03 August 2010

Kinross Gold to Buy Red Back Mining for $7.1 Billion, a 17% Premium, Or Was It?

Consolidation and acquisitions of smaller exploring companies by more mature companies with strong cash flows will be a dominant trend in the precious metals industry for the next ten years at least.

The long bear market in gold and silver has left mining companies ill-equipped to meet the growing demand for the metal by industry and investors. The majors will have to buy ready supply from the mid caps and juniors with proven resources, but a shortage of capital to successfully extract it and bring it to market.

There are a number of mining companies sitting on very attractive proven reserves, with market caps that scarcely reflect what they are known to have in the ground. If the stock market remains inefficient, for whatever reason, the acquisition activity will rise to fill that void.

I would also expect more of the junior to enact 'shareholder rights' plans to prevent predatory takeover offers, given the penchant to naked shorting and the sport which the funds have with these thinly traded small cap stocks on the Canadian exchanges. There are many junior mining companies that are not worthwhile investments or acquisitions. It takes due diligence to discover the value, take a position, and wait for price and that value to converge.

None of the stories I have seen so far discuss the price per ounce of proven reserves that Kinross paid for Red Back, which is a key metric. Also, the "17% premium" over market paid for the stock at 29.80 per share is really nil because this is the market price of just a few weeks ago before this artificial smackdown in the price of gold and silver, and the miners. Still, the stock had an amazing ramp higher over the past year. Management seems to be well taken care of in this acquisition. I should like to see more data about price per proven reserves and also prospective reserves to see if shareholders were taken care of as well.

And I should caution you that hedge fund managers, analysts and major companies are notorious for 'talking their book' when stalking their prey, so as to not drive up the price while they are accumulating their positions. Often managers are talking down the sector, and even the market most often through 'professional intermediaries,' while they are privately buying their initial stakes in target companies. That is how this game is played.

Their are a lot of restless dollar reserves around the world parked in dollar bonds paying negative returns looking for hard asset investments. China Plans to Help Bullion Producers Expand Overseas

"China “will place heavy emphasis on supporting large-scale gold producers in their development and overseas expansion plans,” the central bank said in the statement."
There seems to be a new gold and silver rush just beginning, and it could become quite impressive once it gains momentum.

Kinross Gold to Buy Red Back Mining for $7.1 Billion
By Laura Marcinek and Rebecca Keenan
Aug 2, 2010 7:32 PM

Kinross Gold Corp., Canada’s third- largest producer of the metal, said it agreed to buy the shares of Red Back Mining Inc. it doesn’t already own for about $7.1 billion to add mines in West Africa.

Red Back investors will get 1.778 Kinross common shares and 0.11 of a Kinross common share purchase warrant for each Red Back common share held, the companies said today in a statement. The value of the offer is C$30.50 ($29.80) a Red Back common share, they said, which represents a premium of about 17 percent over Red Back’s July 30 closing share price in Toronto. The city’s stock exchange is closed today for a public holiday.

The volume of gold-mining mergers and acquisitions is increasing as producers are discovering less metal while the bullion price has advanced each year since 2000. Gold-mining companies have been involved in about $32 billion of deals this year, compared with about $4.8 billion a year earlier, according to data compiled by Bloomberg...

Gold discovery rates have been dropping by 4 million ounces a year for the past three decades, Credit Suisse Group AG’s Michael Slifirski said in November, citing a presentation from Gold Fields Ltd. The price of the metal has increased 7.8 percent in London this year. Gold traded at a record $1,265.30 an ounce on June 21.

Red Back, based in Vancouver, operates the Tasiast mine in Mauritania and the Chirano mine in Ghana, and has exploration projects in both countries.

“It is a fashionable part of the gold world at the moment,” Craighead said. “Kinross is probably chasing Red Back specifically for its growth attributes.”