Kinross' takeover of Red Back shows the only route to replacing reserves is to buy them...
RECENTLY KINROSS made an offer for the shares of Red Back with its Mauritanian gold deposits as the target,writes Julian Phillips at GoldForecaster.com.
The offer was accepted by the shareholders of Red Back, but looked on with skepticism by Kinross investors. In the statement made by Kinross, the directors asked for patience to be shown by their shareholders for around six months. Because in that time, they expect to reveal more of the extent of the Red Back deposits.
Institutional analysts expect to see their Mauritanian deposits reach between 10 million ounces and 20 million ounces. The fact that the deposits will require shallow low-cost open mining operations make the venture capable of profits to justify the price paid. And if this proves the case, then it marks the way forward for the big Gold Mining companies in expanding their resources – rather than relying on inherent growth.
First, a little background. The cost of finding new large deposits is climbing, as are the risks attending such work in this politically greedy world. On top of that, most (if not all) large deposits have already been found, and the largest Gold Mining companies need to replace their exhausted deposits.
This means lowering their sights on the size of discoveries, and also entertaining the likelihood of taking over small companies, like Red Back, that have already found the goods.
This can be risky – very risky, in fact – for it not just a matter finding a deposit, but also:
- proving it to independent standards (403-1);
- doing a feasibility study;
- raising finance;
- developing the mine;
- reassuring investors that the political climate is conducive; and then, finally,
- producing the gold.
Ideally the deposit should be continuously expanded (see Goldcorp's Red Campbell Lake or Goldfield's South Reef deposit, for instance). This then makes the project attractive to investors as the risk declines from the discovery to production.
The point at which investment takes place relates directly to the stage of development it is at. But major Gold Mining companies need to replenish resources to continue in existence – and each mine contains only so much proven gold resources.
The rate at which this is depleted gives the mine its life. In turn, the profit path of the mine can then be traced and its value established, albeit at current Gold Prices. And while the dividend policy defines the cash flow to shareholders, the present value of the stock should relate to the average earnings' rating in that particular market. For prospective takeover targets, the number of mines and their life defines the future of the mining company which owns them (they used to be called 'mining houses'). Large groups of mines under one roof become attractive, because the life of a company extends far beyond the life of any of their individual mines.
So what are the prospects for more takeovers of junior Gold Mining companies today? Since the days of accelerated production that lasted from 1985 to around 2005 (the time when the bullion banks loaned Gold Bullion to the miners, so they could sell it to raise cash and thus finance production), new deposits have become more difficult to find and bring to production. The political climate in which miners operate in the world has increased the risks associated with investment. The deposits that are out there have also become smaller.
Gold mining companies are now looking at deposits as small as 1 million ounces. Anything larger is more inviting. Deposits in politically favorable and mining friendly nations add to that attraction.
Now, imagine that you have to before a company that is producing the proven deposits and is already producing and good drill results on your properties you would not choose but go for both, provided the terms are right for you. There are many companies out there – from those exploring, to those with proven deposits, right the way up to junior companies already in production. These are safer than the unknown. So, subject to the takeover enhancing shareholder value and not diluting it, takeovers are a very good way to go for the acquiring shareholders, and a way that will be followed increasingly by large Gold Mining companies in the future.
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