What is Kirkland Lake Gold?

Up until late last year Kirkland Lake was a lode gold producer with the Fosterville and Macassa mines as the company’s flagship assets. After the $4.89 B deal to take over Detour Lake was finished the company now also owns an open pit deposit.

Why do you buy a stock?

Because you think the intrinsic value is higher than the price paid.

A Timeline:

Setting The Scene

On May 11, 2018, Kirkland Lake bought $20 M worth of Novo shares from Artemis Resources at C$5/share…

What has happened since then?

Main negatives:

  • The mineralization at Karratha was shown to not host disseminated gold

Main positives:

  • Egina type lag gravel holdings have expanded significantly
  • Mt Roe holdings have expanded significantly
  • Hardey Formation holdings have expanded significantly
  • Multiple strategic investments by Novo Resources have been made and grown in value
  • Ore sorting technology has made a quantum leap
  • Aboriginal agreements
  • Novo bought Millennium Minerals assets including the Golden Eagle mill
  • Beaton’s Creek has advanced significantly and might see first gold pour in February 2021 (seemingly on time and on budget)
  • Manpower expanded to around 100

What I find curious:

Novo has obviously made some serious progress both in terms of advancements of projects as well as consolidation/expansion of land holding. In other terms it has become more de-risked and blue sky has increased with the caveat that at least Karratha does not seem to be drillable (no disseminated fine gold). Now, I see some people argue that this sale is a sign that Kirkland Lake does not think that Beaton’s Creek will be economic. At face value this would seem to make sense but then it is quite hard to explain why…

1. I assume Kirkland Lake must have greenlighted the acquisition of Millennium Minerals: Novo Undertakes Transformative Acquisition to Fast-Track Planned Pilbara Conglomerate Gold Production

… So as recently as August Kirkland Lake (Novo was trading at C$3.82/share at the time) was fine with dilution in exchange for the “transformative acquisition” of Millennium Minerals, in order to fast-track production at Beaton’s Creek and any other potential satellite deposits, but now in November they would suddenly realize that Beaton’s Creek will definitely not be economic? Or if they had issues with BC specifically, why sell shares like an amateur, like what we have been seeing?

2. Novo Resources has been able to attract some great talent including;

Mr. Chris Mardon

Novo is pleased to welcome Mr. Chris Mardon as its Senior Manager, Operations for Novo’s Nullagine Gold Project. Mr. Mardon is a mining engineering graduate of the Western Australian School of Mines who brings a wealth of mine operational experience to Novo, with a 30-year mining career spanning both local and international operations. Mr. Mardon has extensive experience in similar roles, overseeing successful gold operations throughout Western Australia, in addition to direct operational experience with mechanical sorting technology.

Mr. Brad Woodland:

Novo is also pleased to welcome Mr. Brad Woodland as its Mining Manager for Novo’s Nullagine Gold Project. Mr. Woodland has over 30 years of mining industry experience with the majority directly involved in the gold mining industry. Mr. Woodland’s exposure to paleo-channel mining in the West Australian Goldfields and alluvial gold mining in Laos represents a significant advantage in fully exploiting the conglomerate material in the Nullagine region.

Now one would think that these guys know a thing or two about ore sorting and mining of a deposit the likes of Beaton’s Creek. In contrast, what is Kirkland Lake’s experience?

3. I have communicated with two ex De Beers employees (including an ex senior manager) who are both very bullish on Novo Resources as a whole

These guys would definitely know a thing or two about alluvial mining from De Beer’s flagship mine which was the massive CDM deposit in south-east Africa. Furthermore, the ex senior manager has hands on experience with ore sorting and nuggety deposits (diamonds):

“We were one of the first mines, if not the first, to introduce X-ray machines to diamond recovery plants”

To Sum Up

I would definitely go so far as to say that I think the people mentioned above know a lot more about the ups and downs of mining (nuggety) placer deposits than Kirkland Lake does who have only been mining VEIN HOSTED gold deposits up until late last year.

Thoughts

So given that Novo overall has added a lot of intrinsic value over the last two years which has been communicated in numerous news releases I find it hard to see how one would think that paying C$5 per share and selling for C$2.45 per share makes any sense at all. And if that would be directly linked to Kirkland Lake’s current view on the merits of Beaton’s Creek then I wonder what has changed since August when the greenlighted the acquisition of Millennium Minerals and Novo was trading at C$3.82/share. From what I can see the project is on time, on budget and Novo has hired the right people with the right experience.

Furthermore we have the following clues:

  1. Mark Creasy was happy to let Novo buy his 30% interest in Beaton’s Creek and other areas in exchange for shares of Novo
  2. IMC was happy to receive a substantial portion of Novo shares in exchange for the Millennium Minerals assets
  3. Sprott Private Resource Lending was happy to write a US$60 M loan as well as subscribing for PP shares in order to facilitate the take over of Millennium Minerals assets
  4. Newmont Goldcorp which would have a much easier time selling their stake in Novo has not done so

… None of the above would suggest that any one party thinks that Beaton’s Creek or more importantly Novo Resources as a whole has a negative future. In other words they do not agree with Kirkland Lake and neither does the mining experts we just hired. When you combine these factors with the fact that Kirkland Lake greenlighted the Millennium deal in the first place the recent event starts making less and less sense…

Then have the fact that Kirkland Lake, for some reason, thought it was a good idea to start selling their position in the open market. And of course the cherry on top is to do a bulk sale at what probably is near the end of a gruesome correction in the miners at C$2.45 per share(!). None of Kirkland Lake’s decisions makes much sense since there does not seem to be a coherent/rational line of thinking. I mean honestly, what does it say when you a) (I assume) OK a deal a few months back at higher prices, b) Then starts to sell shares in the open market during a correction, and c) Then finally decides to top it all off with a bulk sale when there is already capitulation selling going on in the miners coupled with it being a holiday (Thanksgiving when trading is thin). Does that look rational? Does that look like strategic and calm decision making? It would be hard to come up with a worse and more schizophrenic way of making sure to destroy  as much value as possible for Kirkland Lake shareholders. If you are one of many people who thinks Kirkland Lake is acting like smart money when it comes to Novo then you will probably understand why I keep betting against you by now.

 

“If the gloves does not fit…”

 

I think that the buyers of Kirkland Lake’s C$45 M block of Novo shares at C$2.45 are going to turn out as the winners (smart money) in this transaction, and I personally added yesterday at prices below what the buyers will be paying. With Kirkland’s ownership diminishing it will allow Novo to be more independent and not having to square things with its former largest shareholder.

The best part is that share price is all important if a) Dilution through share issuance is expected and/or b) A company is NOT expected to have a value forcing catalyst like actual production/cash flow. Novo will probably not need any dilution to reach cash flow and it does not matter if the share price is $5 or $2.45 because the cash flow will adjust the valuation anyway based on a given PE. In other words the share price will gravitate to lets say $7 once proof of concept is at hand over at BC, and if the stock is trading at $2.45 today, it just means the revaluation will be bigger than if the stock started at $5. On the other hand if we would be facing dilution and/or did not have a value forcing catalyst coming up then the recent fall would either destroy some long term value and/or lead to a possibly subdued share price over a longer period.

Food For Thought

  1. It took X years to consolidate the most prospective parts of Egina, Mt Roe and Hardey Formation
  2. It took Y years for Millennium Minerals to tip over and allowing Novo to buy a fully permitted and existing mill
  3. It took Z years for Creasy to relinquish ownership of his stake in Beaton’s Creek and hundreds of square kilometers of Pilbara in exchange for shares
  4. Three years ago Kirkland Lake financed Novo and allowed the company to get to this point, which is now ending with Kirkland selling out at a loss, and resulting in Novo becoming independent again
    • Thanks for the support!

… Literally genius… 

Judging by what I see people write about Novo on forums, twitter and elsewhere I would say that 99% don’t and might never realize that we have been witnessing one of the greatest games of 4D chess. If this is the last piece of the puzzle I do not know but I know Novo has quietly staked more lag gravels as recently as October. I still fully believe Novo will be the masterpiece of my portfolio when all is revealed. I think it is worth remembering that in order to make the greatest returns from a contrarian perspective it by definition means that the greatest amount of people must have an opinion that ends up being wrong. When you see a huge amount of people, having strong opinions while obviously not having done any due diligence at all, that is a good sign.

Are there any guarantees that the majority will be wrong? No. But that is my bet and I guarantee I will make a lot of money if they are.

Lastly:

Would it be better or worse for Novo to go “open kimono” before or after becoming independent…? Food for thought.

 

Remember, remember the 26th of November because this might be one of the most epic corporate fails in hind sight.

 

Note: This is not investment advice. Always do your own due diligence. This article is highly speculative and it’s just my opinions. I can’t guarantee accuracy. I am a shareholder of Novo and the company is a banner sponsor. Assume I am biased.

Best regards,

The Hedgeless Horseman

Follow me on twitter: https://twitter.com/Comm_Invest

Follow me on CEO.ca: https://ceo.ca/@hhorseman

 

 

23 thoughts on “Novo: Remember, Remember The 26th of November

  1. Roger Barrow says:

    I doesn’t make Sense.I owned Apple for 12 years.I Thought Apple was extremiy
    Manipulated. I held on to Apple Because of my Life long being in the Retail Business,
    I did Pretty well, I would have Done 1,000 times better if I aways stayed with my Gut
    Every time I lose with Apple was when I Went with the Herd. With my thinking of
    fundamentals I was always Right about Apple.I got sucked in Sometimes by Manipulation And Teckecals.

    My first thoughts about NOVO going South was Manipulation.
    Sorry I can’t Spell. But Right now 10 am Im going to the Beach,
    its A Beautiful Day Down hear ,South West Florida, on Lido Key

  2. Silver Owl says:

    TORONTO, Nov. 26, 2020 (GLOBE NEWSWIRE) — Kirkland Lake Gold Ltd. (“Kirkland Lake Gold” or the “Company”) (TSX:KL) (NYSE:KL) (ASX:KLA) today announced it has entered into an agreement with Stifel GMP and Clarus Securities Inc. as agents on behalf of Kirkland Lake Gold (the “Dealers”) to arrange for the sale of 18,500,000 units (the “Units”) at a price of $2.45 per Unit for gross proceeds to Kirkland Lake Gold of $45,325,000 (the “Sale Transaction). Each Unit consists of one (1) common share (a “Novo Share”) of Novo Resources Corp. (“Novo”) owned by Kirkland Lake Gold (a “Unit Share”) and one-half (0.5) of a common share purchase warrant of Kirkland Lake (each whole warrant a “Warrant”). Each Warrant shall entitle the holder thereof to acquire one (1) additional Novo Share owned by Kirkland Lake Gold (a “Warrant Share”) at an exercise price of $2.80 for a term of 12 months from the date of issue. In Canada, the sale of the Unit Shares will be made through block trades and the sale of the Warrants will be made on a private placement basis. In the United States, the sale of both the Unit Shares and the Warrants will be made on a private placement basis.
    Private placement not open markets!. Sales for weak hands on news?

  3. Bob says:

    You forgot to mention that Novo has made two discoveries offsetting the proven reserves at BC that has the potential to double the reserves there.

    Several,years ago KL president Tony, said that KLs investment in Novio was not for a gain in stock price, but rather for KL production potential with Novo. It appears that either a JV or buyout of Novo by KL is not in the cards so perhaps that is why KL is selling Novo.

  4. Martin Porter says:

    Possibilities:
    (1)KL wants to raise more cash to invest further in Detour or other acquisitions ie New Found Gold.
    (2)KL wants to buy more Novo shares cheaply,in effect a takeover.-Possible but considering KL boards composition doubtful unless Novo has pre-agreed.This would seem uncharacteristic of Quentin Hennigh but it is a possibility.
    I am buying more Novo.

  5. Tony says:

    KL has an $11 billion US market cap, so it’s not a huge amount to them. Maybe they just have a better place in their company to put $45 million + claim a loss that they can use (I’m not tax expert but that seems rational). Most traditional miners aren’t in love with alluvials, so there’s that too. Either way I’m not too worried about my investment here.

  6. Sach says:

    Author said “None of Kirkland Lake’s decisions makes much sense since there does not seem to be a coherent/rational line of thinking.”

    I agree. It is worth mentioning that when experienced/trustworthy managers do something that looks irrational, then the full story and facts are probably NOT publicly known. In the short term, all that will be known is the orchestrated cover story to save face for both parties. Gee, wonder how I know this, could it be my 40 years as an investor having been burned alive in the past?

    My belief is there is a new trend unfolding where major miners have decided to not invest in the constant hole digging, foot dragging, fibbing exploration companies and to do their own exploration that they control. (Not saying this applies to Novo in any way because I highly trust Quinton.) But the major miners are not stupid, as they will still chase/invest in explorer home runs with New Found Gold potential. IMHO explorers with that potential are uncommon.

    The cover story will be that Kirkland Lake needed the funds for another buy back of its own stock or needed funds for one of its own projects. Doesn’t matter what the cover story is. Maybe Newmont will step up and buy more shares to have more control. Ultimately, what I think doesn’t matter, because as an investor I am just a leaf blowing in the wind, and the wind is what the big guys and the market create.

    At my age, I am going to give up here. Not buying more shares, and certainly not selling shares at a loss. Just moving on to something else to occupy my mind. I believe everyone involved was honest, competent, forthright and tried their best. I own both Kirkland and Novo shares.

  7. Jay Linn says:

    Here is a conspiracy theory. KL sells Novo shares at a loss for corporate tax purpose and then KL insiders buy up Novo shares for their family trust… Just a thought….

    1. Douglas Kung says:

      I think that is a real possibility. Nobody knows but why sell in this way? Novo will be in production by February 2021.

  8. Martin Porter says:

    Not to mention Sumitomos interest in Engina.

  9. Leo says:

    Selling to go big into New Found Gold? That is all I can come up with…

  10. G. Dyn says:

    Maybe…… KL spins off majority of Novo shares prior to an announced merger or acquisition by NEM. If NOVO shares not sold, NEM would own more than 50% of Novo shares after merger/acquisition… That would be a problem… Not sure how much of Novo NEM still owns but at one point was approx 37%. (not 100% sure if this is accurate). When rational actors act irrationally (selling a huge chunk of stock at a loss, when you are clearly all in with their business/model 2 months ago) then there must be something going on we don’t know.

  11. jimh says:

    At the end of the day I think this is as simple as KL wants to do a lot of drilling and exploration on the Detour property and this allows them to do so without selling KL shares, or having a hit to earnings. As big a company as KL is this investment just isn’t large enough to really matter to them vs advancing and increasing ounces at the Detour property aquired. There is a lot of unexplored area in that land package and KL has talked about their belief that there is a lot more there to be found so all in all I take this more as KL wanting to redeploy some cash so that earnings dont take any hit while at the same time allowing for a very large drilling campaign at Detour to prove out (or not) their thesis that they can increase by a significant amount the ounces at that property

  12. Ryan says:

    I think QH has too many iron in the fire. Dude needs to focus on a handful of projects at most and certainly needs more focus on Novo based on this debacle.

  13. zentrarian says:

    I think it’s a lot simpler than all that.

    KL was originally persuaded to buy into NVO by ES, and ES has apparently lost patience with what he (rightly or otherwise) considers the disappointingly slow pace of development and proving up the economics. Without his enthusiasm and support, KL’s board decided to bail on what was always considered a speculation on its part, a side bet rather than something central to its long term strategy.

    KL is becoming a very large company and is starting to act more like a major than a junior or intermediate. It has bigger fish to fry and wants to concentrate on hard rock where its expertise and experience lie, rather than on QH’s promising but arguably still unproven alluvial gold proposition.

    It might be making a big mistake in the long run, but IMO it’s a stretch to say that it is acting irrationally or that it’s simply “selling shares like an amateur.”

    1. Hem says:

      I think this is the most sensible explanation for this issue.

  14. Martin Porter says:

    So this is the way I’m thinking about it now:

    (1)Buy-Novo.
    (2)Buy-Found Gold.
    (3)Buy-Kirkland Lake..
    Have not worked out the timing yet,depends on market action and funds limitation.

    1. Martin Porter says:

      Correction (2)Buy-New Found Gold.

  15. JP Adams says:

    Thanks to The Horseman and the rest of the Novo investment community for your thoughts on the subject of KL selling their interest in Novo.

    After reading this great analysis by The Horseman and comments by the community I’m going buy any additional cheap Novo shares I can find.

    On Fidelity yesterday afternoon the bid was $1.69 and the ask was $3.04. That’s quite a difference of opinion on the value of Novo.

  16. Gary says:

    When otherwise rational actors act irrationally – KL selling 18.5 million shares of Novo in a fire sale, at a huge loss, closing in 1 week, announced when the market is light on a holiday Friday – you know that there is something happening behind the scenes that we do not know about. NEM purchased 37.5% of Novo back in the day. I am not sure of the exact particulars of the transaction, but I am sure it limits the percentage of Novo that NEM is allowed to own. Maybe… NEM is in talks to acquire KL (wouldn’t be too shocking as NEM is always hungry to acquire reserves). If this is the case, KL would likely have to divest a huge chunk of Novo so that NEM does not acquire a controlling stake in Novo after the close of the transaction. – maybe… Also, the guys at KL are not stupid, and I am having a hard time believing that Novo is fundamentally flawed and KL is a aware of some game changing Novo news that neither NEM or Sumitomo is aware, and that somehow KL is desperate for 54 million prior to any bad news coming out of Novo. There has to be a logical reason for KL actions. We will find out sometime soon after 12.3.2020 if NEM is doing a friendly takeover of KL.

  17. Pat J says:

    Five years of holding NSRPF has been a challenge. The stock has a frustrating inability to hold appreciation for very long after the publication of seemingly positive news/results. The most recent death march of a consolidation enhanced by constant news of a plague makes NOVO the least fun listing to view daily in a portfolio. QH is likable, articulate, and certainly traveled but currently becalmed in Colorado, and unable to provide any on-scene insight.
    I bought shares yesterday, but not in NOVO. Bought metal. Bought crypto.
    My cost is $.75 over a few years, so I may add this week.
    I suspect though that, where money is involved, people part ways for good reasons

    1. Hem says:

      “The stock has a frustrating inability to hold appreciation for very long after the publication of seemingly positive news/results.”
      You could be talking about any gold stock!

  18. john says:

    Maybe Kirkland wants to take over NFG.V and so they sell Novoshares to solely acquire NFG.V.

  19. Joshua Hansen says:

    Isn’t there also some Novo stock from recent financings that will become free-trading next month or in January? I bought stock on Friday but am interested in the possibility that the market will offer a gift of much lower prices some weeks from now. I am glad that The Hedgeless Horseman offers such high-quality and detailed coverage of Novo! It is a great service!

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