Use access key #2 to skip to page content.

XMFSinchiruna (26.58)

Kinross Pays a Golden Premium



August 04, 2010 – Comments (0) | RELATED TICKERS: KGC , GG , ABX

Although this may appear on the surface like an exorbitant sum to pay, the rationale will be clear in time.

Kinross Pays a Golden Premium


The lofty price tag
On Monday, Kinross announced a friendly merger to acquire the shares of Red Back Mining, in exchange for Kinross shares and purchase warrants valued at $7.1 billion. Since Kinross already owns 9.3% of Red Back shares, the deal implies a $7.83 billion valuation for a producer with 8.07 million ounces of proven and probable gold reserves. Even if we back out Red Back's $730 million cash hoard, the valuation amounts to $880 for each gold ounce in reserves; which is $132 more (per ounce) than Barrick Gold's (NYSE: ABX) second-quarter operating margin.

Lihir's board has blessed Newcrest's revised offer of nearly $8.7 billion, and that deal now appears set to proceed. Using the same procedure as above, the valuation that Newcrest's offer places upon Lihir is equivalent to $265 per ounce of gold in reserves. Expressed another way, the implied valuation of Lihir's non-cash assets is just 15% more than the Red Back valuation, but Lihir offers 284% more proven and probable gold reserves than Red Back. Moreover, with more than 1 million ounces of annual production, Lihir's existing production volume is more than twice that of Red Back.

With myriad factors to consider, from ore grades to recovery rates, direct comparisons (like the one with Lihir Gold above) are seldom seamless. However, a $615 per-ounce-in-reserve disparity in implied valuation between two established producers can, in my opinion, only be ascribed to a confident expectation of massive reserve expansion.

According to Kinross, "The significant upside in reserves that we believe exists at Red Back, and Kinross' ability to accelerate that potential, makes this an outstanding prospect for shareholders of both companies."

This reminds me of Goldcorp's (NYSE: GG) similarly bullish characterization of the San Dimas mine sold to soon-to-launch Primero Mining, where Goldcorp stated: "the true potential of the deposits are neither fully realized nor reflected in the stated reserves and resources."

With a remarkable exploration effort under way, employing 26 drilling rigs between the two mine complexes, I suspect that Kinross has pounced upon this emerging treasure in advance of a wholesale reserve expansion that will justify the expenditure over time. I expect this transaction to spark further acceleration of dealmaking activity in the sector, with cash-flush giants like Newmont Mining (NYSE: NEM) likewise being forced to pony up a pretty penny for assets in production. As for Kinross, the gap that I had identified in its production pipeline has finally been filled in. Kinross has graduated from a miner to avoid to a miner worth watching.



0 Comments – Post Your Own

Featured Broker Partners