Bloomberg News

Kinross in Play After Paying Too Much for African Gold: Real M&A

February 01, 2012

Jan. 20 (Bloomberg) -- By paying too much for acquisitions in western Africa, Kinross Gold Corp. is now turning itself into the cheapest gold-mining target in the world.

Kinross, Canada’s third-largest gold producer, fell the most in almost two decades after saying this week it will write down the value of its Tasiast mine in Mauritania. The company sold for 76 cents per dollar of net assets yesterday, versus the industry median of 2.5 times, according to data compiled by Bloomberg. Writing off the excess $4.6 billion it spent on Tasiast would still leave Kinross at a 50 percent discount to its competitors, the data show.

While Kinross bought the Mauritanian mine for almost three times what the gold deposit is worth, the company is facing rising labor and raw material costs that may delay production at some of its projects. After more than quadrupling revenue in the past five years as gold prices reached a record, Kinross may now attract interest from Newmont Mining Corp. or Polyus Gold International Ltd. as they try to boost capacity to meet demand, said Stifel Nicolaus & Co. On its own, analysts say Kinross is worth 50 percent more than its current price.

“This is a company whose management team has made some aggressive, disappointing decisions,” Keith Wirtz, who oversees $14.6 billion as chief investment officer at Fifth Third Asset Management in Cincinnati, said in a telephone interview. “Every dollar lower pushes the stock higher up the list of potential takeovers. That will attract the sharks in the water.”

Wirtz said Barrick Gold Corp., the world’s largest producer of the precious metal, could also be a potential acquirer.

Gold Diggers

Steve Mitchell, a spokesman at Toronto-based Kinross, said the company doesn’t comment on market rumor or speculation.

Omar Jabara, a spokesman for Greenwood Village, Colorado- based Newmont, the world’s second-largest gold producer, declined to comment on whether it is interested in Kinross.

Anton Arens, a spokesman for Polyus, didn’t immediately return a telephone call or e-mail requesting comment outside regular business hours. Andy Lloyd, a spokesman for Toronto- based Barrick, also declined to comment on whether it would consider buying Kinross, citing company policy.

Kinross advanced as much as 2.8 percent today before closing 1.1 percent higher at $10.21 in New York.

Founded in 1993, Kinross mines and sells more than 2.5 million gold ounces a year and has operations in Mauritania, Ghana and Ecuador, according to its website. It ranked behind Barrick and Goldcorp Inc. among Canadian gold producers and was the sixth-largest gold mining company globally in 2010, data compiled by Bloomberg show.

Red Back Mining

Kinross, which has spent more than $14 billion on takeovers since its inception almost 19 years ago, acquired the Tasiast mine after completing its acquisition of Red Back Mining Inc. for about C$8 billion ($7.8 billion) in September 2010, according to data compiled by Bloomberg.

When the deal was announced, Kinross Chief Executive Officer Tye Burt called it a “transformational opportunity” that would create a “gold growth powerhouse.”

After completing the transaction, Kinross has lost about half its value as expenses to produce gold jumped and the company said it spent too much to acquire Red Back’s assets.

Kinross Chief Financial Officer Paul Barry said Jan. 17 that the company will write down a portion of the $4.6 billion in so-called goodwill, or the excess purchase price above the underlying value of an acquired asset, on the Tasiast mine.

‘Have to Monetize’

Kinross ended at $10.10 a share yesterday, giving the company a capitalization of $11.5 billion. That’s about the same as its market value before Kinross announced its deal for Red Back in August 2010, according to data compiled by Bloomberg.

“Management screwed up,” Yemi Oshodi, managing director of M&A and special situations trading at New York-based WallachBeth Capital LLC, said in a telephone interview. “At which point do you throw in the towel and say, ‘I can’t do this on my own, I have to monetize these assets.’”

After the slump this week, Kinross traded yesterday at a 24 percent discount to its assets minus liabilities, the lowest of any gold mining company with at least $1 billion in value.

While 65 percent of the Tasiast mine’s book value of $7.1 billion is recorded as goodwill, writing down the entire purchase cost above the gold deposit’s net asset value of $2.5 billion would leave Kinross at 1.09 times its shareholder equity, according to data compiled by Bloomberg.

Relative Value

The median gold mining company commanded more than twice as much per dollar of net assets, the data show.

Newmont may be interested in Kinross’s projects to boost production and because it already operates in western Africa, said George Topping, a Toronto-based analyst at Stifel.

Newmont said in November it suspended development of its $4.8 billion Minas Conga project in Peru after weeks of clashes between police and demonstrators who oppose the mine. The company’s global gold output may stagnate until 2017, according to Veritas Investment Research Corp.

“Newmont has no growth, whereas Kinross has plenty of growth projects,” Topping said in a telephone interview.

Kinross may also entice Polyus, Russia’s largest gold miner, according to John Goldsmith, a money manager at Montrusco Bolton Investments Inc., which oversees about C$4.5 billion.

Mikhail Prokhorov, one of Polyus’ billionaire owners, said just over a year ago that the company plans to merge with a global competitor to become one of the world’s three biggest gold producers. Combining Polyus and Kinross, which owns two properties in Russia, would create a company rivaling AngloGold Ashanti Ltd. as the third-largest gold miner by output globally.

Polyus, Barrick

Robert Buchan, Kinross’s former chief executive officer, was also appointed chairman of Polyus in July.

“This could be really attractive for them,” Goldsmith said in a telephone interview. “Maybe Polyus and another company comes in and does a combined bid.”

Barrick, which analysts say will more than double its free cash flow to $3.4 billion this year, can afford to shoulder the costs to develop Kinross’s projects, according to Pawel Rajszel, a Toronto-based analyst at Veritas Investment. This week, Kinross estimated that those costs may reach $7 billion.

With Kinross’s mines, Barrick could exceed its five-year gold production targets, he said. The company owns 74 percent of African Barrick Gold Plc and added a copper mine in Zambia when it bought Equinox Minerals Ltd. last year.

‘Use it Most’

“It would add significant growth to Barrick’s profile, especially at a time when Barrick could use it most,” Rajszel said in a telephone interview. “They can afford costs to go up, they can afford to add this asset into their portfolio, and they can definitely afford it with their free cash flow.”

The cost to acquire Kinross may still deter potential buyers, even with its attractive valuation, according to Adam Graf, a New York-based analyst at Dahlman Rose & Co.

At $11.5 billion, Kinross’s market capitalization already exceeded the value of the biggest gold mining takeover, data compiled by Bloomberg show.

“It would be challenging, and there’s a very limited list of buyers,” Graf said in a telephone interview.

Kinross’s preliminary agreement with Ecuador’s government over royalties and taxes for its project in that country raises concern over how much profit the site will be able to generate, according to David Christensen, chief executive officer of ASA Ltd. in San Mateo, California, which manages $600 million and owns Kinross shares.

‘Tremendous Upside’

Fifth Third’s Wirtz says Kinross is so cheap the potential rewards now outweigh the risks in an acquisition. According to a sum-of-the-parts analysis by Stifel, Kinross is worth $20.36 a share, based on the underlying value of its net assets.

With the Tasiast mine valued at $3.71 a share, a potential acquirer could pay a 65 percent premium to Kinross’s current share price and still get the Mauritanian gold deposit for free, according to data compiled by Stifel and Bloomberg.

“There’s tremendous upside to this high risk-high reward equation,” Wirtz said. “A competitor of theirs might deem this to be opportunistic.”

--Editors: Michael Tsang, Daniel Hauck.

To contact the reporters on this story: Charles Mead in New York at cmead11@bloomberg.net; Liezel Hill in Toronto at lhill30@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Simon Casey at scasey4@bloomberg.net.


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