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.
- Sept 05, 2017:: “Kirkland Lake Gold Announces C$56 Million Strategic Investment Into Novo Resources“
- May 11, 2018: “Artemis Resources sells A$20m Novo stake to Kirkland Lake Gold“
- August 04, 2020: “Novo Undertakes Transformative Acquisition to Fast-Track Planned Pilbara Conglomerate Gold Production“
- November 26, 2020: “Kirkland Lake Gold Announces Sale of Novo Shares and Warrants“
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?
- The mineralization at Karratha was shown to not host disseminated gold
- 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.
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:
- Mark Creasy was happy to let Novo buy his 30% interest in Beaton’s Creek and other areas in exchange for shares of Novo
- IMC was happy to receive a substantial portion of Novo shares in exchange for the Millennium Minerals assets
- 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
- 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
- It took X years to consolidate the most prospective parts of Egina, Mt Roe and Hardey Formation
- It took Y years for Millennium Minerals to tip over and allowing Novo to buy a fully permitted and existing mill
- 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
- 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.
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.
The Hedgeless Horseman
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