Zeev's Turnips Patch-No Politics (ZEEV)

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*** Gold related post (NEM/KGC) ***


Newmont's Kinross sale sends several signals

By: Tim Wood
2003/09/15 Mon 17:00 EDT

NEW YORK -- It is hardly news that Newmont [NEM] sold just over five-eighths of its legacy stake in Kinross [KGC], but the timing and meaning of the sale is worth unpacking.

Kinross initially fell heavily on the news this morning, but soon recovered as the impact was digested. Clearly, the market is enthused about the overhang of stock being cleared which will help boost tradability of the stock.

Until Friday’s sale, Newmont’s principals had made a point in their public appearances of calling Kinross undervalued. In that vein, they repeatedly sought to reassure Kinross investors that they would not be a weak hand; something Kinross needed as it bedded down its three-way merger with TVX and Echo Bay.

Yet the market clearly never took the Newmont assurances as permanent; a view justified by Friday’s divestment. Kinross suffered a capping effect that has now been significantly diluted. Simply put, Kinross has been one of the most highly geared-to-gold stocks, but has so far offered a tame performance because of the overhang as well as worse than ordinary quarterly results.

So why did Newmont sell? There are two primary reasons. Firstly, cold cash is never unwelcome and, second, the Newmont bosses are among the industry’s shrewdest traders of value, opportunity and risk.

The Kinross stake had essentially become dead money for Newmont. The overhang had becalmed the stock for most of the year – on an adjusted basis the stock only last month beat its December high. Similarly, Newmont’s inability to equity account the stake and Kinross’s reserves, made realized certainty more important than indefinite speculation.

Whilst it is true that Newmont’s effective realized price is much higher through the sale of some Franco-Nevada assets into Kinross, the point is that it has badly lagged Newmont. It would inevitably be traded since it would be accretive.

At the same time, Newmont is a bellwether decision maker by virtue of its sheer size and the reputation of Lassonde and his business partner, Seymour Schulich. The selling was, therefore, an interpretation of value – the trade marked the close of one of the best weeks for Kinross in months.

If you’re more than a casual investor in gold stocks, it is not an unhelpful hint. Will we look back on this period and see that Newmont called a top in current valuations, just as the gold price appeared to stall?

That does not mean Kinross or the whole market needs to be going to hell.

Newmont can certainly use the $218 million in cash it received. Although it is generating free cash from its operations, Newmont still needs to fatten its balance sheet, principally by reducing debt and improving key ratios toward a debt rerating. It can hardly be a coincidence that the Kinross stake almost equals the final cost of buying out the Yandal bondholders and hedge counterparties.

That will leave the Newmont cash pile largely unchanged aside from ongoing debt reduction. Going below a 5% stake also means Newmont can deal its remaining Kinross shares outside the glare of 13D filing requirements. Possibly, with the cap removed, Newmont may even provoke the sort of gains that allow its remaining 3/8 stake to become worth the clutch of scrip it has just ditched.

It is worth noting that Newmont has been surprisingly disciplined about not doing a rights issue or placement. A shelf registration remains untouched and if the company was going to go ahead with an issuance, it would have done so soon after the most recent failure to close above $40. That is very good news for Newmont stockholders who can only become more loyal as threats of dilution are reduced.

Finally, who couldn’t help notice that Griffiths McBurney & Partners is the co-lead on the deal. GMP’s profile continues to increase and not just among the junior set.

http://www.mips1.net/MGGold.nsf/Current/4225685F0043D1B285256DA2007711D2?OpenDocument