MINING MARKETS AND INVESTMENT NEWS — Investment Commentary — Merger merits wait-and-see stance

Roger Chaplin, mining analyst with T. Hoare & Co., is recommending a wait-and-see attitude following the announcement of the mega-merger between Kinross Gold (K-T) and Amax Gold (AU-N), which will create the fifth-largest gold producer in North America.

Chaplin views the deal as an attempt to combine Kinross’s single major gold mine, Hoyle Pond in Ontario, and strong balance sheet (US$190 million in cash) with Amax’s two major mines, Fort Knox in Alaska and the 50%-held Kubaka in Russia, and weak balance sheet (net debt: US$450 million).

“Overall, the merger looks to be a step in the right direction,” he says.

“But there will still be some worries over the earnings (or losses), the balance sheet and mine lives.”

Chaplin notes that both companies were hit hard in late 1997: Kinross for its lack of long-lasting, quality mines and Amax Gold for its weak balance sheet. “The merger will help to address both these areas,” he states.

Chaplin recommends a “hold,” with the caveat that if the gold price starts to move, “the merged Kinross-Amax will be one to watch.”

Overall, Chaplin is not exactly enthusiastic about the merger and the “big but not particularly beautiful” set of operations that will arise from its completion. He points out that the merged company will have significant debt, and questions whether gold production can be maintained at the current level of 1.2 million oz. “On the bright side, the [merged] company will have three solid, core mines, and the cash flow will be positive,” he adds.