Not content to sit aside as the industry marches forward with consolidation,
The US$1.7-billion stock-and-cash deal will see Echo Bay shareholders receive 0.52 of a Kinross share for each Echo Bay share held and TVX shareholders receive 0.65 of a Kinross share for each TVX share held. The conversion rate for TVX shareholders will be adjusted accordingly if shareholders approve a previously announced 1-for-10-share consolidation.
The merger, which must still gain regulatory acceptance, calls for the retention of Kinross’s name, listings on the Toronto and American stock exchanges, and a corporate head office in Toronto. A third listing will be sought on the New York Stock Exchange, promising to boost the merged company’s projected 297 million shares outstanding.
As part of the agreement, TVX must purchase
Half of the cash component will be covered by the group’s existing reserves (leaving the new Kinross with US$99 million), and the remainder by a note to be financed through a debt facility. The companies do not anticipate the need for equity financings now or after the merger.
Each company has scheduled a shareholder vote for the third quarter and expects the deal to close early in the subsequent 3-month period. The merger requires the approval of two-thirds of Echo Bay’s and TVX’s shareholders but a simple majority of Kinross’s shareholders. Kinross will also request a 1-for-3 share consolidation from its shareholders, though the outcome does not affect the merger itself, except in terms of the proposed exchange ratios, if approved.
So far, Echo Bay has locked up 60% of its voting shares through Newmont’s 45.2% interest and Kinross’s 14.8% interest. Lock-up agreements for 20% of TVX’s voting shares have been secured as well.
Kinross does not require the approval of its bond-holders.
Based on average share prices for the 30 days prior to the deal’s announcement, the offer represents a 23% premium over Echo Bay shares and a 47% premium over TVX’s. When the dust settles, the new Kinross will be held 40.3% by existing Kinross shareholders, 31.1% by TVX shareholders (excluding Newmont), 14% by Echo Bay shareholders (excluding Newmont and Kinross) and 14.6% by Newmont shareholders.
“The key issue for us in this transaction is the creation of a strong balance sheet, with a quarter of the production coming into the package being what we discern to be high-margin, low-maintenance ounces,” Kinross Chairman Robert Buchan told analysts during a conference call.
Post-merger, Kinross expects its market capitalization to exceed US$2 billion ($3.5 billion), placing it within the top 60 companies trading on the Toronto Stock Exchange today but still well shy of peers
The new Kinross will own, or have interests in, 12 gold mines and one base metal mine on five continents. Pro forma cash flow from operations is anticipated at US$190 million annually, which increases by 30% for each US$25 increase in the price of gold. Not much is expected from operational synergies, with after-tax savings projected at a conservative US$15 million per year.
All told, Kinross expects to produce 2 million oz. gold annually at a total cash cost of less than US$200 per oz., including byproduct credits. Sixty-five per cent of the output flows from North American operations, and the company will be the only senior producer on the continent with less than 5% of its gold reserves hedged.
Combined proven and probable reserves are pegged at 17.9 million oz. gold and 52.6 million oz. silver. Measured and indicated resources stand at 19.2 million oz. gold and more than 60 million oz. silver.
“Clearly, if we are able to accomplish what we think we can, we are going to have a company that not only has the capability to grow but also the size and strength to be an acquisition target,” said Buchan, in reference to the recent takeovers of Homestake Mining and
In late 2001, Barrick paid a 31% premium on Homestake’s shares, to become the world’s second-largest gold producer, after South African producer
“Kinross, TVX and Echo Bay have a legitimate opportunity here to join hands and go forward as a strong company that has a quality, long-life asset base,” echoed Robert Leclerc, chairman of Echo Bay. “We’ll also have the cash flow, liquidity and other balance-sheet attributes that introduce the merged company to a much bigger and more important platform.”
Kinross brings six operations to the table with combined attributable production of 900,000 oz. annually. The half-owned Refugio mine, where residual leaching is nearing an end, is one of three advanced projects through which the group plans to maintain annual production at 2 million oz.
Trickle-down
“The results from the trickle-down leach cycle had given us a great deal of encouragement to [re]start the operation anyway, so we’re assuming it will come into production in 2003,” said Buchan. “And we are very confident that the Birkachan deposit is minable and will be brought into production in 2004. Beyond that, there are a number of other issues that we can bring to bear.”
Kinross acquired its interest in Refugio through the 1998 takeover of Amax Gold, two years after the mine was opened. Although the operation experienced problems from the start, leading to its temporary shutdown in mid-2001, production had been rising steadily, peaking at 180,016 oz. in 1999 but still below original design specifications.
Buchan expects Refugio to achieve similar production rates as before.
Kinross and partner
Situated in far-eastern Russia, the Birkachan deposit lies within trucking distance of Kinross’s 54.7%-owned Kubaka mine. Thus, like Refugio, the deposit requires minimal capital to be advanced to production.
“We are more and more comfortable that, from a political perspective, we will have the ability to mine Birkachan in ’04,” stressed Buchan. “We certainly have no question about its technical viability.”
At last report, resources at Birkachan stood at 726,700 tonnes grading 18.76 grams gold per tonne.
Aquarius
The Aquarius deposit, near Timmins, Ont., completes the trio of advanced projects and is wholly owned by Echo Bay. Whether that or other projects in the Timmins region will be incorporated into a recently proposed joint venture between Placer and Kinross is still under consideration.
“Our issue is: if it is going to be incorporated into the joint venture, then we have to agree on what that price will be,” said Buchan. “Clearly, as the gold price has got higher, the valuations of leveraged assets such as this have increased dramatically, as has been seen in the share prices of all three companies represented here.
“So, having said that, what we are doing today, looking at ’04-’05, is to evaluate it on a stand-alone basis. We have looked at the feasibility study done by Echo Bay and are confident our framework is legitimate.”
According to Buchan, Aquarius will crank out aro
und 150,000 oz. annually at less than US$200 per oz. These projections are off from original feasibility predictions, but the necessary capital infusion is now US$80 million instead of US$90 million.
At last report, Aquarius hosted 1.6 million tonnes of proven and probable reserves grading 2.3 grams per tonne. The estimate is based on a gold price of US$300 per oz.
Buchan also alluded to synergistic associations between its George Lake project and Echo Bay’s Lupin mine in Nunavut. Kinross purchased the former from
Goose Lake
Kinross had already spent more than $6 million at George Lake under a 1999 option agreement that would have seen it earn a 70% interest in return for $20 million in expenditures. Most of the expenditures were sunk into the Goose Lake deposit, where 3.9 million tonnes grading 12.5 grams gold per tonne have been outlined.
Five other deposits exist on the property, hosting a combined 3.9 million tonnes at 10 grams per tonne, but, like Goose Lake, each one’s advancement has been frustrated by the region’s high transportation costs.
Other contributions from Echo Bay include a half-interest in the Round Mountain and McCoy-Cove mines in central Nevada and the Kettle River mine in Washington state. Combined with Lupin, the mines cranked out 657,784 attributable ounces last year at an average cash operating cost of US$223 per oz.
For its part, TVX contributes various interests in five mines: 49% in New Britannia in Manitoba (
In 2001, the mines contributed 378,000 oz. gold and nearly 6.1 million oz. silver to TVX’s account. Total cash costs rang in at US$180 per oz., and total production costs at US$273 per oz., net of byproduct credits.
TVX also owns the Olympias, Skouries and Stratoni operations in Greece. Given their well-publicized legal problems, the group has been valued “conservatively.”
Petition
Recently, the Conseil d’tat, Greece’s supreme administrative court, rejected a local action group’s request for an immediate suspension of activities at Stratoni, which produces silver, lead and zinc. A petition for annulment was subsequently heard, though a final decision will not be rendered until later this year. Until then, production continues.
The same court annulled TVX’s plans to build a gold circuit at Olympias, forcing the company to record a US$200-million writedown in the fourth quarter of 2001.
“At the end of the day, after being presented with this [merger] opportunity, we thought this was the perfect platform to surface value for our shareholders and move forward,” said Sean Harvey, president of TVX.
The new Kinross will be headed up by Buchan, as president and chief executive officer. Scott Caldwell will retain his position as Kinross’s vice-president of operations and will also assume the role of chief operating officer.
The board of directors will comprise six Kinross nominees, two TVX nominees, and one nominee from each of Echo Bay and Newmont. Kinross currently has seven directors.
Subject to undisclosed conditions, a break-up fee of $28 million is payable if the merger fails to proceed.
At presstime, Kinross was trading at $3.37, or 55 less than on the day prior to the announcement; TVX, at $2.14, or 50 higher; and Echo Bay, at $1.76, or 9 less. All three changes came on unusually high trading volumes.
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