August 9, 2012 4:26 pm
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Kinross Gold (NYSE:KGC, TSE:K) has retained financial advisor Royal Bank of Canada on a mandate that may include defense work, claimed two industry bankers. One of these bankers said he heard the miner had mandated RBC around five weeks ago.
A company representative did not return telephone calls seeking comment. RBC declined to comment.
On a Thursday morning conference call, incoming CEO Paul Rollinson said the company does not respond to “speculation in the media,” when questioned by an analyst about dealReporter’s 8 August story on the advisor mandate.
Last week, the Toronto-based miner announced the appointment of Rollinson as chief executive, replacing Tye Burt. The company cited “current market and industry fundamentals” in the decision and said a change in CEO is required to guide Kinross through the process of improving capital efficiency and investment returns. The company also wants to improve its major projects at Tasiast in Mauritania, Lobo-Marte in Chile, and Fruta Del Norte in Ecuador.
According to a third industry banker, an industry lawyer and an analyst, the leadership change does not appear to indicate Kinross’s immediate willingness to sell itself.
Given Rollinson and Burt have long worked closely together, a fourth industry banker said the CEO switch “does not change the thinking behind the strategies that got Kinross where they are.” Prior to joining Kinross, Rollinson and Burt worked at Deutsche Bank and BMO Nesbitt Burns.
On the conference call, Chairman John Oliver said that Rollinson brings a different management style and focus than Burt and that “the status quo is not an option.”
Two of the bankers and the lawyer said Kinross’s current valuation deters it from considering a sale. The lawyer said he expects Kinross to try and fend off any hostile takeover attempt. In Thursday morning trading, Kinross’s shares were at CAD 7.60, a 51% drop from August 2011.
The appointment of Rollinson as Burt’s replacement has prompted speculation on the motives of selection. One of the bankers and a fifth industry banker questioned Kinross’s decision not to go farther afield for its new chief. One rumor doing the rounds is that the selection of Rollinson could indicate that Kinross’s board is open to a merger or sale, said the fifth industry banker.
Another of the bankers countered, arguing that if Kinross were leaning toward a sale, the company could have announced a sale under Burt given the perceived likeness between the two executives.
Further clouding sale prospects for Kinross is the limited universe of potential buyers that would be able and willing to swallow the company whole, said three of the 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 added that privately held, Russia-focused Polyus Gold International might also be willing to make a run at Kinross.
Three of the bankers said the likelihood of Barrick pursuing a Kinross deal has diminished. All three cited the suitor’s recent CEO change. One added the market has had a negative reaction to Barrick’s CAD 7.15bn copper bet last year. Additionally, he pointed out that Barrick has said it wants to focus on profitability.
In June, Toronto-based Barrick replaced Aaron Regent with Jamie Sokalsky in a shakeup sources told this news service may have been, in part, catalyzed by a difference of opinion on whether Barrick should make another large acquisition after last year’s purchase of Equinox Minerals.
Barrick’s stock fell roughly 19% in the weeks after it announced the purchase of Equinox in April 2011. In its 2Q12 earnings release, Barrick’s incoming CEO said he was reviewing the company’s mines and projects as “part of a more disciplined capital allocation framework” where rates of return, rather than production, should be more of the focus.
Further downplaying the potential of a Kinross sale, one of the bankers said the miner has been widely pitched by bankers to clients in the last six to nine months as a possible target. But the company continues to face a significant amount of uncertainty around its capex-heavy assets Tasiast and the Cerro Casale joint venture with Barrick, as well as permitting complications in Ecuador, several of the bankers said.
Capital expenditure forecasts at Tasiast have ballooned to USD 500m to USD 1bn above the original estimate of approximately USD 2.7bn. Initial capex overhang at Cerro Casale, located in Chile, is estimated at USD 4bn. In its 2Q12 results, released Wednesday evening, the company said negotiations with the Ecuadorian government on an enhanced economic package at its Fruta Del Norte project in the country are progressing.
Rather than a sale, Kinross should focus on cutting its expenses, building its cash position and rationalizing assets, one of the bankers said. Another of the bankers said if Kinross could sell an asset at a price that would be accretive to the company, relative to where it is trading, it could be helpful. It would also signal that that there is value in the Kinross portfolio that is not being reflected in the market, this banker added.
Rollinson said on the conference call the company needed to be more aggressive on controlling costs, cutting waste and building free cash flow. “This value driven approach may lead us to make some tough choices,” he said.
Were Kinross to sell assets, one of the bankers said its stake in Cerro Casale should be the first to go, followed by Fruta Del Norte.
In 2010, Kinross sold 25% of Cerro Casale to Barrick for approximately USD 474m. Kinross now owns 25% and Barrick 75% of the project. Kinross acquired Fruta del Norte through its approximately CAD 1.2bn acquisition of Aurelian Resources in 2008.
Two of the bankers said any potential divestitures would hinge on whether Kinross could sell them at an appropriate price. One of these bankers said he doubted Kinross would have a fire sale.
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