Coverage Resumed on Canadian Producer Following Acquisition

A review of the transaction and its implications are provided in a BMO Capital Markets report.

In a Feb. 3 research note, analyst Brian Quast reported that BMO Capital Markers resumed coverage and lowered its target price on Kirkland Lake Gold Inc. (KL:TSX; KL:NYSE) to CA$61 per share following its acquisition of Detour Gold. In comparison, Kirkland Lake Gold is trading around CA$49.75 per share.

BMO decreased its target price on Kirkland Lake Gold for two reasons, Quast wrote. One was to account for the increased risk tied to Kirkland incorporating the Detour assets into its own. The second was to get Kirkland Lake Gold's valuation closer to that of its peers as it moves toward becoming a senior gold producer.

However, Quast highlighted that the Detour purchase was positive, "given that the long-life asset is a good strategic fit for Kirkland Lake's asset portfolio and that the transaction is immediately accretive to shareholders on a net asset value basis (NAV)," by about 26%.

Quast reviewed the Kirkland Lake-Detour deal and how it affects BMO's model on the acquiring company.

In the transaction, each single Detour Gold share was exchanged for 0.4343 share of Kirkland Lake Gold; about 77 million shares were issued in all. "Kirkland Lake Gold now has about 289 million shares outstanding with an approximately CA$15.6 billion market capitalization," noted Quast.

The analyst indicated that cash flow following the merger is estimated to be neutral in 2020 but accretive, by about 14%, in 2021. BMO expects Fosterville will drive Kirkland Lake Gold's near-term cash flow generation.

Quast relayed that BMO's model of the Detour Lake mine, albeit conservative, outlines production of 13,800,000 of gold over a 21-year life of mine at an average all-in sustaining cost of CA$871 per ounce. This assumes BMO metals prices and a 5% discount rate. BMO assigned 50% of Kirkland Lake Gold's NAV to the Detour Gold assets.

BMO has a Market Perform rating on Kirkland Lake Gold.

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Disclosures from BMO Capital Markets, Kirkland Lake Gold, February 3, 2020

IMPORTANT DISCLOSURES

Analyst's Certification
I, Brian Quast, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.

Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Company Specific Disclosures
Disclosure 5: BMO Capital Markets or an affiliate received compensation for products or services other than investment banking services within the past 12 months from Kirkland Lake Gold.
Disclosure 6B: Kirkland Lake Gold is a client (or was a client) of BMO Nesbitt Burns Inc., BMO Capital Markets Corp., BMO Capital Markets Limited or an affiliate within the past 12 months: B) Non-Investment Banking Securities Related Services
Disclosure 8A: BMO Capital Markets or an affiliate has a financial interest in 1% or more of any class of the equity securities of Kirkland Lake Gold.