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My Take On The Possible Deal Between Barrick Gold And Kinross Gold

According to a report, Kinross Gold could buy assets from Barrick Gold, which pursues a debt reduction strategy.

Kinross Gold has plenty of cash on the balance sheet and could make a purchase.

However, I believe that the company should not rush into this deal.

A recent Reuters report stated that Kinross Gold (NYSE: KGC) and Newmont Mining (NYSE: NEM) were the likely buyers for Barrick Gold's (NYSE: ABX) six U.S. gold assets. These mines are Bald Mountain, Round Mountain, Spring Valley, Ruby Hill, Hilltop and Golden Sunlight. The report stated that this package could be sold for $500-700 million. I am bullish on Kinross Gold, so it's worth taking a look at a scenario where the company purchases these mines from Barrick Gold.

If Kinross Gold purchases these mines, it will purchase producing mines as well as development projects. The main producing mines are Bald Mountain, Round Mountain and Golden Sunlight. This year, they are expected to produce 430,000-490,000 ounces of gold at all-in sustaining costs of approximately $1110 per ounce. Kinross Gold has recently lowered its full-year AISC guidance to $975-1025 per ounce. Thus, if the company purchases mines from Barrick, its AISC will increase, at least in the near term. As you can see, Barrick Gold is divesting higher-cost mines - a strategy that makes perfect sense in the current gold environment. So, Kinross Gold will have to push costs down in order for the purchase to be profitable. Silver Standard Resources (NASDAQ: SSRI) bought Marigold mine from Barrick Gold in 2014, and was able to come up with a plan to push costs down. So far, it has worked for Silver Standard Resources, and its shares are outperforming gold and silver equities this year. If you want a good read on Kinross' acquisition history, you can read the recent article by fellow contributor Christopher de Sousa (Hint: Kinross' results on this front are far from stellar).

Kinross Gold finished the second quarter with more than $1 billion in cash. This amount of cash almost forces the company to search for investments at times of depressed gold prices. Theoretically, this is the perfect time to acquire new mines. The big problem that Kinross and other gold miners who have some cash on their balance sheet face is that there are no exceptional mines for sale. Each miner which divests producing mines does this to optimize its costs, as no one will be eager to sell mines that produce significant cash flow. In my view, the costs of potential purchases are too close to current gold prices. These mines could be a good strategic fit for Newmont Mining, which has a larger portfolio and bigger resources than Kinross Gold. But for Kinross Gold, such a purchase is an aggressive move. In my view, the company has upside without further growth, as its shares have been punished too much. At the same time, it needs a cushion in case gold prices fall below $1100 per ounce. This scenario should not be ruled out.

All in all, I am not excessively optimistic on the possible deal between Kinross Gold and Barrick Gold. Also, if both Newmont Mining and Kinross Gold are targeting the same assets, this could lead to inflation of the purchase price. This is the outcome that should be avoided in the current gold price environment. We will see how this story evolves. Meanwhile, I remain bullish on Kinross Gold.


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