Gold miner Kinross Gold Corp said it will buy the 91 percent of Red Back Mining Inc that it does not already own for around $7bn to create one of the world's largest gold miners.
The company said it will pay around $30.50 Canadian a share in stock and warrants for each Red Back share, a 17 percent premium to Red Back's current share price of C$26.02. Kinross already owns about 9.3 percent of the smaller company.
“We see this as an opportunity to acquire an absolutely world class asset at a fair price – it effectively turbo-charges our growth profile,” Kinross Chief Executive Tye Burt told reporters.
Red Back owns mines in Mauritania and Ghana, giving Kinross entry into west Africa. The combined company will have 10 mines and four development projects in eight countries. Kinross has mines and projects in Canada, the US, Brazil, Chile, Ecuador and Russia.
The combined company's 2010 production would be about 2.6 to 2.7 million gold equivalent ounces. Analyst forecasts place the company's 2015 gold production at about 3.9 million ounces, but Kinross said it believes there is significant potential for Red Back's assets beyond that estimate.
Gold deals have been hot in 2010 as large miners search for growth and the value for the precious metal has soared to historically high levels of around $1,200 an ounce.
Kinross has been working toward an acquisition of Red Back for six months, and became more comfortable with the idea of the takeover after acquiring its nearly 10 percent stake in May, Burt said.
The deal would create the fourth largest gold company by market capitalisation, he said, putting it behind Barrick Gold, Goldcorp Inc, and Newmont Mining.
Australia's Newcrest Mining will likely eclipse the value of the combined company when it completes its takeover of Lihir Gold.
Confident in growth
Red Back shareholders will hold about 37 percent of the combined company when the deal closes. Chairman Lukas Lundin and Chief Executive Richard Clark are expected to join Kinross' board, the companies said.
Burt asked that shareholders concerned about dilution from the deal be patient.
“We've shown we have an eye for value and we've done a very large amount of work,” Burt said. “We have a high degree of confidence in what we've seen, so be patient for six to 12 months as we continue to advance the drilling and technical work. I think (shareholders) will be excited by the results.”
Kinross believes the deal will be immediately accretive on a net asset value basis, but that Wall Street may disagree.
“The Street, with its numbers, will see it as dilutive initially. We simply disagree on that, given the work we've had a chance to do,” he said.
He said the deal will boost cash flow when Red Back's Mauritania mine expands over the next three years.
Kinross hopes to hire as many members of the Red Back management and operating team as possible, according to Burt.
Under the terms of the deal, Red Back shareholders will receive 1.778 Kinross common shares plus 0.11 of a Kinross common share purchase warrant for each Red Back share.
Kinross expects the warrants to be listed on the TSX and be exercisable for a four year term at a price of $21.30.
The companies said either part could terminate the deal if they receive an unsolicited superior proposal, subject to the right of each company to match that offer. Kinross would have to pay a termination fee of C$250m, while Red Back's breakup fee would be C$217m.