million termination fee payable to Kirkland Lake under certain circumstances.
Both companies' boards unanimously approved the deal and recommended that shareholders of both companies vote in favor of the arrangement.
Luxor Capital Group LP, which holds about 15.7 million Newmarket shares, declared its support for the transaction.
Kirkland Lake Gold President and CEO Tony Makuch said Ray Threlkeld and Maryse Belanger, who are current members of Newmarket's board, will join the company's board upon completion of the deal, along with new members Jon Gill and Arnold Klassen, while Darren Hall will take on the role of president of Australian operations.
The combined company is expected to produce about 500,000 ounces of gold per year, at all-in sustaining costs of about US$1,015 per ounce, with a combined cash balance of over C$275 million and combined cash flow generation of C$92 million in the first half of 2016.
"The combination of Macassa and Fosterville will form the production backbone of a new mid-tier, high quality gold producer with low cost production and superior free cash flow generation," the joint statement read.
Kirkland Lake operates the Macassa, Holt, Holloway and Taylor gold mines located along the Porcupine-Destor fault zone in Ontario, while Newmarket operates the Fosterville and Stawell gold mines in Victoria, Australia, as well as the Cosmo gold mine in Australia's Northern Territory.