Kinross Gold sells Diavik stake

Diamonds have been kind to Kinross Gold (K-T, KGC-N).

Last year Kinross paid about US$104.4 million for a 22.5% interest in Harry Winston Diamond’s (HW-T, HWD-N) 40% stake in the Diavik joint venture (Kinross’s 9% indirect stake in the Diavik mine). Now it plans to sell it to Harry Winston for US$220 million, making a profit of about US$115.6 million.

Under the proposed deal, Harry Winston will pay Kinross US$50 million in cash, roughly 7.1 million Harry Winston shares valued at about US$100 million, and a 12- month US$70-million note. The note will bear an annual interest rate of 5%. The boards of both companies have yet to approve the agreement.

Kinross is also arranging to sell its 19.9% direct stake in Harry Winston to a group of financial institutions through a block trade. Kinross acquired its stake in March 2009, buying 15.2 million shares for US$3 apiece at a cost of about US$45.6 million. The transaction hands Kinross a profit of roughly US$150 million.

Back of the envelope calculations suggest that after investing a total of US$150 million last year in Harry Winston and Diavik, Kinross walks away with a gain this year of about US$268 million.

“Our initial investment has pro- vided us with a great return and now is a good time to realize gains from that initial investment for our shareholders,” Steve Mitchell, Kinross’s vice-president of corporate communications, told The Northern Miner.

“The share price has had a very nice ride since we first made our investment at US$3. We decided to take our profits on that initial investment but we took an equity share in Harry Winston as part of the consideration, so we continue to have a lot of confidence in diamonds and in Harry Winston.”

In a note to clients, UBS Research writes that Kinross could use some of its profits to help fund its recent 9.4% stake ($600 million) in Red Back Mining (RBI-T) and that there is potential for the gold producer to raise its stake in Harry Winston from 7.1 million shares after the closing of the two transactions, should Harry Winston elect to settle the 12-month note payable in shares.

UBS has a 12-month share price target on Kinross Gold of US$25.50. (At presstime in New York, Kinross was trading at US$16.34 per share.)

Diavik, Canada’s second diamond mine, began producing diamonds in the Northwest Territories in January 2003. The mine is based on four diamond-bearing kimberlite pipes within Lac de Gras. Today, the Diavik mine is Canada’s largest diamond producer and one of the most profitable diamond mines in the world.

The mine is a joint venture between Harry Winston and Diavik Diamond Mines, a wholly owned subsidiary of London-based Rio Tinto (RTP-N, RIO-L).

Under the joint-venture agreement, Harry Winston Diamond pays 40% of the operating and capital costs and has the right to receive and market 40% of Diavik’s diamond production; it does not operate the mine.

In Toronto, Harry Winston shares fell $1.55 or 10.65% on the news to close at $13 per share, with 4.5 million shares trading hands.

Over the last year, Harry Winston has traded in a range of $5.36- $14.95, with 76.6 million shares outstanding. UBS Research has a 12-month target price on the stock of $15.50 per share.

Kinross is also buying B2Gold’s (BTO-T) right to acquire an interest in the Kupol East and West licences in Russia for an upfront payment of US$33 million and subsequent payments of US$15 million for each incremental million- oz. of gold reserves contained in the licence areas, up to a maximum of 9 million oz. gold.

B2Gold will also receive payments equal to 1.5% of a net smelter return royalty from the start of production, subject to a right for Kinross to repurchase the royalty for US$30 million.

Under the terms of a previous agreement, Kinross had undertaken to secure a 37.5% joint-venture interest for B2Gold in the Kupol East and West exploration licences areas.

Under the new agreement, Kinross is no longer obligated to enter into a joint-venture arrangement with B2Gold.

The Kupol East and West licences are adjacent to the Kupol gold mine and will remain 100%- owned by the Chukotka Mining & Geological Co. (CMCG), which also owns 100% of the Kupol mine. CMGC is owned 75% by Kinross and 25% by the State Unitary Enterprise of the Chukotsky Autonomous Okrug (Chukotsnab).

Clive Johnson, Vancouver-based B2Gold’s president and chief executive, said proceeds from the sale would help the company chase additional acquisitions, while at the same time the terms of the transaction allow the company to benefit from the exploration upside at Kupol through contingent payments and royalties, making it a win-win.

B2Gold currently has two mines in Nicaragua and development and exploration assets in Nicaragua, Colombia and Costa Rica.