Kinross unloads stake in Crixas for US$220 million

VANCOUVER — Canada’s third-largest gold producer Kinross Gold (K-T, KGC-N) has divested its 50% stake in the Crixas gold operation in central Brazil to South African partner AngloGold Ashanti (AU-N, AGG-A) in a cash deal worth US$220 million.

The divestiture marks the latest in a series of sales by Kinross, as it focuses on core assets in a bid to control costs and deal with fall-out from a US$2.49-billion write-down at its Tasiast open-pit gold mine in northwestern Mauritania, Africa. Kinross acquired Tasiast as the main asset in a US$7.1-billion takeover of Red Back Mining in 2010.

Last year Kinross sold its 8.5% stake in diamond miner Harry Winston (HW-T, HWD-N) for roughly US$100 million, which followed the 2010 sale of its 22.5% share in a partnership holding Harry Winston’s 40% interest in a joint-venture controlling the Diavik Diamond mines.

Kinross reported its first quarter results in early May, revealing a year-on-year average cost increase to US$742 per oz. gold from the US$545 per oz. the company recorded in first quarter 2011. Revenues increased by 11% to US$1.04 billion, while net earnings jumped 16% to US$203 million despite a 6% production decrease to 604,250 gold equivalent oz.

Kinross’ share of proven and probable reserves at Crixas clocked in at around 375,000 oz. of gold. According to Bank of Montreal (BMO) Capital Markets analyst David Haughton, Crixas was projected to contribute 74,000 oz. of gold to Kinross’ total output during 2012, at a cost of US$746 per oz.

“The sale of the stake in Crixas does not materially alter the Kinross production profile,” Haughton wrote in May 29 research comment. “Nor does it affect Kinross’ cash cost outlook. [The company] maintains a significant presence in Brazil through its Paracatu mine. [The sale] appears logical for all parties.”

Crixas houses three underground mines, Mina Nova, Mina Palmeiras, and Mina III and includes a dedicated processing plant. The AshantiGold run operation has produced roughly 3.5 million oz. of gold during its lifespan.

BMO Capital Markets analysts speculate Kinross may consider selling additional non-core assets, including: a 50% interest in the Round Mountain gold mine the company holds with Barrick Gold (ABX-T, ABX-N, ABG-L) in Nevada, which BMO analysts value at US$437 million; its 25% stake in the Cerro Casale project in Chile valued at US$398 million, again with partner Barrick; and its 100%-owned Kettle River-Buckhorn gold mine in Washington state valued at US$313 million.

“The sale of Crixas demonstrates a strategy to focus on core-assets and to ease cash flow pressures during the current project development phase,” Haughton notes.

Kinross president and CEO Tye Burt apparently agrees, with shares plunging 53% over the past nine months, Burt says it was time for the company to focus on the development of its key growth assets.

Kinross’ growth catalysts include its operational review at Tasiast, its high-grade Dvoinoye gold deposit roughly 100 km north of its Kupol operation in Eastern Russia, its new Lobo-Marte investment in Northern Chile, and its Fruta del Norte development in southeastern Ecuador,

“Crixas is a non-operated, non-core asset for Kinross,” Burt said. “Its divestiture is consistent with our strategy of portfolio optimization, and focusing our resources on the company’s core operations and priority projects.”

Kinross’ shares jumped 14¢ on the back of the divestment news, but market enthusiasm tapered off at midday, and the company closed down 1.7% at $8.28. Kinross has, however; benefitted from a recent rebound in gold prices, with shares up 7% or 54¢ over the past two weeks. BMO Capital Markets maintains an “Outperform” rating on the company, with a $14.50 target price.

From AngloGold’s point of view, the transaction carries a number of benefits that augment a growing presence in the Americas. Acquiring 100% ownership in Craxis — which AngloGold already operates — will boost the company’s annual attributable production in Brazil to 500,000 oz. gold and increase its total output in the America regions to more than 1 million oz.,

“This deal further simplifies our portfolio and gives us greater exposure to Brazil, where we’ve had significant success in growing our production as well as our reserve and resource base,” comments CEO Mark Cutifani. “We see long-term, lower risk, potential from [Crixas], which is a key component of our strategy to grow the contribution from the Americas.”

According to AngloGold, the US$220 million purchase price will be funded from existing cash reserves and debt facilities. The company released its first quarter results on May 10, which included a doubling of year-on-year adjusted earnings, totalling US$429 million or $1.11 per share.

AngloGold’s board recently approved US$1.9 billion in capital investment over the next five years to expand operations at its Cripple Creek and Victor gold mine in Colorado, as well as to develop its Mongbwalu and Kibali projects in the Democratic Republic of Congo.

AngloGold’s shares remained relatively flat in New York following the news release, with the company closing down 1.69% at $35.57 per share. AngloGold has also benefited from the recent resurgence in gold prices, with company shares up 11.2% or $3.62 since mid-May.