Barrick Should Dig For Better Deals And Pass On Kinross

Jul.22.12 | About: Barrick Gold (ABX)

Per a report from Veritas Investment Research in Toronto, Barrick Gold Corporation (NYSE:ABX) is exploring the possibility of acquiring Kinross Gold Corporation (NYSE:KGC), Canada's third-largest gold miner. While Kinross does have proven and probable gold reserves of 62.5 million ounces, Barrick will acquire all the company's issues as well. It would be wiser for Barrick to invest in cheaper companies with mid-range production potential.

First, Kinross simply is not making money right now. Income growth and net profit margin are down 373 percent and 55 percent respectively, in addition to both EPS and P/E ratio being in the red. Furthermore, the company's weak financial indicators are compounded by issues at the working level.

In January, the company took a massive $2.49 billion write-down on the Tasiast Gold Mine in Mauritania. Triggered by overvalued assets and underestimated production costs, the write-down infuriated investors and led to a massive sell-off of the company's stock. Later in June, the company halted production at Tasiast due to a labor issue.

A review of the Kinross Gold Corp's 2011 production statement reveals more issues with overestimating the grade of gold reserves. For example, the grade of total proven reserves is listed at 0.60 grams per ton (g/t); however, the grade of probable reserves is 0.84 - almost a 40 percent increase. Looking specifically at the Tasiast mine, the company's prime project, the grade of proven reserves is 1.75 g/t, while probable reserves is 1.92 g/t. Higher grade probable reserves could certainly be true in many cases, but the company's credibility is questionable; especially when considering one reason behind the write-down on the Tasiast project was the unexpected discovery of a low grade gold envelope surrounding the supposed gold-rich core, lowering the average grade of the mine's gold resources.

Barrick is exploring the idea of acquiring Kinross because large new gold mines are becoming increasingly rare. With a stock price around $8 and the company's substantial production capability, a potential acquisition of Kinross would certainly have value to Barrick. However, Barrick could be better served by acquiring or establishing a joint venture partnership with junior gold mining companies that own valuable land holdings. Barrick could also negotiate additional mining leases or expand operations in a region where the company has experienced past success, such as northern Nevada.

One possibility for an acquisition or joint venture could be Gold Standard Ventures Corporation (NYSEMKT:GSV), who is currently conducting exploration and development (E&D) in the Railroad District on Nevada's prolific Carlin Trend. The E&D has been successful and Gold Standard Ventures is forecasting multi-million ounce gold discoveries. Gold Standard Ventures is currently trading for just $2 a share, a quarter of the price of Kinross.

Bullfrog Gold Corporation (OTCQB:BFGC) recently acquired prospective land holdings in Nevada and Arizona with substantial amounts of probable reserves. Bullfrog Gold's Newsboy Project has increasing amounts of proven reserves and potential for up to a million ounces of gold. Paramount Gold and Silver Corp (NYSEMKT:PZG) is also trading for $2 and has proven and probable reserves of nearly a million ounces of gold at its San Miguel project.

These are just a few cheap alternatives to Kinross with potential for substantial inventory gains. Barrick should consider these other companies, instead of acquiring a struggling company with unreliable data and overvalued holdings.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: The writer is not a licensed broker or investment adviser and therefore cannot recommend that you buy, sell, or hold any security. While every attempt was made to verify the information in this report, much has been derived from public sources and cannot be guaranteed for accuracy.