Lundin’s Fortress to buy Fruta del Norte

Kinross Gold (TSX: K; NYSE: KGC) acquired the Fruta del Norte gold project in Ecuador through its US$1.2-billion acquisition of Aurelian Resources in 2008, but heated local opposition forced the gold producer to abandon the project in 2013 after spending US$225 million on the asset. The outcome was a US$720-million writedown in last year’s second quarter, and a lot of disgruntled shareholders.

Now Fortress Minerals (TSXV: FST.H) — a member of the Lundin Group of Companies — thinks it can do better, and is buying the project from Kinross in a cash-and-share deal worth US$240 million. The price consists of US$100 million to US$190 million in cash, with the rest made up of shares. The amount of cash in the deal depends on the net proceeds from Fortress’ proposed equity financing.

Kinross CEO J. Paul Rollinson noted in a press release that as a member of the Lundin group, Fortress Minerals is “well positioned to take Fruta del Norte to the next stage in its development.”

The transaction is expected to be completed by mid-December and is subject to conditions, including approval from Fortress shareholders and the stock exchange, and the Ecuadorian government granting an 18-month extension after the transaction closes so that Fortress can carry out more project feasibility work and negotiate developments.

If shareholders approve, Fortress says it will change its name to Lundin Gold after the acquisition, explaining that Lundin Gold will be the principal gold vehicle of the companies controlled by the Lundin Family, with Fruta del Norte “being the flagship asset upon which it will build its gold business.”

The $250-million equity raise (at a price of $4 per share) that Fortress plans to complete through a brokered private placement will fund the acquisition and capitalize the company, it says. The Lundin Family Trust, which is the company’s controlling shareholder, has already subscribed for up to US$100 million of the offering. 

Lukas Lundin is Fortress’ president, CEO and a director. He described Fruta del Norte in a press release as “one of the most significant gold discoveries in the last fifteen years,” and said he is “confident in our ability to rapidly advance the project to a construction decision and obtain the required permits to build this world-class gold asset.”

Fortress believes that Fruta del Norte “has the potential to be a large-scale, low-cost, underground gold mining operation,” and that the project could move quickly through feasibility to a construction decision by “leveraging the considerable amount of historical exploration, development, mine planning and permitting work that has already been completed to date.”

The company is confident the project has “significant exploration potential,” as well as more than 800 sq. km of surrounding concessions “where multiple early and advanced exploration targets have already been identified.”

It noted that not only has Ecuador “been communicating the potential for mining policy reforms in order to improve international investment in the country’s mining sector,” but that the Lundin family “has an impressive track record of acquiring world-class projects in highly prospective and sometimes challenging jurisdictions.”

The Fruta del Norte project, as of Dec. 31, 2012, had proven and probable reserves of 25.44 million tonnes grading 8.21 grams gold per tonne for 6.72 million contained oz. gold and 11.01 grams silver per tonne for 9 million contained oz. silver.

“That an interested buyer was found makes sense to us as Fruta del Norte remains as one of the premier, undeveloped gold deposits known today,” Macquarie Research analysts Ron Stewart and Mohamed Abo Daff wrote in a research note.

As for Kinross, David Haughton of BMO Capital Markets said in a note that he had not previously ascribed any value to Fruta del Norte for the company and that “the realization of value from the project is a positive,” while analysts Adam Graf and Misha Levental of Cowen and Co. described the news as “blue sky” for the gold producer.

“Fruta del Norte — previously thought to be ‘lost’ to the government — has unexpectedly returned some value to Kinross Gold,” the New York-based analysts write in a client note. “Approval of a sale of a forgotten asset has come as a surprise to the market … with the $240-million value representing all blue sky for Kinross.”

On the day of the announcement, however, Kinross shares closed down 16¢, or 4.9%, at a 52-week low of $3.10, while Fortress Minerals fell 75¢, or 13.6%, to $4.75 per share.

Macquarie Research’s Stewart and Abo Daff said they were wrong in assuming that the sale would have a “modestly positive impact” on Kinross’ share price. “The market paid very little attention to this event,” they wrote in their Oct. 29 research note.

“While we weren’t surprised by the recent decision to divest its interest … we were rather surprised that the market gave them no credit for the deal… by our estimates, the US$240-million transaction should have added around C24¢ per share (US21¢ per share) to the company’s net asset value.”