Is the Asset Acquisition from Barrick a Sweet Deal for Kinross?
(Continued from Prior Part)
Diversified exposure
It was important for Kinross Gold (KGC) to diversify its geographical exposure, preferably toward safer jurisdictions. As we discussed in Risks Investors Should Consider before Investing in Kinross Gold, geographic risk—particularly its increased exposure to Russia, which is considered risky in terms of mining investment—is one of the major investor concerns regarding the stock.
Gold in the Silver State
The assets from the current acquisition are situated in Nevada, a top mining jurisdiction that has a history of support for mining at both the state and community levels. This diversified exposure should position Kinross Gold (KGC) in a positive way in the eyes of investors.
Kinross’s pro forma production is expected to increase by ~56% in the US. By Kinross’s estimates, its mineral reserves in the US could increase by ~62% and its mineral resources could increase by ~236%. After the closing of the transaction, the Americas should account for 61% of Kinross’s global production.
High-quality operations
The acquired mines are open-pit, heap leach operations. By Kinross’s own admission, this is very much in the “sweet spot” of its experience and expertise. Bald Mountain is a large open-pit heap leach operation, which is similar to Kinross’s other operations and is where the company has built expertise over time. This would be a technical and operational fit.
Although Kinross expects 2016 to be similar to 2015 in terms of production for Bald Mountain, the company expects the costs to decline after 2017. During this timeframe, stripping should be completed and the company should be able to access its high-grade ore. In addition, the company invested $385 million in this property in the last five years, which would necessitate a modest amount of further capital investment from Kinross Gold.
Round Mountain
Acquiring the remaining 50% interest in Round Mountain could help Kinross Gold (KGC) to consolidate its interest in an established mine, which it has operated for ten years. According to the company’s management, this would allow it to fully leverage the knowledge and experience of the people who run the mine.
As Kinross Gold reported in 3Q15, the costs at Round Mountain have been falling over the course of the year, making it Kinross’ third-lowest cash cost mine. This is partly the result of its Process Solution Management initiative, which is a new approach to heap leach management that results in more ounces at a lower cost.
Lowering costs is imperative for Kinross, particularly given the fact that its all-in sustaining costs are higher than many of its peers, including Yamana Gold (AUY), Agnico-Eagle Mines (AEM), Eldorado Gold (EGO), and New Gold (NGD). The iShares Gold Trust ETF (IAU) tracks the performance of gold prices.
Kinross Gold not only bought these assets for its current production profile but also for the upside it can offer in terms of production and costs. We’ll discuss this further in our next article.
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