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The intense competition for the extremely early-stage Great Bear, which has no proven gold reserves at its Dixie project, illustrates how rare big gold finds are becoming worldwide.Handout

Five major mining companies engaged in an intense bidding war for Red Lake exploration company Great Bear Resources Ltd. , with Kinross Gold Corp. eventually emerging the winner last week.

Three sources familiar with the talks said Canadian heavyweights Barrick Gold Corp. and Agnico Eagle Mines Ltd. , as well as Australia’s Evolution Mining Ltd. and Newcrest Mining Ltd. , were offered the opportunity to bid on Great Bear. The parties were given access to Great Bear’s confidential data, conducted site visits at Red Lake in Northwestern Ontario and almost all tabled formal offers.

The Globe and Mail is not identifying the sources as they were not authorized to speak publicly on the matter. Kinross, Barrick, Agnico and Evolution declined to comment. Newcrest did not respond to a request for a statement.

“I can’t really comment on the internal details of the Kinross transaction, other than to confirm it was multi-party,” Chris Taylor, chief executive officer of Great Bear, wrote in an e-mail to The Globe.

The intense competition for the extremely early-stage Great Bear, which has no proven gold reserves at its Dixie project, illustrates how rare big gold finds are becoming worldwide, and the lengths the largest mining companies are going to secure them.

Kinross, Canada’s second-biggest gold miner by production, announced on Dec. 8 it had reached a friendly agreement with Great Bear to acquire the firm for $1.8-billion in cash and stock, a 26.5-per-cent premium to its market price. The proposed buyout of Great Bear is among the most expensive ever for an exploration company.

After the deal was announced, Kinross shares fell by more than 10 per cent, with some investors concerned the company is overpaying for a junior explorer with a deposit that may turn out to be a disappointment.

History has shown that, especially in Red Lake, which is known for its erratic geology, buying early-stage companies can be risky. In 2008, Goldcorp Inc., a former high flier in the global gold industry, bought Gold Eagle Mines Ltd. for $1.5-billion. Like Great Bear, Gold Eagle had promising drill results, but no reserves. The acquisition ended in disaster for Goldcorp, which was unable to prove there were large mineable reserves in the ground.

Kinross is keen to point out that, unlike Goldcorp, which “panic bought” Gold Eagle, it took its time, and did its homework on a property that has already been drilled extensively.

Great Bear, which was co-founded by structural geologist Chris Taylor and Bob Singh, has drilled close to 800 holes at Dixie and identified five separate gold discoveries. Early work shows that a large chunk of the gold may be widely-dispersed and uniform.

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The geology appears to have more in common with Barrick’s straightforward-to-mine Hemlo operation in Northwestern Ontario than Red Lake’s typically variably-dispersed gold deposits. Kinross spent three years doing diligence on Great Bear, and looked at hundreds of other possible takeover targets before zeroing in on the development company.

“We’ve got enough data here to make a very confident call,” Paul Rollinson, the CEO of Kinross said last week in an interview with The Globe.

Kinross’s motivation for going all-in on Great Bear was also motivated by the fear of missing out (FOMO), said Josh Wolfson, analyst with RBC Dominion Securities Inc. Kinross executives have emphasized there was a good reason to act now, as opposed to waiting a few years until Great Bear’s geology is firmed up. Kinross felt Great Bear’s valuation would likely climb so high, it would be out of reach, and bigger competitors such as Barrick, with its massive US$5-billion cash war chest, would have the upper hand.

“Kinross, in their meetings, has discussed how if this asset was more advanced, and was better defined, it may not have been something which they would have been able to be competitive on,” Mr. Wolfson said.

Some analysts have speculated that Barrick, or one of the other bidders, could still surface with a higher takeover offer for Great Bear. However, that thesis also has its fair share of skeptics.

“No one will come over the top. No one,” said Pierre Lassonde, co-founder and chairman emeritus with Franco Nevada Corp., the world’s biggest mining royalty company.

Mark Bristow, the CEO of Barrick has long preached the gospel of the merits of acquisitions with no share price premium and lambasted the industry for its past mistakes of paying rich premiums in M&A. Barrick coming over the top of Kinross’s already elevated bid would be an about-face on that strategy, Mr. Lassonde said.

Shares in Great Bear have traded just below the takeover price recently, suggesting most investors believe there will be no other bids.

Early estimates on Kinross’s return on investment if it lands Great Bear are mixed to underwhelming. Kinross has mapped out a vision that envisages a large open pit at Dixie to start, and eventually a transition to higher-grade underground mining.

Tanya Jakusconek with Scotia Capital Inc. said in a report to clients it will take Kinross five to eight years to break even on the acquisition, and she sees a “single digits” return on investment based on mining the open pit.

RBC’s Mr. Wolfson, meanwhile, looked at Kinross eventually mining nine million ounces of gold from an open pit and underground. He predicts a return of between 6 and 8 per cent.

“That’s pretty low,” said Hai Van Le, managing director with Sattva Global Advisors in Vancouver. At a minimum, the industry likes to see a projected return of 20 per cent. That way, contingencies are covered, as well as inflation, which in recent years has caused several large Canadian mine constructions going far over budget.

Kinross has long traded at a discount compared to peers such as Agnico, owing to Kinross’s heavy exposure to risky markets that include Russia and West Africa. But the Great Bear acquisition could change all of that. Mr. Lassonde predicts not only will the acquisition work out, it will lead to a wholesale “re-rating” of Kinross’s shares to elite status.

Investors will have to wait years to find out if Mr. Lassonde’s prediction comes true. Kinross last week pushed out by about a year the timeline for a maiden resource estimate on Dixie. And the open pit “starter mine,” if it does get built, won’t be in operation until 2029, management predicts.

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