Kinross advisor chatter heats up

This article is provided to FT.com readers by dealReporter—a news service focused on providing insightful intelligence on event driven situations to investors. www.dealreporter.com

--------------------------------------------------------------------------------

There has been a recent increase in chatter among the mining investment banking community that Kinross Gold (NYSE:KGC, TSE:K) has retained a financial advisor to explore strategic options, a handful of bankers told dealReporter.

Concerns about spiraling costs and ore quality at the Toronto miner’s marquee Tasiast project in Africa have exacerbated a share slump amid the widespread gold market swoon. Kinross’ roughly 30% share drop over the last six months has outpaced the declines for some of its peers, leading to widespread speculation that the gold producer could be a takeover target.

Each of the bankers said they heard that Kinross had hired a financial advisor, with three of the bankers saying the mandate may be defensive. It could not be learned which, if any, bank has been hired.

A Kinross spokesperson declined comment.

In mid-May, this news service reported that gold majors were probably dusting off the books on Kinross as the miner deals with uncertainty related to Tasiast, which it acquired through its USD 7.1bn acquisition of Red Back Mining in 2010. Since buying Red Back, capital expenditure forecasts at Tasiast have ballooned to USD 500m-USD 1bn above the original estimate of approximately USD 2.7bn.

Despite the takeout opportunity that Kinross’s precipitous share price decline creates, there are several obstacles that may keep the limited universe of buyers at bay, said the aforementioned bankers and three additional industry bankers.

Barrick Gold (NYSE, TSE:ABX), Goldcorp (TSX:G, NYSE:GG), Newmont Mining (NYSE:NEM), and Newcrest Mining (ASX:NCM) were previously pegged by this news service as potential Kinross suitors.

One of the bankers claimed the logical Kinross bidders have picked the company apart and detected the complexities of many of Kinross’s assets beyond Tasiast.

The company’s open pit gold mine in Brazil, Paracatu, has yet to measure up to expectations, said the same banker, highlighting the mine’s increasing costs and declining grades. Kinross’s Cerro Casale joint venture with Barrick, located in Chile, is laden with capital expenditures, said the the same banker. Cerro Casale’s initial capex overhang is estimated at USD 4bn.

Kinross’s Ecuador-based Fruta Del Norte asset, which it acquired through its approximately CAD 1.2bn acquisition of Aurelian Resources in 2008, is perceived is having substantial political risk.

Kinross said in 1Q12 that negotiations with the Ecuadorean government on an enhanced economic package at the project are continuing, with the objective of reaching balanced agreements on exploitation and investment protection.

Political risk also hangs over Kinross’s Kupol mine and nearby Dvoinoye development project, both located in Russia, said the same banker. While he and two of the other bankers acknowledged that these are valuable assets, one of these bankers noted that it is unclear whether a change of control at Kinross would trigger the Russian government to expropriate pieces of the assets.

“Piece-by-piece this is not a company to be terribly thrilled about,” said one of the bankers.

Last week, Barrick announced the appointment of a new CEO. The implication of the executive change on the company’s M&A strategy remains to be seen. But in the event the world’s largest gold miner by production decides to have a go at Kinross, it is unclear whether the company would be housed in African Barrick Gold (LON:ABG) given Tasiast’s location or within Barrick itself, one of the bankers noted.

Barrick holds a 73.9% interest in African Barrick Gold, which was created in 2010 as an Africa-focused company.

Questioned about the likelihood of a Kinross break-up, several of the bankers cautioned that this would be a particularly complex transaction.

One of these bankers said he did not believe Kinross would be particularly amenable to carving up the company while another of the bankers argued that it was unlikely Kinross would want to part with producing assets, especially a “huge cash cow” like Kupol.

This news service previously reported that any potential suitors are expected to remain on the sidelines until August, when Kinross has said it will provide more details about mining methods for Tasiast.

--------------------------------------------------------------------------------

For more information or to inquire about a trial please email sales@dealreporter.com or call Europe/EEMEA: +44 (0)20 7059 6160 Americas: +1 212 686-3076 Asia-Pacific: +852 2158 9714