Kinross Gold (KGC) is expanding its asset base in northwest North America by acquiring the North American exploration company, Underworld Resources. Kinross has agreed to acquire Underworld Resources in a deal worth C$139.2 million ($135.3 million). Toronto-based Kinross is offering 0.141 of a Kinross common share, plus C$0.01 in cash for every share of Underworld. The offer represents a value of C$2.62 a share, a 36% premium to Underworld’s closing price as on March 10. 

Kinross will issue about 6.8 million shares, or 1% of its current outstanding common shares, to pay for Underworld. Kinross already owns roughly 8.5% of Underworld’s outstanding shares. The deal, which has been unanimously approved by Underworld’s Board of Directors, is subject to shareholder and regulatory approvals. 

Underworld Resources is focused on exploration in Canada. Its flagship asset is the White Gold project, located in the Tintina gold belt in Canada’s Yukon Territory. The project has indicated and inferred resources of about 1.5 million ounces. Kinross owns the Fort Knox open pit mine in neighboring Alaska, which is expected to produce about 370,000 ounces of gold annually over the next five years.
Kinross is reinvesting in the smaller projects that it had promised to, after selling off its stake in Cerro Casale. At this size, and given its location, the project would probably remain marginal without more discoveries. Yet Kinross’s experience with lower-grade ores in cold environments at Fort Knox and Maricunga could allow it to develop a meaningful mine at this location. The acquisition would seem to fit well with Kinross’s stated goal of expanding its asset base in the American Cordillera, the chain of mountain ranges that form the western backbone of North America, Central America and South America. 

Like other gold producers, Kinross is benefiting from rising gold prices. The Bema Gold Corp. acquisition last year has been a major contributor to Kinross profits. We expect Kinross exploration projects and acquisitions to also boost its top line going forward. Kinross has cleared its hedge book and stands fully levered to spot gold prices. 

However, the emerging market growth is declining and production level is shrinking at some of its existing operations. We reiterate our Neutral recommendation on Kinross Gold.
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