PERSPECTIVE: Kinross buys Red Back, growth opportunity in Africa

In what is being billed as a friendly deal, Kinross Gold of Toronto has offered US$7.1 billion for Vancouver's...

In what is being billed as a friendly deal, Kinross Gold of Toronto has offered US$7.1 billion for Vancouver's Red Back Mining. Kinross hails the deal as a means of boosting it into the ranks of senior producers. Red Back's Tasiast mine in Mauritania and Chirano mine in Ghana will add more than 400,000 oz of gold to Kinross's bottom line each year. In 2009, Kinross had gold equivalent production of 2.2 million oz. By 2015, with Red Back's mines in its fold, Kinross expects to produce 3.9 million oz of gold.

The acquisition gives Kinross its first foothold in Africa. It is currently operating three mines in the United States (Fort Knox, Kettle River-Buckhorn and Round Mountain), two in Chile (La Coipa and Maricunga), two in Brazil (Crixas and Paracatu) and one in Russia (Kupol). The company also has three development projects on the go (Cerro Casale and Lobo Marte in Chile as well as Fruta del Norte in Ecuador).

The beauty of adding Red Back's mines to the list is that they are already operational but have scope for expansion. The Tasiast and Chirano mines have perhaps 20 million oz of gold in all reserve and resource categories. Divide that number by the price Kinross will pay (US$7.1 billion) and Kinross is paying roughly US$340 per oz for gold in the ground and getting two complete production facilities, to boot. Kinross will also benefit from geographical diversity.

To help finance the Red Back acquisition, Kinross sold its 20% interest in Harry Winston Diamond Corp. for US$186 million. It's interest in the Diavik diamond mine joint venture is also for sale, expected to bring in another US$220 million.

Kinross is coming off a most successful second quarter. Adjusted net earnings were up 34% year or US$113.1 million in Q2 2010 compared to US$84.3 million in the same quarter a year earlier. The realized gold price was US1,158/oz and cash operating costs were US$496/oz gold equivalent. To mark the events, Kinross has declared a dividend of US$0.02 per common share.

On top of all this success, Kinross has appoint a new COO, Brant Hinze. He will go to work on Oct. 1, 2010. Tim Baker, the current COO, is retiring, and leaving behind big shoes to fill. Hinze has senior positions at Newmont in both North and South America in his résumé. He has also worked in the United States, Bolivia and Indonesia.

Both Kinross and Red Back hare holding special shareholder meetings on Sept. 15, to approve their proposed deal. Let us hope nothing happens to derail what looks to be a perfect match.

Red Back chairman Lukas Lundin and CEO Richard Clark are expected to join the Kinross board of directors.


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