Canadian mining company Kinross Gold Corporation’s (KGC) subsidiary Chukotka Mining and Geological Company (CMGC) signed a Share Purchase Agreement with the State Unitary Enterprise of the Chukotka Autonomous Okrug, or CUE, to repurchase shares. As per the agreement, 2,292,348 shares of CMGC currently held by CUE will be repurchased by CMGC for approximately US$350 million.
With this transaction, Kinross will increase its stake in CMGC to 100% from 75% that it owns currently. CMGC is presently the owner of the Kupol Mine and Kupol East-West exploration licences in the Russian Federation’s Far East Region. About a week back, the company received pre approval from the Russian commission to acquire the remaining 25% stake in CMGC.
The company intends to fund the acquisition using the cash proceeds from its recent sale of shares in Harry Winston, as well as a non-recourse debt facility of about $200-million. Export Development Canada and a group of commercial banks have expressed their eagerness to participate in the financing.
The acquisition will further strengthen Kinross’ position in Russia and will bring assets of high quality, thereby ensuring increased production of gold. The ownership of the mine will give Kinross the advantage of a strategic location as well as higher production at low costs and strong cash flow. Prior to the acquisition, Kinross anticipated that Kupol would contribute 17% of the company’s gold equivalent production in 2011 and would also be one of the major contributors to its portfolio.
Kinross has also acquired Dvoinoye deposit and Vodorazdelnaya property which are in close proximity to the Kupol mines and remains optimistic about the venture.
The transaction is expected to close in the third quarter of 2011, and is subject to certain conditions, including other governmental approvals in Russia.
The company enjoys a good financial position at present. In the fourth quarter of 2010, Kinross’ gold production increased 10% year over year to 676,635 ounces, mainly attributable to improved performance at the Paracatu expansion plant and the addition of new production from Tasiast and Chirano.
For 2011, Kinross anticipates production in the range of 2.5–2.6 million gold ounces at an average cost of sales per gold equivalent ounce of $565 – $610. Kinross also expects higher costs resulting from increased energy and labor costs, and lower average grades.
By 2015, Kinross expects its production to grow in the range of 4.5-4.9 million ounces, as new projects start in 2013 and 2014.
Kinross like other gold producers, Barrick Gold Corporation (ABX) and Newmont Gold Mining (NEM), benefits from rising gold prices. We expect Kinross’ exploration projects and acquisitions to boost its top line going forward.
Currently, Kinross Gold has a short-term (1 to 3 months) Zacks #3 Rank (Hold) and a long-term Neutral recommendation.
BARRICK GOLD CP (ABX): Free Stock Analysis Report
KINROSS GOLD (KGC): Free Stock Analysis Report
NEWMONT MINING (NEM): Free Stock Analysis Report
Zacks Investment Research
