Kinross-Red Back Merger?

On a request from Institutional Shareholder Services, Kinross Gold Corporation (KGC) provided details of the proposed merger with Red Back Mining Inc., a leading African gold producer, announced in early August this year.

Kinross’ Story

Kinross is on its way to acquire the Red Back Mining Inc for $7.1 billion. With this merger, Kinross will acquire two key assets from Red Back- Chirano Gold Project in Ghana and the Tasiast Gold mine in Mauritania.

Kinross believes that Red Back’s mining assets has huge exploration and expansion potential. With the merger, Kinross will venture into the newer markets of West Africa, which is one of the fastest growing gold regions of the world. The association with Red Back would scale up Kinross’ gold producing capacities. Analysts’ believe that the merger would boost gold production to 3.9 million ounces by 2015, while Kinross believes production to exceed market expectations.

Subsequent to the merger, Kinross plans to start an intensive exploration program. The company plans to expand operations at Red Back’s Tasiast Gold mine in Mauritania within the next two years and aims to commence operations at a new mill in the fourth quarter of 2013.

Red Backs’ advantage

The integration with Kinross would give Red Back ownership in Kinross, which is relatively a larger mining company. Red Back’s shareholder would hold about 37% of the combined entity. The association would give Red Back exposure to Kinross’ eight operating mines and four development projects. Red Back will also have access to its own expanding
Tasiast mine.

The deal appears lucrative for Red Back at an offer value of C$30.50 (US $28.86) per Red Back share, representing a 21% premium based on the closing price on July 30, 2010. The offer price represents a 12% premium over the Red Back’s 3 months average price of C$27.22 (US $25.75).

Our Take

Kinross’ interest in Red Back is nothing new given its history of acquisitions. Kinross makes meaningful acquisitions to boost reserves. The company has already acquired Crown Resource Corporation and has completed the Buckhorn project, owned by Crown. The project is expected to produce 200,000 oz of gold annually.

Bema’s Kupol project in Russia is an important asset. Cerro Casale project also of Bema in Chile with Barrick Gold Corporation (ABX) is also a strategic asset for Kinross because this mine has the world’s largest underdeveloped deposits.

Kinross is also acquiring small Canadian companies to make the most out of the new exploration prospects with a relatively small capital investment. The acquisition of the Underworld Resources Inc. also fits in well with Kinross’ stated goal of expanding its asset base in North America. Its flagship asset is the White Gold project, located in the Tintina gold belt in Canada’s Yukon Territory. The project has resources of about 1.5 million ounces of gold. Kinross has also subscribed to a 3.2% interest in Vancouver based BCGold Corp. (where it already holds a 12.8% stake), Oro Silver and Rye Patch Gold.

Red Back’s assets would definitely provide Kinross with huge mining opportunities. However, there are few tribulations for Kinross. Firstly, the transaction requires a majority vote (66.67%) from Red Back’s shareholders. Without such favorable votes the merger would be difficult. Red Back’s shareholders will vote on September 15 for the deal. Secondly, the deal would be dilutive for Kinross’ shareholders as the company would give Red Back shareholders 1.778 of Kinross shares and 0.110 of share purchase warrant for each Red Back share, in return. Kinross plans to make new issues of about 425 million shares and 26 million warrants in the event of the merger.

The uncertainties associated with the deal led to a decline in share prices despite surging gold prices. Kinross’ shares fell 0.95% or 16 cents and closed at $16.76 on September 1, 2010.

Currently, Kinross is a short-term (1 to 3 months) Zacks #3 Rank (“Hold”) and a long-term (6+ months) Neutral recommendation.

KINROSS GOLD (KGC): Free Stock Analysis Report

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