Kinross Gold [TSX: K] (NYSE: KGC) and Red Back Mining (OTC:RBIFF) [TSX: RBI] have both rejected shareholder advisory business Institutional Shareholder Services' (ISS) negative recommendation of the two gold mining companies' potential merger.
In early August, Kinross announced that it would acquire the remaining shares of Red Back that it did not already own, in a US$7.1 billion deal, or C$30.50 per Red Back share.
Some shareholders were skeptical of the deal, as there were concerns of dilution following the merger, while some felt the price of the transaction was too high considering Red Back's current assets. The price represents a premium of approximately 21%, based on the preceding 20-day volume-weighted average price of Red Back shares from July 30, 2010 (the last business day prior to the announcement).
The ISS report, which completely negates the positive conclusions of professional service firm Glass, Lewis & Co's report released earlier this week, also raises concerns about valuation.
"Kinross and Red Back believe that the ISS conclusions regarding valuation reflect a lack of technical understanding and knowledge of early-stage mining property valuation, and the potential to create value for shareholders by identifying and acquiring high-potential properties," both companies said in a statement.
Kinross is looking to acquire Red Back for its Tasiast gold project, which it is looking to develop and expand. Kinross' view is that the deposit's potential and its subsequent valuation for this transaction, was founded on six months of due diligence, which included multiple site visits, twinning of existing Red Back drill holes, extensive metallurgical testing, and modeling of options for mining and processing.
In addition, the board of directors of each company was provided with six fairness opinions prepared by various financial institutions, it said.
"It is standard practice in the mining industry to make acquisitions based on in-depth, professional evaluations of the expected long-term potential of an ore body, even though that potential has not been clearly delineated according to NI 43-101 requirements at the time of acquisition," said Kinross.
Kinross plans to expand the Tasiast mill from its current level of 10,000 tonnes per day to approximately 60,000 tonnes per day and anticipates completing this expansion program within approximately 36 months, commencing operations at a new mill in the fourth quarter of 2013.
The company intends to begin with an intensive exploration program including additional infill and step-out drilling, immediately following closing. The program will involve increasing the number of drill rigs at Tasiast and accelerating the current drilling campaign to delineate the high-grade zone at depth. It expects to issue a new NI 43-101 compliant reserve and resource declaration in February 2011.
Under the terms of the proposed deal, Red Back shareholders will receive 1.778 Kinross common shares, plus 0.110 of a Kinross common share purchase warrant for each Red Back share. Following completion of the transaction, the current Kinross shareholders will hold approximately 63% of the combined company, while shareholders of Red Back will have a 37% stake.
Both Kinross and Red Black remain confident there will be a positive outcome from the special meeting of their shareholders, to be held on September 15, 2010, based on "strong indications" of shareholder support, they said.
Each board has already recommended the transaction to its shareholders.
Kinross is a Canadian-based gold mining company with mines and projects in Canada, the United States, Brazil, Chile, Ecuador and Russia, employing approximately 5,500 people worldwide.
Red Back is an African-focused gold producer. It owns and operates the Chirano Gold Mine in Ghana and the Tasiast Gold Mine in Mauritania.
Kinross was up 0.84% to $18.08 on the Toronto Stock Exchange as of 12:43pm ET on Friday, while Red Back was down nearly 3% to $30.40.
Disclosure: No position