Don't Expect A Kinross Takeover Anytime Soon

| About: Kinross Gold (KGC)

The prolonged decline in Kinross Gold Corporation (NYSE:KGC) in the past 52 weeks from a high of $18.25 to the most recent close of $10.95 has been truly devastating for shareholders who bought into the story.

The company's reputation and market value have suffered greatly ever since it acquired Red Back Mining, the owner of the Tasiast gold project in Mauritania, for $7.1 billion in an all share/warrant offer.

Viewed as overpaying for the Red Back assets, Kinross proceeded to disappoint by increasing Tasiast's capital spending estimates and postponing its construction to try to minimize costs.

Most recently, the company reported a $2.9 billion goodwill impairment charge related to the Red Back acquisition. The news created additional selling pressure by frustrated shareholders as the write-down essentially confirms that Kinross overpaid for Red Back.

The slide in the shares also prompted an analyst to say that the decline in Kinross shares leaves the company open to a takeover bid. This notion, however, focuses on pure financial valuation and ignores reality. (To see what you should make of the average analyst's opinion see here)

In reality, Kinross might trade at a discount to NAV, however, it is still a giant worth about $12.46 billion. Any of the gold giants like Barrick (NYSE:ABX), Goldcorp (NYSE:GG), or Newmont (NYSE:NEM) would not be able to outright buy Kinross.

As the table below illustrates, the current market value of Kinross is a significant portion of the value of the companies that supposedly might be interested in buying the company. Since an outright buyout is realistically off the table, the companies will have to dilute current shareholders by purchasing Kinross through a share issuance/merger - the same method used by Kinross to purchase Red Back Mining for $7.1 billion.

As we can see clearly today, the Kinross-Red Back Mining deal only destroyed value. I therefore, doubt any of the giants pursuing a similar strategy.

Market Value (Billions $)

Kinross Value (Billions $)

% of Market Value

Barrick Gold Corporation (ABX)




Goldcorp Inc. (GG)




Newmont Mining Corporation (NEM)




Newcrest Mining Limited (NCM)




AngloGold Ashanti Limited (AU)




Count Barrick Out

As the table above indicates, Barrick Gold is the most capable of absorbing Kinross. Unfortunately for takeover hopefuls, Barrick's strategy is to divest its Russian exposure, as it recently announced it is selling its 20.4 percent interest in the investment it has in that country.

On the other hand, Kinross is further expanding into Russia by increasing its ownership of Kupol from 75 to 100 percent. It is another reason why a company such as Barrick would not be interested in Kinross.

There Are Other Problems

Since Kinross paid so much for Tasiast, the project's progress has been under a close lens and therefore, blamed for the problems inflicting the company.

As reported recently here, the company's Fruta del Norte project in Ecuador might not receive the necessary permits needed to begin construction. The company wants to renegotiate the currently signed agreement under which it agreed to a windfall profits tax.

The Fruta del Norte is an essential component in Kinross' growth strategy as it entails about 6.7 million ounces of gold and 9 million ounces of silver in proven and probable reserves, according to the company.

Although the company's shares entail value, it is not the only gold producer out there. Therefore, given the negatives, investors are better served to wait the uncertainty, as the growth in Kinross is about 2 years away anyway.

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

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