* Share price has fallen by nearly half since Sept
* Bankers say low valuation should attract interest
* Problems at some mines seen as obstacle to offer
By Pav Jordan and Euan Rocha
TORONTO, March 18 Cost overruns and a
massive writedown have knocked Kinross Gold's stock so
low that some bankers see it as Canada's biggest potential
takeover play, though obstacles to a bid for the senior gold
producer may be too big to surmount.
Kinross, the world's seventh-largest gold miner, owns some
huge, largely unexploited assets spread across four continents,
making it an appealing target for bigger players who are always
on the hunt for deposits to replenish their reserves.
Despite a huge reserve base its stock, which traded for
nearly C$19 at the start of 2011, closed at C$9.90 on Friday as
mounting concerns about the cost of developing its flagship
project sapped investor confidence.
"We haven't seen anyone make a move on Kinross yet, but to
me, I would think that for anyone who wants a company with a lot
of growth assets, this makes a lot of sense," said Stifel
Nicolaus analyst George Topping. "It's the cheapest senior by a
Bankers point to Barrick Gold and Goldcorp,
Canada's top two gold miners, as companies with the means to
consider an acquisition. U.S.-based gold mining giant Newmont
Mining Corp was also named as a possible buyer.
On an in situ basis, the proven and probable gold reserves
of Kinross are being valued by the market at less than $200 an
ounce, well under Barrick's reserves at some $325 per ounce and
even Newmont and Goldcorp at about $275 and $580 an ounce.
Although this does not factor in capital and operating costs, it
highlights the appeal for potential bidders.
At the BMO Global Metals and Mining Conference in Hollywood,
Florida, last month, the future of Kinross was the subject of
much speculation, from the meeting rooms to the bars.
Kinross Chief Executive Tye Burt got the ball rolling early,
saying the company may consider selling its 50 percent stake in
the Crixas underground gold mine in Brazil and its 25 percent
stake in the Cerro Casale gold-silver-copper project in Chile.
"It was insane how many people were talking about a Kinross
breakup at that conference," said one U.S. investment banker
focused on the resource sector who spoke off the record because
of company policy.
BLESSING TO BANE
But despite these selling points, bankers and analysts said
that the factors keeping the stock appetizingly cheap may also
drive prospective buyers away.
The main obstacles are the Tasiast gold mine in Mauritania
and Chirano mine in Ghana, brought into the Kinross fold with
considerable fanfare in its blockbuster $7.1 billion acquisition
of Red Back Mining in 2010.
The assets have gone from being a blessing to a bane for the
company, which has seen its market capitalization shaved nearly
by half since September as concerns have mounted over the cost
of developing Tasiast and other projects.
Kinross earlier this year said it would take a massive $2.94
billion non-cash goodwill impairment charge related to its
acquisition of the Tasiast and Chirano mines.
"On a per ounce basis of reserves, they paid through the
nose for Tasiast," Morningstar analyst Min Tang-Varner said of
the asset, which now accounts for over 20 percent of the miner's
combined gold reserves and resources.
"Time has passed and the market is just getting antsy," she
said. "They've paid a steep price for it and we haven't seen
anything that really justifies the acquisition price paid out."
Bankers said any acquisition approach for Kinross would
likely have to be friendly because prospective buyers will want
to see data on Tasiast before tabling an offer.
Kinross declined to comment about the takeover speculation.
"We would note that these rumors result from our share price
being undervalued, which in turn suggests that Kinross currently
presents a significant buying opportunity," said Steve Mitchell,
the miner's head of corporate communications.
BIG SHAREHOLDERS COULD SPUR DEAL
Potential suitors for Kinross also have their own
situations to consider before making a bid.
Barrick, the world's top gold miner, is still integrating
the assets of copper miner Equinox, which it acquired for more
than $7 billion less than a year ago. Another major takeover may
not be well received by shareholders.
While some like Goldcorp's prospects as a buyer, skeptics
note that the current assets of Kinross have much higher average
operating costs. This means an acquisition would move Goldcorp
up the cost curve, an unattractive prospect in a sector that is
fighting to keep costs in check.
Goldcorp Chief Executive Chuck Jeannes has also stressed
that his company intends to focus on growth in low-risk mining
jurisdictions. The most promising Kinross assets are in more
politically risky places like Ecuador and Russia.
Newmont, the world's second-largest gold miner, could
be a more likely suitor, as the company may want new assets
to sink its teeth into given setbacks on projects like Hope Bay
in the Canadian Arctic and Conga in Peru.
Barrick, Goldcorp and Newmont all declined comment for this
story, or were not immediately reachable.
In the end, the fate of Kinross may be decided by a
handful of big institutional shareholders, who together control
20 to 30 percent of the stock in each of the four miners. If the
Kinross share price stays depressed these investors could nudge
management toward a deal.
Kinross typically holds its annual shareholder meeting
in the first week of May. It has yet to set a date for this
"You can expect some shareholder activism in this case,"
said one Toronto-based investment banker, who declined to be
identified because of company policy.