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TORONTO – With low gold prices and a tight balance sheet putting strain on the company, Kirkland Lake Gold Inc. has put out the “For Sale” sign and said it will consider takeover bids and other transactions as part of a strategic review.
But there is no guarantee that the Toronto-based miner will find a friendly offer in such a challenging gold market. And that means the company needs to turn around its operations and generate positive cash flow.
“There’s definitely challenges here, and if they were easy [to fix], somebody would have solved them long ago,” chief executive George Ogilvie said Monday in an interview.
Like other small gold producers operating in Ontario, Kirkland Lake is facing cash flow problems at gold prices below US$1,250 an ounce. While the company’s reported cash costs are roughly US$1,100 an ounce, it has also poured large amounts of sustaining capital back into its Macassa mine, meaning it is bleeding cash. It is also burdened with $120-million of debt.
At the end of its last quarter, Kirkland Lake had working capital of $50.7-million. Assuming current gold prices and no financing, Desjardins Securities analyst Adam Melnyk expects working capital to drop to $19-million in the 2016 fiscal year.
“This strategic review certainly wasn’t surprising in light of their financials,” noted Jon Case, a portfolio manager at Sentry Investments.
Kirkland Lake went through a management shake-up last November in which it brought in Mr. Ogilvie as CEO. He acknowledged that the company did not react quickly enough to lower costs when gold prices declined last year. But he is confident that it can make necessary adjustments to the mine plan to turn Macassa around.
“I’ve seen enough in the two months I’ve been here that I’m optimistic this operation can make money at US$1,200 an ounce,” Mr. Ogilvie said.
But given the recent struggles at the mine, analysts remain skeptical about the proposed turnaround until it actually bears fruit.
Typically, the announcement of a sale process provides an immediate boost to a company’s stock price. That was not the case for Kirkland Lake, however, as its shares on the Toronto Stock Exchange dropped 13% to $2.60 on Monday.
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