CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019 and 2018
1
Management’s Responsibility for Financial Reporting
The accompanying consolidated financial statements of Kirkland Lake Gold Ltd. are the responsibility of management and have been approved by the Board of Directors.
The accompanying consolidated financial statements have been prepared by management and are in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
A system of internal controls has been developed and is maintained by management to provide reasonable assurance that the Company’s assets are safeguarded, transactions are executed and recorded in accordance with management’s authorization, proper records are maintained and relevant and reliable financial information is produced. These controls include maintaining quality standards in hiring and training of employees, policies and procedures manuals, a corporate code of conduct and ensuring that there is proper accountability for performance within appropriate and well-defined areas of responsibility. The system of internal controls is further supported by a compliance function, which is designed to ensure that we and our employees comply with securities legislation and conflict of interest rules.
The significant accounting policies used are described in Note 3 to the consolidated financial statements. The financial statements include estimates based on the experience and judgment of management in order to ensure that the financial statements are presented fairly, in all material respects.
The Board of Directors exercises its responsibilities for ensuring that management fulfills its responsibilities for financial reporting and internal control with the assistance of its Audit Committee. The Audit Committee is appointed by the Board of Directors and all of its members are directors who are not officers or employees of Kirkland Lake Gold Ltd. The Audit Committee meets periodically to review financial reports and to discuss internal controls over the financial reporting process, auditing matters and financial reporting issues. The Committee reviews the Company’s annual financial statements and recommends their approval to the Board of Directors.
These financial statements have been audited by KPMG LLP, the independent registered public accounting firm, in accordance with the standards of the Public Company Oversight Board (United States) on behalf of the shareholders. KPMG LLP has full and free access to the Audit Committee and may meet with or without the presence of management.
(Signed) "Anthony Makuch" | (Signed) "David Soares" | |
Anthony Makuch | David Soares | |
President and Chief Executive Officer | Chief Financial Officer | |
February 19, 2020 | ||
Toronto, Canada |
2
Management’s Report on Internal Control Over Financial Reporting
The management of Kirkland Lake Gold Ltd. (“Kirkland Lake Gold”) is responsible for establishing and maintaining adequate internal control over financial reporting, and have designed such internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.
Management has used the Internal Control—Integrated Framework (2013) to evaluate the effectiveness of internal control over financial reporting, which is a recognized and suitable framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has evaluated the design and operation of Kirkland Lake Gold's internal control over financial reporting as of December 31, 2019, and has concluded that such internal control over financial reporting is effective.
The effectiveness of Kirkland Lake Gold’s internal control over financial reporting as of December 31, 2019 has been audited by KPMG LLP, Chartered Professional Accountants, as stated in their report that appears therein.
(Signed) "Anthony Makuch" | (Signed) "David Soares" | |
Anthony Makuch | David Soares | |
President and Chief Executive Officer | Chief Financial Officer | |
February 19, 2020 | ||
Toronto, Canada |
3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Kirkland Lake Gold Ltd.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of Kirkland Lake Gold Ltd. (“the Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income, cash flows and changes in equity for the each of the years then ended, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the financial performance and its cash flows for each of the years then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 19, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
4
Evaluation of uncertain income tax positions
As discussed in Notes 4 and 9 to the consolidated financial statements, in determining the provision for income taxes, the Company interprets income tax legislation, case law and records an estimate of the amount required to settle income tax obligations. The Company is subject to income tax audits by tax authorities in the jurisdictions in which it operates. Income tax law can be complex and the interpretation of income tax laws by tax authorities or the courts may vary from the Company’s view.
We identified the evaluation of uncertain income tax positions as a critical audit matter. A high degree of auditor judgment was required to evaluate the Company’s interpretation of, and compliance with income tax law in the relevant jurisdictions and the estimate of the ultimate resolution of its income tax filing positions.
The primary procedures we performed to address this critical audit matter included the following. We tested internal controls over the Company’s income tax process, including controls related to the identification and interpretation of income tax law in the various jurisdictions in which it operates and the determination of uncertain income tax positions. We involved tax professionals with specialized skills, industry knowledge, and relevant experience who assisted in evaluating the Company’s interpretations of income tax legislation and case law by 1) inspecting advice obtained by the Company from external specialists, and 2) developing an independent assessment of the Company’s uncertain income tax positions based on our understanding and interpretation of income tax laws and comparing it to the Company’s assessment.
/s/ KPMG LLP
Chartered Professional Accountants, Licensed Public Accountants
We have served as the Company’s auditor since 2010.
Toronto, Canada
February 19, 2020
5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Kirkland Lake Gold Ltd.
Opinion on Internal Control Over Financial Reporting
We have audited Kirkland Lake Gold Ltd.’s (“the Company”) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income, cash flows and changes in equity for the years then ended, and the related notes (collectively, the consolidated financial statements), and our report dated February 19, 2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
6
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
February 19, 2020
7
KIRKLAND LAKE GOLD LTD.
Consolidated Statements of Financial Position
(In thousands of United States Dollars)
As at | Note | December 31, 2019 | December 31, 2018 | ||||
Assets | |||||||
Current assets | |||||||
Cash & cash equivalents | $707,206 | $332,227 | |||||
Accounts receivable | 10 | 16,678 | 20,151 | ||||
Inventories | 11 | 47,686 | 40,089 | ||||
Prepaid expenses | 9,589 | 5,445 | |||||
Income tax receivable | 13,471 | — | |||||
794,630 | 397,912 | ||||||
Non-current assets | |||||||
Other long-term assets | 12 | 255,329 | 165,092 | ||||
Restricted cash | — | 22,190 | |||||
Mining interests and plant and equipment | 13 | 1,496,926 | 1,117,170 | ||||
Deferred tax assets | 9 | 10,732 | 7,796 | ||||
$2,557,617 | $1,710,160 | ||||||
Liabilities | |||||||
Current liabilities | |||||||
Accounts payable and accrued liabilities | 14 | $151,760 | $125,635 | ||||
Share based liabilities | 16 | 36,783 | 4,276 | ||||
Lease obligations | 15 | 10,176 | 12,465 | ||||
Income tax payable | 188,450 | 34,434 | |||||
Provisions | 17 | 29,776 | 15,817 | ||||
416,945 | 192,627 | ||||||
Non-current liabilities | |||||||
Share based liabilities | 16 | 18,474 | — | ||||
Lease obligations | 15 | 5,140 | 9,759 | ||||
Provisions | 17 | 43,987 | 40,878 | ||||
Deferred tax liabilities | 9 | 256,317 | 203,790 | ||||
$740,863 | $447,054 | ||||||
Shareholders' equity | |||||||
Share capital | 886,309 | 923,964 | |||||
Reserves | 28,843 | 35,135 | |||||
Accumulated other comprehensive income (loss) | 14,571 | (87,911 | ) | ||||
Retained earnings | 887,031 | 391,918 | |||||
1,816,754 | 1,263,106 | ||||||
$2,557,617 | $1,710,160 |
Commitments and Contractual Obligations (Note 24)
Subsequent Events (Note 26)
APPROVED ON BEHALF OF THE BOARD:
Signed "Jeff Parr", DIRECTOR Signed "Anthony Makuch", DIRECTOR
The accompanying notes are an integral part of the consolidated financial statements
8
KIRKLAND LAKE GOLD LTD.
Consolidated Statements of Operations and Comprehensive Income
For the years ended December 31, 2019 and December 31, 2018
(In thousands of United States Dollars, except per share amounts)
Year ended | Year ended | ||||||
Note | December 31, 2019 | December 31, 2018 | |||||
Revenue | $1,379,988 | $915,911 | |||||
Production costs | (281,034 | ) | (267,432 | ) | |||
Royalty expense | (36,432 | ) | (26,418 | ) | |||
Depletion and depreciation | 13 | (168,921 | ) | (133,718 | ) | ||
Earnings from mine operations | 893,601 | 488,343 | |||||
Expenses | |||||||
General and administrative | (45,365 | ) | (31,565 | ) | |||
Transaction costs | 26 | (1,236 | ) | — | |||
Exploration | (33,469 | ) | (66,614 | ) | |||
Care and maintenance | (1,191 | ) | (3,081 | ) | |||
Earnings from operations | 812,340 | 387,083 | |||||
Other (loss) income, net | 7 | (18,817 | ) | 5,130 | |||
Finance items | |||||||
Finance income | 8 | 6,941 | 5,714 | ||||
Finance costs | 8 | (2,282 | ) | (3,617 | ) | ||
Earnings before income taxes | 798,182 | 394,310 | |||||
Current income tax expense | 9 | (189,572 | ) | (40,743 | ) | ||
Deferred income tax expense | 9 | (48,530 | ) | (79,624 | ) | ||
Net earnings | 560,080 | 273,943 | |||||
Other comprehensive income (loss) | |||||||
Items that have been or may be subsequently reclassified to net earnings: | |||||||
Exchange differences on translation of foreign operations | 43,139 | (112,347 | ) | ||||
Items that will not be subsequently reclassified to net earnings: | |||||||
Changes in fair value of investments in equity securities, net of tax | 12 | 59,343 | (11,642 | ) | |||
Total other comprehensive income (loss) | 102,482 | (123,989 | ) | ||||
Comprehensive income | $662,562 | $149,954 | |||||
Basic earnings per share | 18(b(ii)) | $2.67 | $1.30 | ||||
Diluted earnings per share | 18(b(ii)) | $2.65 | $1.29 | ||||
Weighted average number of common shares outstanding (in 000's) | |||||||
Basic | 18(b(ii)) | 210,142 | 210,692 | ||||
Diluted | 18(b(ii)) | 211,645 | 212,623 |
The accompanying notes are an integral part of the consolidated financial statements
9
KIRKLAND LAKE GOLD LTD.
Consolidated Statements of Cash Flows
For the years ended December 31, 2019 and December 31, 2018
(In thousands of United States Dollars)
Year ended | Year ended | |||||||
Note | December 31, 2019 | December 31, 2018 | ||||||
Operating activities | ||||||||
Net earnings | $560,080 | $273,943 | ||||||
Adjustments for the following items: | ||||||||
Depletion and depreciation | 168,921 | 133,718 | ||||||
Share based payment expense | 6,854 | 5,459 | ||||||
Other loss (income), net | 24,985 | (5,130 | ) | |||||
Finance items, net | (4,659 | ) | (2,097 | ) | ||||
Income tax expense | 238,102 | 120,367 | ||||||
Cash reclamation expenditures | (938 | ) | (6,840 | ) | ||||
Change in non-cash working capital | 19 | (25,400 | ) | 33,599 | ||||
Operating cash flows before interest and income taxes | 967,945 | 553,019 | ||||||
Interest received | 6,941 | 5,714 | ||||||
Income tax paid | (55,496 | ) | (9,943 | ) | ||||
Net cash provided by operating activities | 919,390 | 548,790 | ||||||
Investing activities | ||||||||
Additions to mining interests | 13 | (258,010 | ) | (162,673 | ) | |||
Additions to plant and equipment | 13 | (198,413 | ) | (112,531 | ) | |||
Additions to other long-term assets | — | (18,386 | ) | |||||
Investments in public and private entities | 12 | (34,382 | ) | (66,124 | ) | |||
Payments received from sub-leases | 251 | — | ||||||
Proceeds on dispositions of assets | 1,449 | 2,480 | ||||||
Transfer from (to) restricted cash, net | 22,232 | (206 | ) | |||||
Net cash used in investing activities | (466,873 | ) | (357,440 | ) | ||||
Financing activities | ||||||||
Proceeds from exercise of stock options | 18(a) | 2,622 | 2,709 | |||||
Interest paid | (922 | ) | (1,496 | ) | ||||
Payment of lease obligations | 15 | (14,673 | ) | (23,109 | ) | |||
Share repurchases | 18(a) | (42,775 | ) | (30,811 | ) | |||
Payment of dividends | 18(a) | (29,470 | ) | (16,329 | ) | |||
Net cash used in financing activities | (85,218 | ) | (69,036 | ) | ||||
Impact of foreign exchange on cash balances | 7,680 | (21,683 | ) | |||||
Change in cash | 374,979 | 100,631 | ||||||
Cash, beginning of year | 332,227 | 231,596 | ||||||
Cash, end of year | $707,206 | $332,227 |
Supplemental cash flow information – Note 19
The accompanying notes are an integral part of the consolidated financial statements
10
KIRKLAND LAKE GOLD LTD.
Consolidated Statements of Changes in Equity
For the years ended December 31, 2019 and December 31, 2018
(In thousands of United States Dollars, except share information)
Share Capital | Reserves | Accumulated other comprehensive income (loss) | Retained earnings | Shareholders' equity | |||||||||||||||||
Note | Shares (000s) | Amount | Share based payments and other reserves | Foreign currency translation | Investment revaluation | ||||||||||||||||
Balance at December 31, 2017 | 210,945 | $951,184 | $33,122 | $8,974 | $27,104 | $137,212 | $1,157,596 | ||||||||||||||
Exercise of share options, including transfer from reserves | 18(a) | 518 | 3,591 | (882 | ) | — | — | — | 2,709 | ||||||||||||
Share based payments expense | 16(iii) | — | — | 2,895 | — | — | — | 2,895 | |||||||||||||
Foreign currency translation | — | — | — | (112,347 | ) | — | — | (112,347 | ) | ||||||||||||
Change in fair value of investments in equity securities, net of tax | — | — | — | — | (11,642 | ) | — | (11,642 | ) | ||||||||||||
Dividends declared | 18(a) | — | — | — | — | — | (19,237 | ) | (19,237 | ) | |||||||||||
Share repurchases | (1,640 | ) | (30,811 | ) | — | — | — | — | (30,811 | ) | |||||||||||
Net earnings | — | — | — | — | — | 273,943 | 273,943 | ||||||||||||||
Balance at December 31, 2018 | 209,823 | $923,964 | $35,135 | ($103,373 | ) | $15,462 | $391,918 | $1,263,106 | |||||||||||||
Exercise of share options, including transfer from reserves | 18(a) | 671 | 3,855 | (1,233 | ) | — | — | — | 2,622 | ||||||||||||
Share issuance | 258 | 1,265 | (1,265 | ) | — | — | — | — | |||||||||||||
Share based payments expense | — | — | 3,434 | — | — | — | 3,434 | ||||||||||||||
Modification of share based payment, net of tax | 16(i) | — | — | (7,228 | ) | — | — | (29,248 | ) | (36,476 | ) | ||||||||||
Foreign currency translation | — | — | — | 43,139 | — | — | 43,139 | ||||||||||||||
Change in fair value of investments in equity securities, net of $9,548 tax | — | — | — | — | 59,343 | — | 59,343 | ||||||||||||||
Dividends declared | 18(a) | — | — | — | — | — | (35,719 | ) | (35,719 | ) | |||||||||||
Share repurchases | 18(a) | (1,127 | ) | (42,775 | ) | — | — | — | — | (42,775 | ) | ||||||||||
Net earnings | — | — | — | — | — | 560,080 | 560,080 | ||||||||||||||
Balance at December 31, 2019 | 209,625 | $886,309 | $28,843 | ($60,234 | ) | $74,805 | $887,031 | $1,816,754 |
The accompanying notes are an integral part of the consolidated financial statements
11
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Kirkland Lake Gold Ltd. (individually, or collectively with its subsidiaries, as applicable, the "Company"), is a publicly listed entity incorporated in the province of Ontario, Canada. The Company’s common shares are listed on the Toronto Stock Exchange (“TSX”), and the New York Stock Exchange ("NYSE") under the symbol "KL" and the Australian Securities Exchange ("ASX") under the symbol “KLA”. The Company’s head office, principal address and records office are located at 200 Bay Street, Suite 3120, Toronto, Ontario, Canada, M5J 2J1.
The Company is a growing gold producer with five wholly-owned operating mines, one wholly-owned mine currently on care and maintenance and several exploration properties in Canada and Australia. On January 31, 2020, the Company completed the acquisition of Detour Gold Corporation (see Note 26).
2. BASIS OF PREPARATION
Statement of Compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board ("IASB"). The accounting policies applied in the consolidated financial statements are presented in note 3 and have been applied consistently to all years presented, unless otherwise noted. The consolidated financial statements were approved by the Company’s Board of Directors on February 19, 2020.
The consolidated financial statements have been prepared on a historical cost basis except for certain financial assets and liabilities which are measured at fair value.
The preparation of the consolidated financial statements in compliance with IFRS requires management to make certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4.
3. SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies are set out below:
a) | Basis of presentation and consolidation |
The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries. Subsidiaries are those entities controlled by the Company. Control exists when the Company is exposed to or has rights to the variable returns from the subsidiary and has the ability to affect those returns through its power over the subsidiary. Power is defined as existing rights that give the Company the ability to direct the relevant activities of the subsidiary. The financial statements of the subsidiaries are included in the consolidated financial statements from the date that control is transferred to the Company to the date control ceases. All intercompany transactions, balances, income and expenses are eliminated in full upon consolidation.
The subsidiaries of the Company as at December 31, 2019 and their principal activities are described below:
12
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Name | Country of Incorporation | Proportion of Ownership Interest | Principal Activity |
Kirkland Lake Gold Inc. | Canada | 100% | Operating |
St Andrew Goldfields Ltd. | Canada | 100% | Operating |
Crocodile Gold Inc. | Canada | 100% | Holding Company |
Newmarket Gold Victorian Holdings Pty Ltd. | Australia | 100% | Holding Company |
Fosterville Gold Mine Pty Ltd. | Australia | 100% | Operating |
Newmarket Gold NT Holdings Pty Ltd. | Australia | 100% | Holding Company |
NT Mining Operations Pty Ltd. | Australia | 100% | Operating |
Kirkland Lake Gold (Barbados) Corporation | Barbados | 100% | Holding Company |
b) | Foreign currency translation |
The functional currency for each entity consolidated within the Company's financial statements is determined by the currency of the primary economic environment in which it operates (the “functional currency”). The functional currency for the Company and its Canadian subsidiaries is the Canadian dollar; the functional currency for all Australian subsidiaries is the Australian dollar. The consolidated financial statements are presented in United States dollars which is the presentation currency for the Company.
In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are translated at the rates prevailing at that date. Non-monetary items carried at fair value that are measured at fair value in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated at the rate on the date of transaction.
Exchange differences are recognized in profit or loss in the period in which they arise except for exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognized initially in other comprehensive income and reclassified from equity to profit or loss on disposal or partial disposal of the net investment.
On the disposal of a foreign operation (i.e. a disposal of the Company’s entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary that includes a foreign operation), all the accumulated exchange differences in respect of that operation attributable to the Company are reclassified to profit or loss. In the case of a partial disposal (i.e. no loss of control) of a subsidiary that includes a foreign operation, the proportionate share of accumulated exchange differences are re-attributed to non-controlling interests and are not recognized in profit or loss.
c) | Business Combinations |
A business combination is defined as an acquisition of assets and liabilities that constitute a business. A business is an integrated set of activities and assets that consist of inputs, including non-current assets, and processes, including operational processes, that when applied to those inputs have the ability to create outputs that provide a return to the Company and its shareholders. A business also includes those assets and liabilities that do not necessarily have all the inputs and processes required to produce outputs, but can be integrated with the inputs and processes of the Company to create outputs. When acquiring a set of activities or assets in the exploration and development stage, which may not have outputs, the Company considers other factors to determine whether the set of activities or assets is a business.
13
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Business combinations are accounted for using the acquisition method whereby identifiable assets acquired and liabilities assumed, including contingent liabilities, are recorded at their fair values at the acquisition date. The acquisition date is the date at which the Company obtains control over the acquiree, which is generally the date that consideration is transferred and the Company acquires the assets and assumes the liabilities of the acquiree. The Company considers all relevant facts and circumstances in determining the acquisition date.
The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the fair values of the assets at the acquisition date transferred by the Company, the liabilities, including contingent consideration, incurred and payable by the Company to former owners of the acquiree and the equity interests issued by the Company. The measurement date for equity interests issued by the Company is the acquisition date. When the cost of the acquisition exceeds the fair value of the identifiable assets acquired and liabilities assumed, the difference is recognized as goodwill. Acquisition related costs are expensed as incurred.
d) | Revenue recognition |
Revenue includes sales of gold doré, which is generally physically delivered to customers in the period in which it is produced, with the sales price based on prevailing spot market gold prices. The Company recognizes revenue when it transfers control of the gold doré to a customer. Generally, transfer of control occurs when the goods have been delivered to the customer. Payment is received on the date of or within a few days of the transfer of control.
e) | Financial Instruments |
Financial instruments are measured on initial recognition at fair value, plus, in the case of financial instruments other than those classified as fair value through profit or loss ("FVPL"), directly attributable transaction costs. Financial instruments are recognized when the Company become party to the contracts that give rise to them and are classified as amortized cost, fair value through profit or loss or fair value through other comprehensive income, as appropriate. The Company considers whether a financial liability contains an embedded derivative when the entity first becomes a party to it. The embedded derivatives are separated from the host contract if the host contract is not measured at fair value through profit or loss and when the economic characteristics and risks are not closely related to those of the host contract. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required.
Financial assets at FVPL
Financial assets at FVPL include financial assets held for trading and financial assets not designated upon initial recognition as amortized cost or fair value through other comprehensive income ("FVOCI"). A financial asset is classified in this category principally for the purpose of selling in the short term, or if so designated by management. Transaction costs are expensed as incurred. On initial recognition, a financial asset that otherwise meets the requirements to be measured at amortized cost or FVOCI may be irrevocably designated as FVPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. Financial assets measured at FVPL are measured at fair value with changes in fair value recognized in the consolidated statements of operations. Warrant investments are classified as FVPL.
14
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Financial assets at FVOCI
On initial recognition of an equity investment that is not held for trading, an irrevocable election is available to measure the investment at fair value upon initial recognition plus directly attributable transaction costs and at each period end, changes in fair value are recognized in other comprehensive income ("OCI") with no reclassification to the consolidated statements of earnings. The election is available on an investment-by-investment basis. Investments in equity securities, where the Company cannot exert significant influence, are designated as financial assets at FVOCI.
Financial assets at amortized cost
A financial asset is measured at amortized cost if it is held within a business model whose objective is to hold assets to collect contractual cash flows and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, and is not designated as FVPL. Financial assets classified as amortized cost are measured subsequent to initial recognition at amortized cost using the effective interest method. Cash, restricted cash, trade receivables and certain other assets are classified as and measured at amortized cost.
Financial liabilities
Financial liabilities, including accounts payable and accrued liabilities and finance leases are recognized initially at fair value, net of transaction costs. After initial recognition, other financial liabilities are subsequently measured at amortized cost using the effective interest method. Gains and losses are recognized in net earnings when the liabilities are derecognized as well as through the amortization process. Borrowing liabilities are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the statement of financial position date. Accounts payable and accrued liabilities and finance leases are classified as and measured at amortized cost.
Derivative instruments
Derivative instruments, including embedded derivatives, are measured at fair value on initial recognition and at each subsequent reporting period. Any gains or losses arising from changes in fair value on derivatives are recorded in net earnings.
Fair values
The fair value of quoted investments is determined by reference to market prices at the close of business on the statement of financial position date. Where there is no active market, fair value is determined using valuation techniques. These include using recent arm’s length market transactions; reference to the current market value of another instrument which is substantially the same; discounted cash flow analysis; and, pricing models.
Financial instrument fair value measurements are classified into a hierarchy based on the degree to which the fair value is observable as follows:
Level 1 fair value measurements are quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
15
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Impairment of financial assets
A loss allowance for expected credit losses in recognized in earnings for financial assets measured at amortized cost. At each balance sheet date, on a forward-looking basis, the Company assesses the expected credit losses associated with its financial assets carried at amortized cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. The impairment model does not apply to investment in equity instruments.
The expected credit losses are required to be measured through a loss allowance at an amount equal to the 12-month expected credit losses (expected credit losses that result from those default events on the financial instrument that are possible within 12 months after the reporting date) or full lifetime expected credit losses (expected credit losses that result from all possible default events over the life of the financial instrument). A loss allowance for full lifetime expected credit losses is required for a financial instrument if the credit risk of that financial instrument has increased significantly since initial recognition.
Derecognition of financial assets and liabilities
A financial asset is derecognised when either the rights to receive cash flows from the asset have expired or the Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party. If neither the rights to receive cash flows from the asset have expired nor the Company has transferred its rights to receive cash flows from the asset, the Company will assess whether it has relinquished control of the asset or not. If the Company does not control the asset then derecognition is appropriate.
A financial liability is derecognised when the associated obligation is discharged or canceled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in net earnings as a gain or loss on debt extinguishment.
f) | Cash and cash equivalents |
Cash and cash equivalents includes cash and short-term money market instruments with an original maturity of three months or less, or which are on demand.
g) | Inventories and stockpiled ore |
Inventories are valued at the lower of weighted average cost or net realizable value. Inventories include work-in-process inventory (stockpiled ore, gold in circuit), bullion inventories as well as materials and supplies inventory.
For work-in-process inventory, the costs of production include: (i) materials, equipment, labour and contractor expenses which are directly attributable to the extraction and processing of ore; (ii) depletion and depreciation of plant and equipment used in the extraction and processing of ore; and (iii) related production overheads (based on normal operating capacity). Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and costs of selling the final product.
16
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Supplies are valued at the lower of weighted average cost and net realizable value.
h) | Exploration & evaluation expenditures |
Exploration expenditures relate to costs incurred in the initial search for mineral deposits with economic potential or in the process of obtaining more information about existing mineral deposits. The Company expenses exploration costs as incurred given the low degree of confidence that a future economic benefit will flow to the Company.
Evaluation expenditures are costs incurred to establish the technical and commercial viability of developing mineral deposits identified through exploration activities or by acquisition. The Company capitalizes evaluation costs when there is a high degree of correlation between the expenditure incurred and the discovery of specific mineral resources.
Capitalized evaluation costs are subsequently re-classified to Mining Interest once the technical feasibility and commercial viability of an exploration project has been demonstrated and is the point at which management decides to proceed with developing the project. This typically includes, but is not limited to, completion of an economic feasibility study and the receipt of the applicable construction and operating permits for the project. Future expenditures incurred in the development of that exploration project are subsequently accounted for in accordance with the Company’s Mining Interest policy, as described in note 2(i).
Prior to re-classification of capitalized evaluation costs to Mining Interest, the Company performs an impairment test, based on the recoverable amount. In addition, the carrying values of capitalized evaluation costs are reviewed for possible impairment when an impairment indicator exists, including but not limited a decision of abandonment in relation to the area of interest.
Capitalized evaluation costs are not subject to depletion until they are re-classified to Mining Interest, at which point they are depleted in accordance with the Company’s Mining Interest policy as described in note 2(i).
i) | Mining interest |
Mining interests represent capitalized expenditures related to the development of mining properties, related plant and equipment and expenditures arising from property acquisitions. Upon disposal or abandonment, the carrying amounts of mining interests are derecognized and any associated gains or losses are recognized in profit or loss.
Mining properties
Purchased mining properties are recognized as assets at their cost of acquisition or at fair value if purchased as part of a business combination. The Company expenses exploration expenditures and near term ore development costs as incurred. Near term development costs occur in areas where the Company expects production to occur within the subsequent 12 months. Property acquisition costs, longer term development, and costs incurred to expand ore reserves are capitalized if the criteria for recognition as an asset are met.
The carrying amounts of mining properties are depleted using the unit-of-production ('UOP') method over the estimated recoverable ounces, when the mine is capable of operating at levels intended by management. Under this method, depletable costs are multiplied by the number of ounces produced, and divided by the estimated recoverable ounces contained in proven and probable reserves and a portion of resources where it is considered highly probable that those resources will be economically extracted.
17
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
A mine is capable of operating at levels intended by management when: (i) operational commissioning of major mine and plant components is complete; (ii) operating results are being achieved consistently for a period of time; (iii) there are indicators that these operating results will be continued; and (iv) other factors are present, including one or more of the following:
– | a significant portion of plant/mill capacity has been achieved; |
– | a significant portion of available funding is directed towards operating activities; |
– | a pre-determined, reasonable period of time has passed; or significant milestones for the development of the mining property have been achieved. |
Management reviews the estimated total recoverable ounces contained in depletable reserves and resources at each financial year end, and when events and circumstances indicate that such a review should be made. Changes to estimated total recoverable ounces contained in depletable reserves and resources are accounted for prospectively.
Plant and equipment
Plant and equipment is carried at cost less accumulated depreciation and impairment losses or initially measured at fair value if purchased as part of a business combination. The cost of plant and equipment comprises its purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, the estimated close down and restoration costs associated with the asset and borrowing costs incurred that are attributable to qualifying assets as noted in note 3(j).
Depreciation is recorded on a straight-line or unit of production basis, over the shorter of the useful life of the asset or the remaining life of the mine; the life of mine is based on estimated recoverable ounces contained in proven and probable reserves and a portion of resources where it is considered highly probable that those resources will be economically extracted. Depreciation associated with plant and equipment which is utilized in the development of an asset is capitalized as development costs attributable to the related asset.
Estimated useful lives for depreciable plant and equipment normally vary from three to fifteen years, for a maximum of twenty years for buildings.
Assets under construction are depreciated when they are substantially complete and available for their intended use, over their estimated useful lives. Management reviews the estimated useful lives and depreciation methods of the Company’s plant and equipment at the end of each financial year, and when events and circumstances indicate that such a review should be made. Changes to estimated useful lives or depreciation methods resulting from such review are accounted for prospectively.
Right-of-use assets
Contracts that convey the right to the Company to control the use of an identified asset for a period of time in exchange for consideration is accounted for as a lease, resulting in the recognition of a right-of-use ('ROU') asset at the commencement of the lease. The ROU asset is measured at cost and includes the following:
(i) the amount of the initial measurement of the lease liability;
(ii) any lease payments made at or before the commencement dates, less any lease incentives received;
(iii) any initial direct costs; and
(iv) an estimate of costs to restore the underlying asset, and any site upon which it is located, to the condition required by the terms and conditions of the lease.
18
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
ROU assets are depreciated on a straight-line basis over the shorter of the asset's useful life and the lease term.
j) | Borrowing costs |
Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (i.e. an asset that necessarily takes a substantial period of time to get ready for its intended use or sale) are capitalized as part of the cost of the asset. Borrowing costs incurred to finance qualifying assets that from part of general borrowings are capitalized based upon a weighted average capitalization rate. All other borrowing costs are expensed in the period they occur. Capitalization of borrowing costs ceases when the asset is substantially complete or if active development is suspended or ceases.
k) | Impairment of non-financial assets |
Assets that have an indefinite useful life, such as goodwill, are not subject to amortization and are tested annually for impairment or whenever indicators of impairment exist. Assets that are subject to amortization, depletion or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount of assets is the greater of their fair value less costs to sell and value in use.
Fair value is based on an estimate of the amount that the Company may obtain in a sale transaction on an arm’s-length basis. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash generating unit ('CGU') to which the asset belongs. The Company’s CGUs are the lowest level of identifiable groups of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGUs, otherwise they are allocated to the smallest group of CGUs for which a reasonable and consistent allocation basis can be identified.
An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depletion or depreciation or amortization, if no impairment loss had been recognized.
l) | Leases |
The Company recognizes contracts that convey the right to control the use of an identified asset for a period of time in exchange for consideration as a lease, with an ROU asset and corresponding lease liability recognized at the commencement date of the lease. ROU assets are recognized as discussed in note 3(i) whereas lease liabilities are initially measured at the present value of the remaining lease payments, discounted using the interest rate implicit in the lease or, if not readily determinable, the Company's incremental borrowing rate. Lease payments included in the measurement of a lease liability include:
• | fixed payments, including in-substance fixed payments; |
• | variable lease payments that depend on an index or a rate; |
• | amounts expected to be payable under a residual value guarantee; and |
• | the exercise price of a purchase option if the Company is reasonably certain to exercise that option, lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension option, |
19
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
and penalties for early termination of a lease unless the Company is reasonably certain it will not terminate early.
Lease liabilities are measured at amortized cost using the effective interest method. Lease liabilities are subsequently remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it is reasonably certain that it will exercise a purchase, extension or termination option.
Finance charges are recorded as finance costs within net earnings, unless they are attributable to qualifying assets, in which case they are capitalized.
m) | Share based payments |
The Company has the ability under certain share based compensation plans (notes 16 and 18(b(i)) to grant equity based awards to directors, senior officers and employees of, or consultants to, the Company or employees of a corporation providing management services to the Company.
i) Stock Options
The grant date fair value of the estimated number of stock options awarded to employees, officers and directors that will eventually vest, is recognized as share based compensation expense over the vesting period of the stock options with a corresponding increase to equity. The grant date fair value of each stock option granted is estimated on the date of the grant using the Black-Scholes option-pricing model and is expensed over the vesting period, based on the Company’s estimate of equity instruments that will eventually vest. At the end of each reporting period, the Company revises its estimate of the number of equity instruments expected to vest and adjusts the amount of recorded compensation expense accordingly. The impact of the revision of the original estimates, if any, is recognized in net earnings or capitalized in mining properties such that the accumulated expense reflects the revised estimate, with a corresponding adjustment to the share based payment reserve. The share based payment cost is recognized in net earnings or capitalized in mining properties (for options granted to individuals involved on specific projects).
For transactions with non-employees, the fair value of the equity settled awards is measured at the fair value of the goods or services received, at the date the goods or services are received by the Company. In cases where the fair value of goods or services received cannot be reliably estimated, the Company estimates the fair value of the awards at the date of grant.
ii) Long-term Incentive Plan
The performance share units (“PSUs”) and restricted share units (“RSUs”) awarded to eligible executives and employees will be settled in cash, common shares, or a combination therein. They are measured at fair value at grant date. The fair value of the estimated number of PSUs and RSUs awarded that are expected to vest is recognized as share based compensation expense over the vesting period of the PSUs and RSUs. A corresponding amount is recorded as share based liabilities, as RSUs and PSUs are treated as cash-settled share based payments, until the liability is settled through a cash payment. At each reporting date and on settlement, the share based liability is remeasured, with any changes in fair value recorded as compensation expense.
20
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Phantom share units, which were assumed by the Company as a result of the 2016 business combination with Newmarket Gold Inc., were recorded at their fair market value on the date of acquisition based on the quoted market price of the Company’s shares and are revalued at each reporting date based on the difference between the quoted market price of the Company’s shares at the end of the period and the grant date strike price. The fair value is recognized as a share based payment expense in net earnings with a corresponding entry in share based liabilities.
iii) Deferred Share Units
Deferred share units (“DSUs”) awarded to non-executive directors will be settled in cash, common shares, or a combination thereof on the date when a director ceases to be a director. The fair value of the DSUs awarded, representing the fair market value of the Company’s shares is recognized as share based compensation expense at grant date with a corresponding amount recorded as a share based liability. Until the DSU liability is settled, the fair value of the DSUs is re-measured at the end of each reporting period and at the date of settlement, with changes in fair value recognized as share based compensation expense in the period.
n) | Pension plans |
The Company has a defined contribution pension plan for its Canadian employees whereby the Company contributes a fixed percentage of the employees’ salaries to the pension plan. The employees are able to direct the contributions into a variety of investment funds offered by the plans. In Australia, the Company contributes a fixed percentage of the employees’ salaries to a federally mandated preservation fund of the employee's choice. Pension costs associated with the Company’s required contributions under the plans are recognized as an expense when the employees have rendered service entitling them to the contribution and are charged to net earnings, or capitalized to mining interests for employees directly involved in the specific projects.
o) | Deferred income tax |
Taxes, comprising both income taxes and mining taxes, are recognized in net earnings, except when they relate to items recognized in other comprehensive income or directly in equity, in which case the related taxes are recognized in other comprehensive income, or directly in equity, respectively.
Deferred income taxes are recognized in the consolidated financial statements using the balance sheet liability method of accounting, and are recognized for unused tax losses, unused tax credits and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. As an exception, deferred tax assets and liabilities are not recognized if the temporary differences arise from the initial recognition of goodwill or an asset or liability in a transaction (other than in a business combination) that affects neither accounting profit nor taxable profit.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled based on the tax rates (and tax laws) that have been enacted or substantively enacted at the statement of financial position date.
Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which temporary differences can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
21
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current assets and liabilities on a net basis.
p) | Share capital |
Common shares issued by the Company are classified as equity. Incremental costs directly attributable to the issue of new common shares are recognized in equity, net of tax, as a deduction from the share proceeds (share issue costs).
q) | Provisions |
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.
Contingent liabilities are not recognized in the consolidated financial statements, if not estimable and probable, and are disclosed in notes to the consolidated financial statements unless their occurrence is remote. Contingent assets are not recognized in the consolidated financial statements unless the Company is virtually certain to recover the asset, but are disclosed in the notes if their recovery is deemed probable.
Environmental rehabilitation
Provisions for environmental rehabilitation are made in respect of the estimated future costs of closure and restoration and for environmental rehabilitation costs (which include the dismantling and demolition of infrastructure, removal of residual materials and remediation of disturbed areas) in the accounting period when the related environmental disturbance occurs. The provision is discounted using a pre-tax rate, and the unwinding of the discount is included in finance costs. At the time of establishing the provision, a corresponding asset is capitalized and is depreciated on a UOP basis. The provision is reviewed on an annual basis for changes in cost estimates, changes in legislation, discount rates and operating lives.
Changes to estimated future costs are recognized in the statement of financial position by adjusting the rehabilitation asset and liability. Increases in estimated costs related to mine production become part of ore inventory. For closed sites, changes to estimated costs are recognized immediately in the net earnings.
r) | Earnings (loss) per share |
Basic earnings or loss per share is computed by dividing the net earnings attributable to common shareholders by the weighted average number of common shares outstanding for the relevant period. The Company follows the treasury stock method in the calculation of diluted earnings per share. The treasury stock method assumes that outstanding stock options with an average exercise price below the market price of the underlying shares are exercised and the assumed proceeds are used to repurchase common shares of the Company at the average market price of the common shares for the period.
22
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
4. SIGNIFICANT ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY
In the application of the Company’s accounting policies, which are described in note 3, management is required to make judgments, estimates and assumptions about the carrying amount and classification of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are generally recognized in the period in which the estimates are revised.
The following are the significant judgments and areas involving estimates, that management have made in the process of applying the Company’s accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements.
Significant Judgments in Applying Accounting Policies
Determination of functional currency
In accordance with International Accounting Standards (“IAS”) 21, The Effects of Changes in Foreign Exchange Rates, management determined that the functional currency of the Company’s Canadian and Australian subsidiaries is, respectively, the Canadian and Australian dollar. Determination of functional currency involves judgments to determine the primary economic environment and the Company reconsiders the functional currency of its entities if there is a change in events and conditions which determined the primary economic environment.
Deferred income taxes
Judgment is required in determining whether deferred tax assets are recognized on the statement of financial position. Deferred tax assets, including those arising from unutilized tax losses require management to assess the likelihood that the Company and/or its subsidiaries will generate taxable earnings in future periods, in order to utilize recognized deferred tax assets.
Business combinations
Determination of whether a set of assets acquired and liabilities assumed constitute the acquisition of a business or asset may require the Company to make certain judgments as to whether or not the assets acquired and liabilities assumed include the inputs, processes and outputs necessary to constitute a business as defined in IFRS 3 – Business Combinations.
Transition from the exploration and evaluation stage to the development stage
Judgment is required in determining when an exploration and evaluation project has demonstrated technical feasibility, commercial viability and transitions from the exploration and evaluation stage to the development stage. In assessing the technical feasibility and commercial viability of an asset or CGU, the estimated operating results and net cash flows are determined by estimating the expected future revenues and costs, including the future production costs, capital expenditures, site closure and environmental rehabilitation costs. The estimated net cash flows include cash flows expected to be realized from the extraction, processing and sale of proven and probable reserves as well as mineral resources when there is a high degree of confidence in the economic extraction of those resources.
23
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Accounting Estimates and Assumptions
Determination of reserves and resources
Reserve and resource estimates are used in the unit of production calculation for depletion and depreciation expense, the determination of the timing of rehabilitation provision costs, business combination accounting and impairment analysis.
There are numerous uncertainties inherent in estimating reserves and resources. Assumptions that are valid at the time of estimation may change significantly when new information becomes available. Changes in the forecast prices of commodities, exchange rates, production costs, or recovery rates as well as new drilling results may change the economic status of reserves and resources and may result in the reserves and resources being revised.
Deferred income taxes
Estimates of future taxable income are based on forecast cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company and/or its subsidiaries to realize the net deferred tax assets recorded at the statement of financial position date could be impacted.
Business combinations
The allocation of the purchase price of acquisitions requires estimates as to the fair market value of acquired assets and liabilities. The information necessary to measure the fair values as at the acquisition date of assets acquired and liabilities assumed requires management to make certain judgments and estimates about future events, including but not limited to estimates of mineral reserves and mineral resources and exploration potential of the assets acquired, future operating costs and capital expenditures, discount rates to determine fair value of assets acquired and future metal prices and long term foreign exchange rates.
Changes to the preliminary measurements of assets and liabilities acquired may be retrospectively adjusted when new information is obtained until the final measurements are determined within one year of the acquisition date.
Valuation of Long-lived Assets
The carrying amounts of mining properties and plant and equipment are assessed for any impairment triggers such as events or changes in circumstances which indicate that the carrying value may not be recoverable. If there are indicators of impairment, an exercise is undertaken to determine whether the carrying values are in excess of their recoverable amount. Such review is undertaken on an asset by asset basis, except where such assets do not generate cash flows independent of other assets, and then the review is undertaken at the CGU.
The Company considers both external and internal sources of information in assessing whether there are any indications that mining interests are impaired. External sources of information the Company considers include changes in the market, economic and legal environment in which the Company operates that are not within its control and affect the recoverable amount of mining interests. Internal sources of information the Company considers include the manner in which mining properties and plant and equipment are being used or are expected to be used and indications of economic performance of the assets.
24
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Provision for Environmental Rehabilitation
Significant estimates and assumptions are made in determining the environmental rehabilitation costs as there are numerous factors that will affect the ultimate environmental rehabilitation provision. These factors include estimates of the extent and costs of rehabilitation activities, current changes in available technologies and regulations, cost increases, and changes in discount rates.
Those uncertainties may result in actual expenditures in the future being different from the amounts currently provided. The provision represents management’s best estimate of the present value of the future rehabilitation costs.
5. ADOPTION OF NEW ACCOUNTING STANDARDS
Adoption of new accounting standards
The Company has adopted the following amendments to accounting standards, effective January 1, 2019. These changes were made in accordance with the applicable transitional provisions.
IFRS 16, Leases
In January 2016, the IASB issued IFRS 16, Leases (“IFRS 16”) which replaced the existing lease accounting guidance under IAS 17, Leases ("IAS 17") and IFRIC 4, Determining Whether an Arrangement Contains a Lease ("IFRIC 4"). Effective January 1, 2019, the Company adopted the requirements of IFRS 16, which requires lessees to recognize ROU assets and lease liabilities on the balance sheet for most leases, resulting in a corresponding increase in depreciation and interest expense. Furthermore, the adoption of IFRS 16 resulted in an increase in cash flows from operating activities, as most lease payments are now reflected as financing outflows in the consolidated statement of cash flows.
The Company elected to apply IFRS 16 using a modified retrospective approach by recognizing the cumulative effect of initially adopting IFRS 16 as an adjustment to opening retained earnings as at January 1, 2019. Therefore, the comparative period information has not been restated and continues to be reported under IAS 17 and IFRIC 4. The impact of adopting IFRS 16 and the changes to the Company's accounting policy for leasing are discussed below.
Accounting Policy Changes
Prior to January 1, 2019, the Company applied IFRIC 4 in determining whether a contract was, or contained, a lease by assessing if fulfillment of the contract was dependent on the use of a specific asset or assets and if the contract conveyed a right to use the asset or assets. Contracts determined to meet the above definition were classified as finance leases, with the assets held under the finance leases depreciated over their expected useful lives on the same basis as owned assets. The leased assets were measured at the lower of the fair value and the present value of the minimum lease payments at the inception of the lease, less accumulated depreciation and impairment losses. All other leases were classified as operating leases and accounted with IAS 17 Leases.
The above leasing policy was applied to contracts where leasing arrangements were completed in 2018. Any new or existing contracts containing leases that were still in force as at January 1, 2019 were re-assessed and accounted for in accordance with IFRS 16.
From January 1, 2019, the leasing policy discussed in note 3(l) was applied. Furthermore, the Company applied its incremental borrowing rate as the discount rate for any new leases identified as a result of IFRS 16 and elected to
25
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
apply a single rate to a portfolio of leases with similar characteristics. Existing finance leases continued to be discounted applying the rate implicit in the lease.
Upon transition to IFRS 16, the Company has elected not to recognize ROU assets and lease liabilities for short-term leases with a remaining lease term of 12 months or less and leases of low-value assets. Lease payments associated with these leases are recognized as an expense on a straight-line basis over the lease term. In addition, the Company elected not to separate non-lease components for leases identified within drilling and propane supply contracts and will account for the lease and non-lease components as a single lease component. The Company will continue to elect these practical expedients going forward.
Impact on Financial Statements
On January 1, 2019, the Company recognized $31.8 million of ROU assets, of which $29.4 million represents leased assets previously recognized within plant and equipment under IAS 17, a net investment in sub-leases of $0.8 million and $3.2 million of additional lease liabilities, with the difference primarily recognized in retained earnings. Since the Company elected to recognize the ROU assets at an amount equal to the lease liabilities, adjusted for any prepaid or accrued lease payments, the impact to retained earnings was insignificant and reflects the net investment in sub-leases arising from the sub-leasing of office space.
The impact is summarized as follows:
ROU assets recognized as at January 1, 2019 upon adoption of IFRS 16 | $2,353 | ||
Net investment in sub-leases | 809 | ||
Lease obligations recognized as at January 1, 2019 upon adoption of IFRS 16 | 3,223 | ||
Other adjustments | 29 | ||
Net decrease to opening retained earnings as at January 1, 2019 | $90 |
The Company re-assessed the classification of its sub-leases previously classified as operating leases under IAS 17 and concluded that the sub-leases are finance lease assets, resulting in the recognition of a net investment in sub-leases on the consolidated statement of financial position as at January 1, 2019. The ROU assets and lease liabilities are presented within Mining Interests and Plant and Equipment and Lease Obligations, respectively.
The carrying amount of ROU assets and lease liabilities recognized on January 1, 2019 that were previously classified as finance leases under IAS 17 and continued to be assessed as leases under IFRS 16 were determined at the carrying amount of the lease assets and lease liabilities immediately before the transition to the new standard.
The Company recognized lease liabilities in relation to leases which had previously been classified as operating leases under IAS 17. These liabilities were measured at the present value of the remaining lease payments, discounted at the Company's incremental borrowing rate as at January 1, 2019. The weighted average incremental borrowing rate applied as at January 1, 2019 was 4.06%.
26
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Operating lease commitments disclosed as at December 31, 2018 | $8,442 | ||
Discounted using the incremental borrowing rate at January 1, 2019 | 8,075 | ||
Finance lease liabilities previously recognized as at December 31, 2018 | 22,224 | ||
Adjustment for contracts re-assessed as finance leases containing variable payments not included in lease liabilities | (1,783 | ) | |
Adjustment for non-lease components contained within operating lease commitments | (1,508 | ) | |
Recognition exemption for: | |||
Short-term leases | (1,352 | ) | |
Low-value items | (87 | ) | |
Other adjustments | (122 | ) | |
Lease obligations recognized as at January 1, 2019 | $25,447 |
IFRIC 23, Uncertainty over Income Tax Treatments
On June 7, 2017, the IASB issued IFRIC Interpretations 23, Uncertainty over Income Tax Treatments ("IFRIC 23"). The Interpretation provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The Company adopted the Interpretation in its financial statements for the annual period beginning on January 1, 2019. The adoption of IFRIC 23 did not have a material impact on the Company's consolidated financial statements. Additional disclosure over the Company's evaluation of uncertainty over income tax treatments is provided in note 9.
6. EMPLOYEE BENEFITS EXPENSE
The following employee benefits expenses are included in production costs and general and administrative costs for the years ended December 31, 2019 and 2018 include the following:
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||
Salaries, short-term incentives and other benefits | $176,773 | $173,993 | ||||
Share based payment expense (note 16(iii)) | 9,307 | 5,459 | ||||
$186,080 | $179,452 |
7. OTHER (LOSS) INCOME, NET
Other income (loss), net for the years ended December 31, 2019 and 2018 includes the following:
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||
Loss on disposal of plant and equipment and mining interest | ($4,983 | ) | ($2,017 | ) | ||
Change in fair value of warrant investments (note 12) | (18 | ) | (10,892 | ) | ||
Foreign exchange (loss) gain, net | (16,208 | ) | 16,902 | |||
Other income | 2,392 | 1,137 | ||||
Other (loss) income, net | ($18,817 | ) | $5,130 |
27
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
8. FINANCE ITEMS
Finance income and expense for the years ended December 31, 2019 and 2018 includes the following:
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||
Interest income on bank deposits | $6,941 | $5,714 | ||||
Finance income | $6,941 | $5,714 | ||||
Interest on finance leases and other loans | 922 | 1,496 | ||||
Finance fees and bank charges | 512 | 969 | ||||
Unwinding of discount on rehabilitation provision (note 17) | 848 | 1,152 | ||||
Finance costs | $2,282 | $3,617 |
9. INCOME TAXES
a) | Income tax expense |
A reconciliation of income tax expense for continuing operations and the product of earnings from continuing operations before income tax multiplied by the combined Canadian federal and provincial statutory income tax rate is as follows:
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||
Earnings before income taxes | $798,182 | $394,310 | ||||
Computed income tax expense at Canadian statutory rates (25%) | 199,546 | 98,578 | ||||
Non-deductible expenses/Non-taxable (income) | (1,286 | ) | (4,751 | ) | ||
Foreign tax rate differential | 32,267 | 10,801 | ||||
Current and deferred Ontario Mining Tax | 10,581 | 12,190 | ||||
Revision in estimates | (5,879 | ) | 74 | |||
Tax benefit not recognized | 3,314 | — | ||||
Withholding taxes | 324 | 2,737 | ||||
Other | (765 | ) | 738 | |||
Income tax expense | 238,102 | 120,367 | ||||
Current income tax expense | 189,572 | 40,743 | ||||
Deferred tax (recovery) expense | $48,530 | $79,624 |
During the year ended December 31, 2019, the effective tax rate is 29.8% (year ended December 31, 2018 - 30.5%).
b) | Deferred income tax balances |
The tax effect of temporary differences that give rise to deferred income tax assets and liabilities at December 31, 2019 and 2018 are as follows:
28
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
As at | December 31, 2019 | December 31, 2018 | ||||
Net deferred tax assets: | ||||||
Employee provisions | 13,543 | 2,148 | ||||
Loss carry forwards | 6,315 | 6,117 | ||||
Mark to market adjustments | (9,201 | ) | (753 | ) | ||
Other | 75 | 284 | ||||
$10,732 | $7,796 |
As at | December 31, 2019 | December 31, 2018 | ||||
Net deferred tax liabilities: | ||||||
Mining interests and plant and equipment | (229,166 | ) | (201,389 | ) | ||
Environmental rehabilitation provision | 15,967 | 14,310 | ||||
Ontario Mining Tax | (30,729 | ) | (23,635 | ) | ||
Loss carry forwards | — | 12,861 | ||||
Inventory | (18,686 | ) | (4,666 | ) | ||
Mark to market adjustments | 2,902 | (3,354 | ) | |||
Employee provisions | 4,694 | 3,483 | ||||
Other | (1,299 | ) | (1,400 | ) | ||
($256,317 | ) | ($203,790 | ) |
Changes in net deferred tax assets and liabilities for the years ended December 31, 2019 and 2018 are as follows:
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||
Balance, beginning of year | ($195,994 | ) | ($133,645 | ) | ||
Recognized in net earnings | (48,530 | ) | (79,624 | ) | ||
Recognized in equity | 2,637 | 1,674 | ||||
Foreign currency translation in other comprehensive income (loss) | (3,698 | ) | 15,601 | |||
Net deferred tax liabilities, end of year | ($245,585 | ) | ($195,994 | ) |
At December 31, 2019, no deferred tax liabilities have been recognized in respect of the aggregate amount of $694,367 (December 31, 2018 - $274,747) of taxable temporary differences associated with investments in subsidiaries. The Company controls the timing and circumstances of the reversal of these differences, and the differences are not anticipated to reverse in the foreseeable future.
As at December 31, 2019, deferred income tax assets have not been recognized in respect of the following because it is not probable that future taxable profit will be available against which the Company can use the benefits:
As at | December 31, 2019 | December 31, 2018 | ||
Capital loss carryforwards | 8,730 | 11,668 | ||
Investment tax credits | 12,601 | 11,999 | ||
Mining interests | 11,076 | 10,546 | ||
Provision for reclamation liabilities and other accruals | 11,158 | — | ||
Australian royalty tax | 347,883 | 299,029 |
29
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
The temporary differences arising from investment tax credits have an expiry date of 2025 to 2030. The temporary differences arising from mineral properties, Australian royalty tax and capital losses carried forward have an indefinite expiry date.
As at December 31, 2019, the Company had the following Canadian and Australian income tax attributes to carry forward:
Year ended December 31, 2019 | Expiry | ||
Canada | |||
Non-capital losses | 23,830 | 2036-2039 | |
Tax basis of mining interests | 218,366 | Indefinite | |
Tax basis of plant and equipment | 213,646 | Indefinite | |
Australia | |||
Tax basis of mining interests | 6,303 | Indefinite | |
Tax basis of plant and equipment | 62,736 | Indefinite |
c) | Uncertainty over Income Tax Treatments |
The Company operates in Canada and Australia and as such, is subject to, and pays taxes under the regime in place within these countries, which are governed by general corporate tax laws. The Company has filed, and continues to file, all required tax returns and pays the taxes reasonably determined to be due. Tax rules and regulations are complex and subject to interpretation, with changes in tax law, or the manner in which they are interpreted, potentially impacting the Company's effective tax rate as well as its business and operations.
The Company's tax records, transactions and filing positions may be subject to examination by the tax authorities. The tax authorities may interpret the tax implications of a transaction differently from the Company, requiring many years before a resolution can be reached. Uncertainty in the interpretation and application of applicable tax laws and regulations by the tax authorities could adversely affect the Company.
10. ACCOUNTS RECEIVABLE
As at | December 31, 2019 | December 31, 2018 | ||||
Trade receivables | $241 | $8,129 | ||||
Sales tax and other statutory receivables | 13,568 | 11,357 | ||||
Other receivables | 2,869 | 665 | ||||
$16,678 | $20,151 |
The fair value of receivables approximates their carrying value. None of the amounts included in receivables at December 31, 2019 are past due.
Trade receivables represent the value of gold doré sold as at period end for which the funds are not yet received; gold sales are generally settled within 1-2 weeks after delivery to a refinery. There is no allowance for doubtful accounts or a recorded allowance for credit losses. In determining the recoverability of other receivables, the Company considers any change in the credit quality of the counterparty, with the concentration of the credit risk limited due to the nature of the counterparties involved.
30
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
11. INVENTORIES
As at | December 31, 2019 | December 31, 2018 | ||||
Gold doré | $791 | $1,114 | ||||
Gold in circuit | 10,941 | 9,493 | ||||
Ore stockpiles | 7,888 | 7,770 | ||||
Supplies and consumables | 28,066 | 21,712 | ||||
$47,686 | $40,089 |
The cost of gold doré, gold in circuit, ore stockpiles (“metal inventory”), and supplies and consumables recognized as an expense and included in operating costs in the years ended December 31, 2019 and 2018 are $280,745 and $267,189, respectively. During the year ended December 31, 2019, there were write downs of inventory to net realizable value of $4,527 (year ended December 31, 2018 - $nil). There were no reversals of write downs of inventory to net realizable value during the years ended December 31, 2019 and 2018.
12. OTHER LONG-TERM ASSETS
As at | December 31, 2019 | December 31, 2018 | ||||
Investments in equity securities | $253,540 | $141,781 | ||||
Warrant investments | 1,605 | 1,209 | ||||
Deposits and other | 184 | 22,102 | ||||
$255,329 | $165,092 |
Investments in equity securities
Changes in the investments in equity securities for the years ended December 31, 2019 and 2018 are as follows:
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||
Balance, beginning of year | $141,781 | $100,109 | ||||
Acquisition of investments | 34,026 | 66,124 | ||||
Disposition of investments | — | (525 | ) | |||
Unrealized gain (loss) | 68,891 | (13,316 | ) | |||
Foreign currency translation | 8,842 | (10,611 | ) | |||
Investments in equity securities, end of year | $253,540 | $141,781 |
The fair value of the investments and warrants held as at December 31, 2019 and December 31, 2018 are as follows:
Investments in equity securities | Shares held at December 31, 2019 | Fair value as at December 31, 2018 | Purchase/(sales) | Unrealized gain/(loss) | Foreign currency translation | Fair value as at December 31, 2019 | |||||||||||
Bonterra Resources Inc. | 8,510,629 | $8,472 | $6,397 | ($694 | ) | $571 | $14,746 | ||||||||||
Osisko Mining Inc. | 32,627,632 | 73,452 | — | 24,135 | 4,170 | 101,757 | |||||||||||
Novo Resources Corp. | 29,830,268 | 54,249 | — | 30,214 | 3,057 | 87,520 | |||||||||||
Wallbridge Mining Company Ltd. | 57,000,000 | — | 24,434 | 14,687 | 822 | 39,943 | |||||||||||
Other | 5,608 | 3,195 | 549 | 222 | 9,574 | ||||||||||||
Total | $141,781 | $34,026 | $68,891 | $8,842 | $253,540 |
31
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Warrant investments | Warrants held at December 31, 2019 | Valuation technique | Fair value as at December 31, 2018 | Purchase/(sales) | Unrealized gain/(loss) | Foreign currency translation | Fair value as at December 31, 2019 | |||||||||||
Bonterra Resources Inc. | 1,000,000 | Black Scholes | $19 | $356 | ($62 | ) | $10 | $323 | ||||||||||
Novo Resources Corp. | 14,000,000 | Barrier Option Pricing | 1,027 | — | 211 | 44 | 1,282 | |||||||||||
De Grey Mining Ltd. | — | Black Scholes | 163 | — | (167 | ) | 4 | — | ||||||||||
Total | $1,209 | $356 | ($18 | ) | $58 | $1,605 |
The inputs used to value the warrant investments as of December 31, 2019 are as follows:
Input | Bonterra Resources Inc. | Novo Resources Corp. | ||
Closing share price (C$) | $2.25 | $3.81 | ||
Exercise price (C$) | $3.10 | $6.00 | ||
Remaining life of the warrants (years) | 1.64 | 0.68 | ||
Volatility | 56.61 | % | 49.57 | % |
Risk-free interest rate | 1.69 | % | 1.69 | % |
Barrier (C$) | — | $12.00 | ||
Rebate (C$) | — | $6.00 |
13. MINING INTERESTS AND PLANT AND EQUIPMENT
Year ended December 31, 2019 | Depletable | Non depletable | Total mining interest | Plant and equipment | Total | ||||||||||
Cost | |||||||||||||||
At January 1, 2019 | $962,121 | $106,138 | $1,068,259 | $447,941 | $1,516,200 | ||||||||||
Additions, including transfer from construction in progress1 | $161,322 | $110,370 | $271,692 | $204,319 | $476,011 | ||||||||||
Construction in progress, net of transfers to plant and equipment additions | $— | $— | $— | $40,086 | $40,086 | ||||||||||
Change in environmental closure assets (estimate and discount rate) | $15,276 | $— | $15,276 | $— | $15,276 | ||||||||||
Disposals | ($28,233 | ) | ($129 | ) | ($28,362 | ) | ($31,291 | ) | ($59,653 | ) | |||||
Foreign currency translation | $25,420 | $3,918 | $29,338 | $17,254 | $46,592 | ||||||||||
Cost at December 31, 2019 | $1,135,906 | $220,297 | $1,356,203 | $678,309 | $2,034,512 | ||||||||||
Accumulated depreciation and depletion | |||||||||||||||
At January 1, 2019 | $281,431 | $— | $281,431 | $117,599 | $399,030 | ||||||||||
Depreciation | $456 | $— | $456 | $61,736 | $62,192 | ||||||||||
Depletion | $112,305 | $— | $112,305 | $— | $112,305 | ||||||||||
Disposals | ($26,789 | ) | $— | ($26,789 | ) | ($24,304 | ) | ($51,093 | ) | ||||||
Foreign currency translation | $8,796 | $— | $8,796 | $6,356 | $15,152 | ||||||||||
Accumulated depreciation and depletion at December 31, 2019 | $376,199 | $— | $376,199 | $161,387 | $537,586 | ||||||||||
Carrying value at December 31, 2019 | $759,707 | $220,297 | $980,004 | $516,922 | $1,496,926 |
1 Includes $6.0 million of costs associated with leases recognized upon adoption of IFRS 16.
32
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Year ended December 31, 2018 | Depletable | Non depletable | Total mining interest | Plant and equipment | Total | ||||||||||
Cost | |||||||||||||||
At January 1, 2018 | $864,385 | $116,285 | $980,670 | $375,571 | $1,356,241 | ||||||||||
Additions, including transfer from construction in progress | 181,486 | 324 | 181,810 | 88,406 | 270,216 | ||||||||||
Construction in progress, net of transfers to plant and equipment additions | — | — | — | 38,923 | 38,923 | ||||||||||
Change in environmental closure assets (estimate and discount rate) | 3,755 | — | 3,755 | — | 3,755 | ||||||||||
Disposals | — | — | — | (17,873 | ) | (17,873 | ) | ||||||||
Foreign currency translation | (87,505 | ) | (10,471 | ) | (97,976 | ) | (37,086 | ) | (135,062 | ) | |||||
Cost at December 31, 2018 | $962,121 | $106,138 | $1,068,259 | $447,941 | $1,516,200 | ||||||||||
Accumulated depreciation and depletion | |||||||||||||||
At January 1, 2018 | $213,440 | $— | $213,440 | $93,492 | $306,932 | ||||||||||
Depreciation | 346 | — | 346 | 47,360 | 47,706 | ||||||||||
Depletion | 90,980 | — | 90,980 | — | 90,980 | ||||||||||
Disposals | — | — | — | (13,901 | ) | (13,901 | ) | ||||||||
Foreign currency translation | (23,335 | ) | — | (23,335 | ) | (9,352 | ) | (32,687 | ) | ||||||
Accumulated depreciation and depletion at December 31, 2018 | $281,431 | $— | $281,431 | $117,599 | $399,030 | ||||||||||
Carrying value at December 31, 2018 | $680,690 | $106,138 | $786,828 | $330,342 | $1,117,170 |
Mining Interests
Non-depletable mining interests at December 31, 2019 of $220,297 (December 31, 2018 - $106,138) includes $104,634 (December 31, 2018 - $42,765) for the carrying amount of previously acquired interest in exploration properties around the Company's Macassa Mine in Canada, with the change in amount primarily attributable to capitalized expenditures at Macassa combined with the impact of foreign exchange, and $115,663 (December 31, 2018 - $63,373) for the carrying amount of various acquired exploration properties in Australia, with the change in amount related primarily to capitalized development at the Northern Territory and the remainder of the change due to foreign exchange impact.
Plant and Equipment
Plant and equipment at December 31, 2019, includes $52,002 (December 31, 2018 - $14,969) of construction in progress. Plant and equipment also includes costs of $46,377 (December 31, 2018 - $44,978) and accumulated depreciation of $22,237 (December 31, 2018 - $15,548) related to capital equipment and vehicles under ROU assets.
14. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
As at | December 31, 2019 | December 31, 2018 | ||||
Trade payable and accrued liabilities | $134,123 | $108,295 | ||||
Payroll and government remittances | 17,637 | 17,340 | ||||
$151,760 | $125,635 |
33
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
15. LEASES
Mining interest and plant and equipment comprise of owned and leased assets.
As at | December 31, 2019 | ||
Mining interests and plant and equipment | $1,467,709 | ||
Right-of-use assets | 29,217 | ||
$1,496,926 |
The Company leases many assets including buildings, mining equipment, storage facilities and IT equipment. Information for which the Company is a lessee is presented below.
Right-of-use assets
Buildings | Mining equipment | Storage facilities | Vehicles | IT equipment | Total | |||||||
Balance, January 1, 2019 | 1,544 | 29,982 | 176 | 22 | 59 | 31,783 | ||||||
Additions (net of disposals) | 1,938 | 4,361 | 371 | — | — | 6,670 | ||||||
Depreciation charge for the year | (496 | ) | (9,944 | ) | (205 | ) | (4 | ) | (13 | ) | (10,662 | ) |
Foreign currency translation adjustment | 82 | 1,332 | 10 | 1 | 1 | 1,426 | ||||||
Balance, December 31, 2019 | 3,068 | 25,731 | 352 | 19 | 47 | 29,217 |
Lease liabilities
As at | December 31, 2019 | December 31, 2018 | ||
Maturity analysis - contractual undiscounted cash flows | ||||
Less than one year | 10,485 | 13,101 | ||
One to five years | 5,232 | 10,006 | ||
Total undiscounted lease liabilities | 15,717 | 23,107 | ||
Lease liabilities included in the statement of financial position | 15,316 | 22,224 | ||
Current | 10,176 | 12,465 | ||
Non-current | 5,140 | 9,759 |
Amounts recognized in profit or loss
Year ended December 31, 2019 | ||
Interest on lease liability | 269 | |
Variable lease payments not included in the measurement of lease liabilities | 26,167 | |
Income from sub-leasing right-of-use assets | 30 | |
Expenses relating to short-term leases | 8,532 | |
Expenses relating to leases of low-value assets, excluding short-term leases of low-value assets | 192 |
Amounts recognized in the statement of cash flows
Year ended December 31, 2019 | Year ended December 31, 2018 | |||
Total cash outflow from financing activities | 14,673 | 23,109 | ||
Total cash outflow from operating activities | 28,212 | 8,442 |
34
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
As a lessor
The Company is party to contracts for the lease of a portion of its corporate office space, which is sub-leased to third parties. The Company sub-leases office space in three buildings that were leased in 2015 and 2017. The Company has classified the sub-lease as a finance lease because the sub-lease is for the whole of the remaining term of the head lease. Lease income from these sub-leases where the Company acts as a lessor is as below.
Year ended December 31, 2019 | ||
Finance lease | ||
Finance income on the net investment of a lease | 30 |
The following table sets out a maturity analysis of lease receivables, showing the undiscounted lease payments to be received after the reporting date.
As at | December 31, 2019 | |
Less than one year | 277 | |
One to two years | 237 | |
Two to three years | 86 | |
Three to four years | — | |
Total undiscounted lease receivable at December 31, 2019 | 600 | |
Unearned finance income | 27 |
16. SHARE BASED PAYMENT LIABILITIES
(i) | Long-term incentive plan ("LTIP") |
The Company has an LTIP that provides for restricted share units ("RSUs") and performance share units ("PSUs") (collectively, “Share Units”) that may be granted to employees, officers and eligible contractors of the Company and its affiliates. A director of the Company is not eligible to participate in the LTIP unless he or she is also an employee of the Company. At the discretion of the Company's Board of Directors, the Company can issue common shares or cash or any combination thereof in satisfaction of the Company’s obligations under Share Units held by participants. The Company has historically equity-settled awards under the LTIP plan and accounted for them accordingly, however granted units that vested in 2019 were settled in cash, resulting in a change in the accounting to cash-settled.
The fair value of the share based liability recognized on modification of $42,948 is greater than the amount previously recognized as expense in equity of $7,228. The Company made an accounting policy choice under IFRS to recognize the excess amount as a direct charge to shareholders' equity as opposed to recognizing an expense in the statement of operations on the date of modification. As a result, the Company recognized $29,248, net of tax of $9,906, as a charge to retained earnings. All remaining and future grants under the LTIP will be accounted for as cash-settled awards. The maximum number of common shares made available for issuance under the LTIP shall not exceed: (i) such number of common shares as would, when combined with all other common shares subject to grants under DSUs, RSUs and PSUs of the Company, be equal to 2% of the common shares then outstanding; and (ii) such number of common shares as would, when combined with all other common shares of the Company, be equal to 5.5% of the common shares outstanding from time to time.
The value of an RSU and PSU at the grant date is equal to the fair market value of a common share of the Company on that date. Unless otherwise determined by the Compensation Committee, no RSU or PSU shall vest later than three years after the date of grant.
35
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Upon vesting of the PSUs, the number of shares the holder can receive ranges between 0% and 200% of the number of the PSUs granted, to be determined at the end of the performance period based on the performance of the Company's underlying shares.
Movements in the number of the PSUs and RSUs for the years ended December 31, 2019 and 2018 are as follows:
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||||
PSUs | RSUs | PSUs | RSUs | |||||
Balance, beginning of year | 502,037 | 524,094 | 342,206 | 364,263 | ||||
Granted | 117,143 | 129,146 | 198,528 | 198,528 | ||||
Cancelled | (23,114 | ) | (23,114 | ) | (38,697 | ) | (38,697 | ) |
Redeemed | (84,298 | ) | (89,298 | ) | — | — | ||
Balance, end of year | 511,768 | 540,828 | 502,037 | 524,094 |
(ii) | Deferred share unit plan ("DSU Plan") |
The Company has a DSU Plan for non-executive directors of the Company, which provides a cash payment, common shares, or a combination thereof on the date when a director ceases to be a director. The Company assumed phantom share units that were previously granted to Australian employees of Newmarket Gold Inc. as a result of a business combination that closed on November 30, 2016. Each phantom share unit entitles the holder to a cash payment on exercise based on market value of the Company's shares on the date of exercise less the strike price of the phantom share unit.
Changes in the number of deferred share units ("DSUs") and phantom share units outstanding during the years ended December 31, 2019 and 2018 are as follows:
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||||
DSUs | Phantom share units | DSUs | Phantom share units | |||||
Balance at beginning of year | 170,528 | 35,625 | 131,006 | 95,000 | ||||
Granted | 21,875 | — | 39,522 | — | ||||
Redeemed | (37,026 | ) | (35,625 | ) | — | (35,625 | ) | |
Cancelled | — | — | — | (23,750 | ) | |||
Balance, at end of year | 155,377 | — | 170,528 | 35,625 |
Changes in the share based payment liabilities during the years ended December 31, 2019 and 2018 are as follows:
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||
Opening liability | $4,276 | $2,116 | ||||
Share based payment expense | 9,307 | 2,564 | ||||
Modification of share based payment | 42,948 | — | ||||
Redeemed DSUs and phantom share units (cash payments) | (2,453 | ) | (441 | ) | ||
Foreign currency translation | 1,179 | 37 | ||||
Total share based payment liability | $55,257 | $4,276 | ||||
Current portion of share based payment liability | $36,783 | $4,276 | ||||
Long term share based payment liability | $18,474 | $— |
36
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
(iii) | Share based payment expense |
The cost of share based payments is allocated to production costs (options granted to employees involved in the commercial operations at the mines and mill), and general and administrative costs (options granted to directors and corporate employees).
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||
RSU and PSU share based payment expense | $— | $2,874 | ||||
Stock options share based payment expense | — | 21 | ||||
Equity based instruments share based payment expense | $— | $2,895 | ||||
Cash settled instruments share based payment expense (note 16) | $9,307 | $2,564 | ||||
Total share based payment expense | $9,307 | $5,459 |
The allocation of share based payment expense on the consolidated statement of operations and comprehensive income for the years ended December 31, 2019 and 2018 is as follows:
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||
General and administrative | $9,018 | $5,216 | ||||
Production costs | 289 | 243 | ||||
Total share based payment expense | $9,307 | $5,459 |
17. PROVISIONS
As at | December 31, 2019 | December 31, 2018 | ||||
Environmental rehabilitation provision | $71,121 | $50,603 | ||||
Long service leave | 2,642 | 6,092 | ||||
Total provisions | 73,763 | 56,695 | ||||
Current provisions | 29,776 | 15,817 | ||||
Long-term balance | $43,987 | $40,878 |
Environmental rehabilitation provision
The Company provides for the estimated future cost of rehabilitating mine sites and related production facilities on a discounted basis as such activity that creates the rehabilitation obligation occurs. The rehabilitation provision represents the present value of estimated future rehabilitation costs. These provisions are based on the Company’s internal estimates, with consideration of closure plans and rehabilitation requirements established by relevant regulatory bodies.
Changes in the environmental rehabilitation provision for the years ended December 31, 2019 and 2018 are as follows:
37
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||
Balance, beginning of year | $50,603 | $54,429 | ||||
Changes in estimates | 19,644 | 6,885 | ||||
Site closure and reclamation costs paid | (938 | ) | (6,840 | ) | ||
Unwinding of discount on rehabilitation provision | 848 | 1,152 | ||||
Foreign currency translation | 964 | (5,023 | ) | |||
Balance, end of year | 71,121 | 50,603 | ||||
Current portion | 24,172 | 10,488 | ||||
Long-term balance | $46,949 | $40,115 |
The majority of the expenditures are expected to occur between 2020 and 2041. The inflation adjusted discount rate used in estimating the environmental provision for the year ended December 31, 2019 was 0% (discount rates between 1.83% and 2.32% and inflation rates between 2% and 3% were used for the year ended December 31, 2018). As the life of the mine is extended, the timing of certain expenditures will be deferred.
All estimates and assumptions are reviewed on an annual basis to take into account any material changes to underlying assumptions and inputs. However, actual rehabilitation costs will ultimately depend upon future market prices for the necessary decommissioning works required, which will reflect market conditions at the relevant time. Furthermore, the timing of rehabilitation is likely to depend on when the mines cease to produce at economically viable rates. This, in turn, will depend upon future gold prices and costs of production, which are inherently uncertain.
18. SHAREHOLDERS' EQUITY
The Company is authorized to issue an unlimited number of common shares without par value.
(a) | SHARE CAPITAL |
As at December 31, 2019, the Company had 209,624,480 common shares outstanding (December 31, 2018 - 209,822,819).
Share capital issuances
– | During the year ended December 31, 2019, the Company issued an aggregate of 670,767 common shares upon the exercise of 670,767 stock options for $3,855 (year ended December 31, 2018 - the Company issued an aggregate of 517,935 common shares upon the exercise of 517,935 stock options for $3,591). |
38
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Repurchases
2019
– | On April 5, 2019, the Company purchased 199,900 common shares for $6,187 (C$8,275) pursuant to the Normal Course Issuer Bid ("NCIB"). All of the shares have been legally canceled as of December 31, 2019. |
– | On May 17, 2019, the Company purchased 199,900 common shares for $6,623 (C$8,859) pursuant to the NCIB which was renewed on the TSX on May 22, 2019. All of the shares have been legally canceled as of December 31, 2019. |
– | On November 29, 2019, the Company purchased 206,700 common shares for $8,141 (C$10,742) pursuant to the NCIB. All of the shares have been legally canceled as of December 31, 2019. |
– | On December 6, 2019, the Company purchased 520,500 common shares for $21,824 (C$28,799) pursuant to the NCIB. All of the shares have been legally canceled as of December 31, 2019. |
2018
– | On April 6, 2018, the Company purchased 69,400 shares for $1,039 (C$1,342) pursuant to the NCIB. All of the shares have been legally canceled as of December 31, 2018. |
– | During the three months ended September 30, 2018, the Company purchased 1,570,600 shares for $29,772 (C$38,912) pursuant to the NCIB. All of the shares have been legally canceled as of December 31, 2018. |
Dividends
2019
Dividend declaration date | Dividend paid date | Per share | Paid USD | Paid CAD | Reduction in retained earnings | ||||||
December 11, 2018 | January 11, 2019 | C$0.04 | $6,328 | C$8,393 | $— | ||||||
March 15, 2019 | April 12, 2019 | C$0.04 | $6,326 | C$8,410 | $6,326 | ||||||
May 7, 2019 | July 12, 2019 | $0.04 | $8,408 | $— | $8,408 | ||||||
September 11, 2019 | October 11, 2019 | $0.04 | $8,408 | $— | $8,408 | ||||||
December 16, 2019 | January 13, 2020 | $0.06 | $— | C$— | $12,577 | ||||||
Total | $29,470 | $35,719 |
2018
Dividend declaration date | Dividend paid date | Per share | Paid USD | Paid CAD | Reduction in retained earnings | ||||||
December 15, 2017 | January 15, 2018 | C$0.02 | $3,351 | C$4,219 | $— | ||||||
March 28, 2018 | April 13, 2018 | C$0.02 | $3,340 | C$4,224 | $3,340 | ||||||
June 18, 2018 | July 13, 2018 | C$0.03 | $4,811 | C$6,337 | $4,908 | ||||||
September 17, 2018 | October 12, 2018 | C$0.03 | $4,827 | C$6,290 | $4,812 | ||||||
December 11, 2018 | January 11, 2019 | C$0.04 | $— | $— | $6,177 | ||||||
Total | $16,329 | $19,237 |
39
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
(b) | RESERVES |
(i) | Share based payment compensation plans |
In addition to the DSU and phantom share unit liabilities disclosed in note 16, the Company has the following outstanding equity based awards:
Stock options
The Company has a stock option plan ("the Stock Option Plan") that provides for the issuance of stock to employees, directors, or officers of the Company and any of its subsidiaries or affiliates, consultants, and management employees. On May 4, 2017, shareholders of the Company approved certain amendments to the Stock Option Plan, including changing the Stock Option Plan to a “rolling plan”. Accordingly, the aggregate number of common shares to be reserved for issuance in satisfaction of stock options granted pursuant to the Stock Option Plan and all other security based compensation plans must not exceed 5.5% of the common shares issued and outstanding (on a non-diluted basis) at the time of granting any stock options. In accordance with the terms of the Stock Option Plan: (i) the exercise price of a stock option granted shall be determined by the Company's Board but in any event, shall not be less than the closing price of the common shares trading on the TSX on the date of grant; (ii) stock options shall have a maximum term of five years; and (iii) will generally be terminated ninety days after a participant ceases to be an officer, director, employee or consultant of the Company.
During the years ended December 31, 2019 and 2018, the Company did not grant any stock options.
Changes in stock options during the years ended December 31, 2019 and 2018 were as follows:
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||||||
Number of | Weighted average | Number of | Weighted average | |||||||
options | exercise price (C$) | options | exercise price (C$) | |||||||
Balance, beginning of year | 897,409 | $5.02 | 1,499,315 | $5.80 | ||||||
Exercised | (670,767 | ) | 5.21 | (517,935 | ) | 6.70 | ||||
Expired | (8,153 | ) | 5.72 | (83,971 | ) | 8.44 | ||||
Stock options outstanding, end of year | 218,489 | $4.44 | 897,409 | $5.02 | ||||||
Stock options exercisable, end of year | 218,489 | $4.44 | 897,409 | $5.02 |
Options are valued using the Black-Scholes option pricing model. Where relevant, the expected life used in the model has been adjusted based on management’s best estimate of the effects of non-transferability, exercise restrictions and behavioral considerations. Expected volatility is based on the historical share price volatility of the Company.
40
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Stock Options Exercised
The following table outlines share options granted under the former stock option plans of Kirkland Lake Gold Inc. and St. Andrews Goldfields Ltd. that were exercised during the year ended December 31, 2019:
Grant price (C$) | Number of options exercised | Exercise dates | Weighted average closing share price at exercise date (C$) | |||
$2.98 - $6.82 | 172,416 | January 1, 2019 - March 31, 2019 | $39.10 | |||
$3.42 - $6.82 | 334,679 | April 1, 2019 - June 30, 2019 | $49.24 | |||
$6.82 | 1,998 | July 1, 2019 - September 30, 2019 | $56.22 | |||
$4.95 - $6.82 | 161,674 | October 1, 2019 - December 31, 2019 | $59.43 | |||
670,767 | $48.69 |
The following table outlines share options granted under the former stock option plans of Kirkland Lake Gold Inc. and St. Andrews Goldfields Ltd. that were exercised during the year ended December 31, 2018:
Grant price (C$) | Number of options exercised | Exercise dates | Weighted average closing share price at exercise date (C$) | |||
$2.85 - $15.11 | 266,499 | January 1, 2018 - March 31, 2018 | $19.57 | |||
$3.42 - $6.82 | 82,049 | April 1, 2018 - June 30, 2018 | $22.64 | |||
$3.42 - $6.82 | 4,630 | July 1, 2018 - September 30, 2018 | $27.15 | |||
$2.98 - $6.82 | 164,757 | October 1, 2018 - December 31, 2018 | $29.49 | |||
517,935 | $23.28 |
(ii) | Basic and diluted income per share |
Basic and diluted income per share for the years ended December 31, 2019 and 2018 is calculated as shown in the table below. The diluted income per share for the years ended December 31, 2019 and 2018 includes the impact of certain outstanding options, PSUs and RSUs.
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||
Net earnings | $560,080 | $273,943 | ||||
Weighted average basic number of common shares outstanding (in '000s) | 210,142 | 210,692 | ||||
Basic earnings per share | $2.67 | $1.30 | ||||
Net earnings | 560,080 | 273,943 | ||||
Cash settling LTIP adjustment | 1,450 | — | ||||
Net earnings for diluted earnings | 561,530 | 273,943 | ||||
Weighted average diluted number of common shares outstanding (in '000s) | 211,645 | 212,623 | ||||
Diluted earnings per share | $2.65 | $1.29 |
41
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Weighted average diluted number of common shares for the years ended December 31, 2019 and 2018 is calculated as follows:
Year ended December 31, 2019 | Year ended December 31, 2018 | |||
Weighted average basic number of common shares outstanding (in '000s) | 210,142 | 210,692 | ||
In the money shares - share options (in '000s) | 450 | 905 | ||
Dilutive RSUs and PSUs (in '000s) | 1,053 | 1,026 | ||
Weighted average diluted number of common shares outstanding | 211,645 | 212,623 |
19. SUPPLEMENTAL CASH FLOW INFORMATION
As at December 31, 2019, the Company’s cash balance of $707,206 (December 31, 2018 – $332,227) was held at major Canadian and Australian banks in deposit accounts, and was comprised of $686,481 (as at December 31, 2018 – $324,483) denominated in US dollars, which was exposed to movements in foreign exchange rates.
Supplemental information to the statements of cash flows is as follows:
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||
Change in non-cash working capital | ||||||
Decrease (increase) in accounts receivable | $2,883 | ($5,831 | ) | |||
(Increase) in inventories | (3,121 | ) | (4,937 | ) | ||
(Increase) decrease in prepaid expenses | (4,429 | ) | 942 | |||
(Decrease) increase in accounts payable and accrued liabilities | (20,733 | ) | 43,425 | |||
($25,400 | ) | $33,599 | ||||
Investing and financing non-cash transactions | ||||||
Plant and equipment acquired through lease | $6,037 | $8,589 |
Effective July 1, 2019, the Company made an accounting policy change to classify cash interest received within the condensed consolidated statement of cash flows for the years ended December 31, 2019 and 2018 as an operating activity rather than a non-operating activity, which more appropriately reflects the nature of these cash flows. The comparative figures for the year ended December 31, 2018 have been re-classified to conform with this change in accounting policy.
20. OPERATING SEGMENTS
The reportable operating segments are those operations for which operating results are reviewed by the President and Chief Executive Officer who is the chief operating decision maker regarding decisions about resources to be allocated to the segment and to assess performance provided those operations pass certain quantitative thresholds. Operations with revenues, earnings or losses or assets that exceed 10% of the total consolidated revenue, earnings or losses or assets are reportable segments.
Each of the Company's reportable operating segments generally consists of an individual mining property managed by a single general manager and operations management team.
The Company’s operating segments reflect these multiple mining interests and are reported in a manner consistent with internal reporting used to assess the performance of each segment and make decisions about resources to be allocated to the segments.
42
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
The information reported below as at and for the years ended December 31, 2019 and 2018 is based on the information provided to the President and Chief Executive Officer.
43
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
As at and for the year ended December 31, 2019 | ||||||||||||||||||
Macassa Mine | Holt Complex | Fosterville | Northern Territory | Corporate and other3 | Total | |||||||||||||
Revenue | $333,644 | $161,413 | $884,931 | $— | $— | $1,379,988 | ||||||||||||
Production costs | (99,227 | ) | (104,888 | ) | (76,919 | ) | — | — | (281,034 | ) | ||||||||
Royalty expense | (11,240 | ) | (7,738 | ) | (17,454 | ) | — | — | (36,432 | ) | ||||||||
Depletion and depreciation | (44,499 | ) | (33,021 | ) | (91,401 | ) | — | — | (168,921 | ) | ||||||||
Earnings from mine operations | 178,678 | 15,766 | 699,157 | — | — | 893,601 | ||||||||||||
Expenses | ||||||||||||||||||
General and administrative | — | — | — | — | (45,365 | ) | (45,365 | ) | ||||||||||
Transaction costs | — | — | — | — | (1,236 | ) | (1,236 | ) | ||||||||||
Exploration | (1,338 | ) | (5,288 | ) | (15,895 | ) | (10,948 | ) | — | (33,469 | ) | |||||||
Care and maintenance | — | (43 | ) | — | (1,148 | ) | — | (1,191 | ) | |||||||||
Earnings (loss) from operations | 177,340 | 10,435 | 683,262 | (12,096 | ) | (46,601 | ) | 812,340 | ||||||||||
Other income (loss), net1 | (18,817 | ) | ||||||||||||||||
Finance items | ||||||||||||||||||
Finance income1 | 6,941 | |||||||||||||||||
Finance costs1 | (2,282 | ) | ||||||||||||||||
Earnings before income taxes | 798,182 | |||||||||||||||||
Expenditures on: | ||||||||||||||||||
Mining interest | $104,728 | $37,221 | $78,449 | $51,294 | $— | $271,692 | ||||||||||||
Plant and equipment | 89,718 | 19,400 | 82,851 | 48,550 | 3,886 | 244,405 | ||||||||||||
Total capital expenditures2 | $194,446 | $56,621 | $161,300 | $99,844 | $3,886 | $516,097 | ||||||||||||
Total assets | $645,617 | $223,494 | $546,069 | $197,768 | $944,669 | $2,557,617 | ||||||||||||
Total liabilities | $203,521 | $69,953 | $113,629 | $37,591 | $316,169 | $740,863 |
1 Certain costs are managed on a consolidated basis and are therefore not reflected in segment income.
2 Segment capital expenditures are presented on an accrual basis.
3 Total assets includes $615.7 million of cash that resides within Newmarket Gold NT Holdings Pty. Ltd. ('NGNT'), which is the parent company to the Company's Australian entities. In 2018, the cash balance of $164.5 million was presented as part of the Northern Territory for operating segment note disclosure purposes, however in 2019 the Company has changed the presentation of the cash balance to be included within the 'Corporate and Other' operating segment as it more accurately reflects the total assets of the operating segment.
44
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
As at and for the year ended December 31, 2018 | ||||||||||||||||||
Macassa Mine | Holt Complex | Fosterville | Northern Territory | Corporate and other3 | Total | |||||||||||||
Revenue | $307,807 | $164,045 | $444,059 | $— | $— | $915,911 | ||||||||||||
Production costs | (102,845 | ) | (88,844 | ) | (75,743 | ) | — | — | (267,432 | ) | ||||||||
Royalty expense | (9,074 | ) | (8,352 | ) | (8,992 | ) | — | — | (26,418 | ) | ||||||||
Depletion and depreciation | (45,861 | ) | (25,500 | ) | (60,167 | ) | (2,185 | ) | (5 | ) | (133,718 | ) | ||||||
Earnings (loss) from mine operations | 150,027 | 41,349 | 299,157 | (2,185 | ) | (5 | ) | 488,343 | ||||||||||
Expenses | ||||||||||||||||||
General and administrative | — | — | — | — | (31,565 | ) | (31,565 | ) | ||||||||||
Exploration | (4,090 | ) | (6,232 | ) | (26,481 | ) | (29,811 | ) | — | (66,614 | ) | |||||||
Care and maintenance | — | (2,832 | ) | — | (249 | ) | (3,081 | ) | ||||||||||
Earnings (loss) from operations | 145,937 | 32,285 | 272,676 | (32,245 | ) | (31,570 | ) | 387,083 | ||||||||||
Other income (loss), net1 | 5,130 | |||||||||||||||||
Finance items | ||||||||||||||||||
Finance income1 | 5,714 | |||||||||||||||||
Finance costs1 | (3,617 | ) | ||||||||||||||||
Earnings before income taxes | 394,310 | |||||||||||||||||
Expenditures on: | ||||||||||||||||||
Mining interest | $67,079 | $26,001 | $58,650 | $23,240 | $— | $174,970 | ||||||||||||
Plant and equipment | 59,271 | 16,508 | 46,407 | 5,143 | — | 127,329 | ||||||||||||
Total capital expenditures2 | $126,350 | $42,509 | $105,057 | $28,383 | $— | $302,299 | ||||||||||||
Total assets | $531,457 | $196,176 | $436,616 | $144,945 | $400,966 | $1,710,160 | ||||||||||||
Total liabilities | $204,160 | $51,466 | $122,324 | $31,121 | $37,983 | $447,054 |
1 Certain costs are managed on a consolidated basis and are therefore not reflected in segment income.
2 Segment capital expenditures are presented on an accrual basis.
3 In 2018, the cash balance of $164.5 million was presented as part of the Northern Territory for operating segment note disclosure purposes, however in 2019 the Company has changed the presentation of the cash balance to be included within the 'Corporate and Other' operating segment as it more accurately reflects the total assets of the operating segment.
45
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
The following table shows non-current assets by geographic region:
Non-current assets | ||||||
As at | ||||||
December 31, 2019 | December 31, 2018 | |||||
Geographic information | ||||||
Australia | $712,845 | $571,569 | ||||
Canada | 1,051,224 | 740,679 | ||||
Total | $1,764,069 | $1,312,248 |
The following table summarizes sales to individual customers exceeding 10% of annual metal sales for the following periods:
Metal sales | ||||
Year ended December 31, 2019 | Year ended December 31, 2018 | |||
Customer | ||||
1 - Australia | $882,199 | $442,767 | ||
2 - Canada | 221,958 | 186,195 | ||
3 - Canada | 160,336 | 182,762 | ||
4 - Canada | — | 93,420 | ||
Total | $1,264,493 | $905,144 | ||
% of total sales | 92 | % | 99 | % |
The Company is not economically dependent on a limited number of customers for the sale of its product because gold doré can be sold through numerous commodity market traders worldwide. The hierarchy of customers differ in the years ended December 31, 2019 and 2018.
21. CAPITAL RISK MANAGEMENT
The Company manages its capital structure and makes adjustments to it to effectively support the acquisition, operation, exploration and development of mineral properties. In the definition of capital, the Company includes, as disclosed on its consolidated statement of financial position: share capital, reserves, accumulated other comprehensive income (loss) and retained earnings.
The Company’s capital at December 31, 2019 and 2018 is as follows:
As at | December 31, 2019 | December 31, 2018 | ||||
Share capital | $886,309 | $923,964 | ||||
Reserves | 28,843 | 35,135 | ||||
Accumulated other comprehensive income (loss) | 14,571 | (87,911 | ) | |||
Retained earnings | 887,031 | 391,918 | ||||
$1,816,754 | $1,263,106 |
The Company believes it has sufficient funds to finance its current operating, development and exploration expenditures. Longer term, the Company may pursue opportunities to raise additional capital through equity and or debt markets as it progresses with its properties and projects. The Company will continue to assess new properties and seek to acquire an interest in additional properties if it feels there is sufficient geologic or economic potential and if it has adequate financial resources to do so.
46
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
Management reviews its capital management approach on an ongoing basis and believes that its approach, given the relative size of the Company, is reasonable.
Neither the Company nor its subsidiaries are subject to any other externally imposed capital requirements.
22. FINANCIAL INSTRUMENTS
Carrying values of financial instruments
The carrying values of the financial assets and liabilities at December 31, 2019 and December 31, 2018 are as follows:
As at | December 31, 2019 | December 31, 2018 | ||||
Financial Assets | ||||||
At fair value through profit or loss | ||||||
Warrant investments (note 12) | $1,605 | $1,209 | ||||
Loans and receivables, measured at amortized cost | ||||||
Cash | $707,206 | $332,227 | ||||
Restricted cash | — | 22,190 | ||||
Accounts receivable (not including sales taxes) | 3,110 | 8,794 | ||||
$710,316 | $363,211 | |||||
Investments in equity securities, measured at fair value through Other Comprehensive Income | ||||||
Investments in equity securities (note 12) | $253,540 | $141,781 | ||||
Financial Liabilities | ||||||
At fair value through profit or loss | ||||||
Share based payment liabilities (note 16) | $55,257 | $4,276 | ||||
Other financial liabilities, measured at amortized cost | ||||||
Accounts payable and accrued liabilities (note 14) | $151,760 | $125,635 | ||||
Leases (note 15) | 15,316 | 22,224 | ||||
$222,333 | $152,135 |
Fair values of financial instruments
The fair values of cash, accounts receivable, restricted cash, accounts payable and accrued liabilities approximate their carrying values due to the short term to maturity of these financial instruments.
47
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
The fair value hierarchy of financial instruments measured at fair value on the consolidated statement of financial position is as follows:
As at | December 31, 2019 | December 31, 2018 | ||||
Level 1 | ||||||
Investments in equity securities - publicly traded | $252,385 | $141,781 | ||||
Share based payment liabilities (note 16) | $55,257 | $4,276 | ||||
Level 2 | ||||||
Warrant investments (note 12) | $1,605 | $1,209 | ||||
Level 3 | ||||||
Investments in equity securities - privately held | $1,155 | $— |
Financial instruments risks factors
The Company is exposed to financial risks sensitive to changes in share prices, share price volatility, foreign exchange and interest rates. The Company’s Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. Currently the Company has no outstanding options, forward or future contracts to manage its price-related exposures.
The Company's risk exposures and the impact on the Company's financial instruments are summarized below:
Credit risk
The Company's credit risk is primarily attributable to trade and other amounts receivable, which consist primarily of goods and services tax due from the Federal Governments of Australia and Canada. Consequently, credit risk is considered low and no allowance for doubtful debts has been recorded at the date of the consolidated statements of financial position. At December 31, 2019 and December 31, 2018, there were no significant trade receivables and the Company has no significant concentration of credit risk arising from trade receivables.
The Company’s cash and restricted cash are held with established Canadian and Australian financial institutions for which management believes the risk of loss to be remote. Deposits held with banks may exceed the amount of insurance provided on such deposits.
Liquidity risk
The Company monitors the expected settlement of financial assets and liabilities on an ongoing basis; there are no significant payables or obligations that are outstanding past their due dates. As at December 31, 2019, the Company had a net working capital of $377,685 (December 31, 2018 - $205,285), including cash of $707,206 (December 31, 2018 - $332,227).
Future financing requirements, if any, will depend on a number of factors that are difficult to predict and are often beyond the control of the Company. The main factor is the realized price of gold received for gold produced from the Company’s operating mines and the operating and capital costs of those mines, and exploration and development costs associated with the Company’s growth projects.
The contractual cash flow obligations of the Company as at December 31, 2019 are as follows:
48
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
As at December 31, 2019 | Total | Less than a year | 1-3 years | 4-5 years | After 5 years | ||||||||||
Accounts payable and accrued liabilities | $151,760 | $151,760 | $— | $— | $— | ||||||||||
Lease obligation payments | 15,717 | 10,485 | 5,054 | 178 | — | ||||||||||
Income taxes payable | 188,450 | 188,450 | — | — | — | ||||||||||
$355,927 | $350,695 | $5,054 | $178 | $— |
Market risk
(a) | Foreign currency risk |
The Company is exposed to foreign currency risk as the development and operation of the Company’s mining assets will largely be funded with Canadian and Australian dollars while gold is priced on international markets in US dollars, the Company’s presentation currency.
CAD | AUD | |||||
Closing US dollar exchange rate at December 31, 2019 | $0.77 | $0.70 | ||||
Average US dollar exchange rate during the year ended December 31, 2019 | $0.75 | $0.70 | ||||
Closing US dollar exchange rate at December 31, 2018 | $0.73 | $0.70 | ||||
Average US dollar exchange rate during the year ended December 31, 2018 | $0.77 | $0.75 |
Currency risk only exists on account of monetary financial instruments denominated in a currency that is not the functional currency. The following table indicates the impact of foreign currency exchange risk on net monetary financial assets, denominated in a currency other than the functional currency, as at December 31, 2019. The table below also provides a sensitivity analysis of a 10 percent adverse movement of the US dollar against the Canadian dollar and Australian dollar as identified which would have decreased the Company’s net earnings by the amounts shown in the table below. A 10 percent weakening of the US dollar against the foreign currencies would have had the equal but opposite effect as at December 31, 2019.
US$ | |||
Total foreign currency net financial assets in US$1 | $685,295 | ||
Impact of a 10% variance of the CAD:US exchange rate on net earnings | $5,130 | ||
Impact of a 10% variance of the AUD:US exchange rate on net earnings | $43,085 |
(1) | Includes financial assets and financial liabilities denominated in United States Dollars |
(b) | Interest rate risk |
The Company’s exposure to risks of changes in market interest rates relates primarily to interest earned on its cash balances. The Company reviews its interest rate exposure periodically, giving consideration to potential renewals of existing positions and alternative financial investments.
The finance leases bear interest at fixed rates. The Company does not account for any fixed rate liabilities at fair value, consequently a change in the interest rates at the reporting date would not impact the carrying amount of financial liabilities on the Consolidated Statement of Operations. The impact on cash of a movement in interest rates by a plus or minus 1% change would not be material to the value of cash.
49
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
(c) | Equity securities price risk |
The Company is exposed to equity securities price risk of changes because of the investments in equity securities and warrant investments held by the Company. The Company's portfolio of investments is not part of its core operations, and accordingly, gains and losses from these investments are not representative of the Company's performance during the year. As at December 31, 2019, the impact of a 10% increase or decrease in the share prices of the investments in equity securities would have resulted in an increase or decrease of $21,647, respectively, that would have been included in other comprehensive income. A 10% increase and 10% decrease in the share prices of the investments in equity securities would have resulted in an increase of $188 and decrease of $164 in net earnings, respectively in relation to the warrant investments.
23. RELATED PARTY TRANSACTIONS
The remuneration of directors and executive officers is determined by the compensation committee of the Board of Directors. The directors’ fees, consulting fees and other compensation of directors and executive officers were as follows:
Year ended December 31, 2019 | Year ended December 31, 2018 | |||||
Officer salaries and short-term benefits | $10,661 | $8,230 | ||||
Share based payment expense | 4,237 | 4,478 | ||||
Directors fees | 600 | 512 | ||||
Severance payments | 461 | — | ||||
$15,959 | $13,220 |
Related party transactions are measured at the exchange amount which is the consideration agreed to between the parties.
The Company chartered an aircraft owned by a Company controlled by the ex-Chairman of the Board during his tenure at the Company which ended on May 7, 2019. The total expense was $68 during the year ended December 31, 2019 (year ended December 31, 2018 - $177).
The Company entered into contracts with wholly-owned subsidiaries of Gekko Systems, a global mineral processing and equipment company. The total expense was $61 during the year ended December 31, 2019. Ms. Elizabeth Lewis-Gray, a member of the Company’s Board of Directors effective September 26, 2019, is the Co-founder, Chair and Managing Director of Gekko Systems.
24. COMMITMENTS AND CONTRACTUAL OGLIGATIONS
The Company has royalty obligations on its various mines sites as discussed below:
– | A 1.5% NSR royalty payable to Franco-Nevada Corporation (“FNV”) on production from the Company’s Macassa property. |
– | A 2% NSR on production from the Macassa mine payable to Sandstorm Gold Ltd. (Hurd-McCauley). |
– | A 3% NSR on production from the Macassa mine payable to Harbour Royalty Corp. (Morgan) (linked to gold price, NSR could decrease if gold price decreases below $1,000 CDN). |
50
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
– | A 20% NPI on production at the Macassa mine payable to FNV relating to the Gracie Claim. |
– | Minimum cash payment of $3,000 or $0.25 per ton mined payable to Boisvert/Joseph for claims held at the Macassa property. |
– | Payable to FNV, a 1% NSR on production from the Taylor mine ; a 3% NSR on production for Holloway and a sliding scale NSR linked to gold price for the Holt mine paying 3% and 10% in 2019. |
– | A 0.013% of gold price royalty factor NSR payable to Newmont Corporation relating to production at Holt. |
– | A 1% NSR payable to Zyla relating to production at the Holloway Zone Lightning-TBZ. |
– | A 2% NSR payable to Cadden relating to production at the Holloway Zone Lightning-TBZ. |
– | A $10 per ounce royalty payable to Osisko Mining Inc. relating to production at Holloway zones Smoke East and Black Top. |
– | A 2% NSR payable to Walter Turney at the Taylor zone WPZ (North Portion). |
– | A 0.5% NSR on production from the Macassa, Taylor, Holt and Holloway mines to the First Nations identified in the IBA. |
– | For the Company’s mine properties in the State of Victoria, Australia, a 2% NSR royalty on the Fosterville Gold Mine. |
– | For the Company’s mine properties in the State of Victoria, Australia, a 2.75% NSR royalty on the Fosterville Gold Mine payable to the Victorian Government effective January 1, 2020. |
– | The Fosterville Gold Mine is subject to a license fee which enables it to use the patented BIOX process to treat refractory ore from the underground mine. The fee is paid at a rate of A$1.33 per ounce of gold produced and treated through the BIOX Plant. |
– | A 1% ad valorem royalty on any future gold production above 250,000 ounces derived from the Maud Creek Gold Project (Australia); a 1% gross royalty and A$5 per ounce royalty are payable on any future gold production from certain tenements from the Maud Creek Gold Project that are located south of the main Maud Creek gold deposit. The Company also has a contingent contractual obligation of a payment of A$2 million that would be due upon a decision to proceed with development of the Maud Creek Gold Project. |
– | Beginning July 1, 2019, there is a minimum value based royalty on the gross production revenue per year at Northern Territory. A 1% royalty is payable in the first year, 2% in the second year and 2.5% in the third year and further. |
51
KIRKLAND LAKE GOLD LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
(stated in thousands of United States Dollars, except per share amounts and number of shares, warrants, stock options, share based liability units and equity based instrument units)
25. CONTINGENCIES
Certain conditions exist as of the date the financial statements are issued that may result in a gain or loss to the Company, but which will only be resolved when one or more future events occur or fail to occur, at which time the effects, if any, are recognized in the consolidated financial statements of the Company. The assessment of such contingencies inherently involves the exercise of significant judgments and estimates.
The Company does not believe that any outstanding matters, for which a provision has not been recorded, will have a material impact on the financial position of the Company.
26. SUBSEQUENT EVENTS
On November 25, 2019, the Company announced it had entered into an Arrangement Agreement to acquire all of the issued and outstanding common shares of Detour Gold Corporation ("Detour"), with Detour shareholders receiving 0.4343 of a Kirkland Lake common share for every one Detour share ("Exchange Ratio"). Upon closing of the transaction on January 31, 2020, the Company issued 77,217,129 Kirkland Lake common shares to the former shareholders of Detour. Furthermore, all outstanding stock options of Detour have been exchanged under the agreement at the Exchange Ratio. The Company is authorized up to an additional 343,485 common shares upon exercise of the stock options held by the former options holders of Detour. Subsequent to the share issuance, Kirkland Lake and former Detour shareholders owned 73% and 27%, respectively of the shares of the combined Company.
Detour was a publicly traded mining company in Canada with shares traded on the Toronto Stock Exchange and was subsequently de-listed on February 3, 2020. Detour held a 100% interest in the Detour Lake gold mine, a long-life open pit operation located in Northern Ontario.
The Company determined that the transaction represents a business combination under IFRS 3 Business Combinations, with Kirkland Lake identified as the acquirer. As the transaction closed on January 31, 2020, the initial allocation of the purchase price consideration to the identifiable assets and liabilities assumed is not complete, with the main areas under consideration being the value attributable to the mineral interests associated with the Detour Lake gold mine and the determination of goodwill arising from the acquisition, if any. The Company will disclose a preliminary purchase price allocation in our Q1 2020 interim financial statements.
Acquisition related costs of approximately $1 million were expensed in the fourth quarter and are reflected on the Company's consolidated statement of operations and comprehensive income. Additional transaction costs of approximately $35 million that were contingent upon the closing of the transaction were paid in Q1 2020 and will be reflected on the Company's consolidated statement of operations and comprehensive income for that period.
52