Gold Exploration in West Africa

[FL]

The Kinross (KGC) Buying Red Back (RBI.TO) Deal

[It's strange, to me, the way this and other articles emphasize Red Back's Tasiast property in Mauritania over its important Chirano and related properties in Ghana. FL]

Kinross Prepares to Nearly Double its Market Cap with a Massive Merger (KGC)
By: InvestorGuide Staff, dated August 20th, 2010

http://www.investorguide.com/article/6675/kinross-prepares-to-nearly-double-its-market-cap-with-a-massive-merger-kgc/

Kinross Gold (KGC), based in Ontario, is one of world’s top ten mining companies, primarily focused on gold exploration and mining. Recently it made headlines with a massive acquisition spree in the middle of a market-wide gold rush. Its share price has dropped due to concerns regarding these mergers while the price of gold has steadily risen, which has frustrated investors. However, is Kinross looking years ahead down the road by building up its available reserves and nearly doubling its market capitalization, or has it truly bitten off more than it can chew, by diluting shares and investing in politically unstable regions?

[Daily Chart omitted here; see http://www.investorguide.com/article/6675/kinross-prepares-to-nearly-double-its-market-cap-with-a-massive-merger-kgc/]

Kinross produces two million ounces of gold annually, with a smaller division focused on silver and copper mining. It is a widely spread international organization with nine mines in five countries – the United States, Brazil, Chile, Russia and China. The company has reserves of 56 million ounces of gold, 82 million ounces of silver, and 3.8 billion pounds of copper. The net profit margin in the most recent quarter have increased to 19.27%, up from 17.45% the previous year, and the operating margin has increased to 31.65%, up from 27.54%. The widespread belief that the US dollar will depreciate has sent gold to speculative highs, most recently at $1,234 per ounce.

There is also speculation that due to diminishing supply and increasing demand that the gold industry will quickly consolidate through mergers and acquisitions, and that Kinross, with a current market capitalization of 10.9 billion, will be a likely takeover target for GoldCorp (GG: Charts, News, Offers), valued at 31.43 billion, or Barrick Gold (ABX: Charts, News, Offers), at 44.8 billion.

There is also the looming belief that China will fuel another gold rush next year as a buffer against stagflation and to stabilize its own currency. China’s investments in oil and gold have already drawn long lines in the African and Middle Eastern sands, and in general the local governments have been much friendlier towards them than their North American counterparts.

Kinross’ expansionist plans may start bearing fruit just in time for gold to reach new highs next year. Kinross recently acquisitions include Chile-based Minera Santa Rosa SCM, Canadian junior exploratory miner Underworld Resources, Russian miner Northern Gold and a 60% stake in Teck Cominco Limited, a Vancouver-based consolidated mining company with operations in Canada, Mexico and Peru.

The latest, largest and most controversial of Kinross’ acquisitions is its proposed $7.1 billion friendly takeover of Red Back Mining, which has two young gold mines in West Africa. Kinross needs Red Back’s flagship Tasiast Mine to produce 20 million ounces of gold in order to be profitable. J.P. Morgan analyst John Bridges believes that not only is 20 million achievable, but that Kinross could find as much as 25 million ounces in the Tasiast area.

While this acquisition is sure to profit Kinross in the long run, in the near term future many pundits believe that there will be indigestion due to political instability in West Africa, and share dilution to finance this massive venture. Kinross only has a market cap of 10.9 billion, which means absorbing Red Back would nearly double its size overnight. Since the company doesn’t have cash reserves of 7 billion, it would need to issue new common shares in order to finance the proposed all stock buyout of Red Back, which would in turn mean more shares and diluted value. Critics have pointed out that due to Kinross’ long line of acquisitions, it is already using discounted stock in an all-stock buyout, which seems desperate and impatient. Kinross investors have not reacted kindly to this news, drilling the stock to 52-week lows.

Kinross and Red Back have called for a special shareholders meeting on September 15 to vote on the proposed takeover, although it is widely expected to pass.

In the metals industry, the best defense may be a good offense. However, investors have viewed Kinross’ recent shopping spree as overreaching and desperate, hinging on the hope that gold prices will continue to rise into 2011-2012. Technically, Kinross is not particularly undervalued with a trailing P/E of 25.5 and a forward P/E of 19.48. Its PEG of 2.46 suggests share dilution and devaluation down the road. The calculated support and resistance of 15.11 and 16.74, respectively, show a narrow trading range that suggest the stock could go nowhere in the near term. However, the long term chart shows that the current 52-week low price under $16 could be a good long-term entry point to build a position in Kinross, especially as several analysts have maintained their price targets of $21-$25. In addition, BHP’s recent bid for Potash of Saskatchewan has boosted the Canadian commodities market and the Canadian dollar. These could both benefit Kinross in the near term and pull the stock off its lows.
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