Kinross-Barrick Deal Struck – Analyst Blog

Canadian gold mining company Kinross Gold Corporation (KGC) has sold its 25% interest in the Cerro Casale project in Chile to larger rival Barrick Gold Corporation (ABX) as announced on February 17, 2010. With a 75% interest, Barrick now has control over one of the world’s largest undeveloped gold-copper deposits. Kinross is left with a 25% stake in the project.

 

With 23.2 million oz of gold reserves and 5.8 billion pounds of copper, Cerro Casale has an expected mine life of about 20 years. Barrick’s 75% share of average annual production is anticipated to be about 750,000−825,000 oz of gold in its first five full years of operation.

 

Based on mine life, the company’s share of average annual production is anticipated to be about 600,000−650,000 oz of gold. Barrick’s production is expected to increase to 7.6−8.0 million oz in 2010 (compared with 7.9 million oz in 2009) at lower average cash costs of $425−$455 per ounce.

 

Kinross had acquired a 49% interest in the Cerro Casale gold-copper deposit in northern Chile on February 28, 2007, through its acquisition of Bema Gold. Barrick Gold held the remaining 51% interest. In 2009, the companies reorganized the corporate ownership and each held a 50% interest in Cerro Casale.

 

Kinross is selling its stake due to cost escalation at Cerro Casale, which is affecting the rate of return at the mine. Kinross expects total cost of capital at Cerro Casale to double to $4.2 billion compared with $2 billion expended in 2006. For Barrick, who is concentrating on larger assets, Cerro Casale looks attractive. With a large scale of operation and rising copper prices, cost overrun is not a concern for Barrick.

 

The deal ended with Kinross receiving about $474 million, comprising $454 million in cash and $20 million in contingent obligation, payable by Kinross to Barrick on a production decision. The cash portion of the consideration was adjusted against the working capital.

 

We maintain our Neutral recommendation on Kinross and Barrick.