Kinross plans to merge with Amax — Will create fifth-largest gold producer in North America

Like a father arranging his daughter’s dowry, the parent company of Amax Gold (AU-N) has brokered a deal that will pair it off with a Canadian producer.

Colorado-based Cyprus Amax Minerals (CYM-N), which owns 59% of Amax Gold, has arranged the latter firm’s merger with Toronto-based Kinross Gold (K-T), thereby creating the fifth-largest gold producer in North America.

Under the terms of the deal, each Amax share would be convertible to eight-tenths of a Kinross share. Current Kinross shareholders would hold 43% of the new company, while Cyprus would own a 31% stake in Kinross and other Amax shareholders would hold 13%.

The deal would see Kinross more than double its outstanding shares, to just over 290 million shares, essentially writing down Amax’s debts at the expense of Kinross shareholders through dilution.

The merger, structured to be tax-free for those Amax shareholders who are U.S. residents, is subject to 50.1% shareholder approval. It is expected to close in June.

Canaccord Capital analyst Larry Strauss said that while Kinross’s balance sheet would remain relatively healthy after the merger, he views the increase in shares as “somewhat onerous.” He notes, however, that Kinross “has much better potential for long-term growth with three core mines than with just one.”

The debt load has been considered the main stumbling block in any merger with Amax. The company incurred huge cost overruns during the construction of the Fort Knox gold mine in Alaska. Initial cost estimates for construction were US$256 million, but because of additional site preparation and construction, the final price tag was closer to US$400 million. The company also saw significant overruns in the construction of the Kubaka gold mine in Russia.

According to the company’s year-end financial statement, Amax’s total liabilities came to US$592 million, including US$346 million in long-term debt, and US$73.3 million on loan from Cyprus. All of that debt was guaranteed by Cyprus.

The merger would eliminate US$335 million of that debt in the following manner:

* Cyprus agrees to cancel inter-company debt totalling US$135 million in return for 35 million shares of Kinross.

* Kinross will also apply US$100 million of its own available cash to further debt repayment.

* Another US$120 million will be raised through a “bought deal” in Canada, whereby Kinross will issue nearly 35 million subscription rights at a price of $5.05 each. These rights are convertible to one common share from treasury upon closing of the merger.

If the deal falls through, shareholders have the option to receive their money back, or 50% of their investment in shares and 50% in cash.

Milton Ward, chairman of both Amax and Cyprus, said that practically all the debt will be taken off Cyprus’s balance sheet, except the project loan for Kubaka and a bond issue for Fort Knox which total US$130 million.

Kinross Chairman Robert Buchan and Ward both said they want to transfer these loans over as soon as is appropriate.

Commenting on the merger, Buchan told The Northern Miner, “Good assets are hard to come by, and a balance sheet is easier to fix than a bad asset.” Amax’s two flagship gold mines — Fort Knox and Kubaka — are what drew Kinross to the merger, Buchan said in a conference call.

Besides Fort Knox and Kubassa, the new Kinross would hold interests in 10 other mines: the Hoyle Pond and Macassa mines in Ontario; the Denton-Rawhide and Candelaria mines in Nevada; the DeLamar silver-gold mine in Idaho; a 50% interest in the Refugio gold mine in Chile (Bema Gold [bgo-t] holds the other 50%); and the Blanket gold mine in Zimbabwe.

The new Kinross would boast annual production of nearly 1.2 million oz.

gold, ranking it fifth among gold producers in North America. In 1997, Amax produced nearly 730,000 oz.; Kinross cranked out nearly 430,000 oz. Average cash costs would be about US$210 per oz. Buchan said plans are already in place to increase production at Fort Knox, Refugio and other operations.

The new company would have reserves of 10.1 million oz. gold. When resources are included, that figure jumps to 27 million oz.

The company would have a strong balance sheet, with working capital of US$170 million, though it would carry a debt load of about US$200 million — the debt transferred from Amax plus Kinross’s own convertible debenture.

Future asset writedowns are a concern, says Strauss, because of high non-cash charges, especially at Fort Knox and DeLamar.

The new board would consist of ten members, five from Kinross, three from Cyprus and two from Amax. Buchan will remain chairman and Ward will become vice-chairman.

The new company would be based in Toronto, with its shares traded on the Toronto and New York stock exchanges.