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Kinross a likely target for Barrick, analyst says

The Tasiast mine is an open pit operation located in north-western Mauritania.

GREENSHOOTS 447831519217/Kinross

Kinross Gold Corp., Canada's third largest gold producer, is likely a takeover target for larger rival Barrick Gold Corp., according to a report by Veritas Investment Research in Toronto.

Analyst Pawel Rajszel said in a report sent to clients in recent days that a deal between the companies could be imminent as Barrick, the world's largest gold company, tries to grow its massive production profile at a time when sizable new gold discoveries are increasingly hard to come by.

"I'm convinced it's going to happen," Mr. Rajszel said when asked about a nine-page report that outlines arguments about why a deal could be struck, and why it might be compelling to the companies.

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"Not only do we think that Barrick could justify the deal to shareholders, but we also doubt Kinross would put up much of a fight," the Veritas report said.

Markets have speculated about a takeover of Kinross Gold, embattled by a massive writedown at its Tasiast gold mine in Mauritania, since January.

The giant mine was brought into the Kinross fold with the $7.1-billion takeover of Red Back Mining in 2010, and was hailed as a great buy for months before concerns about cost overruns and complications around the project geology saw investors stampede out of the stock.

"With a 30-per-cent year-to-date decline in Kinross stock, we expect Kinross shareholders would welcome a bid with open arms," Veritas said in the opening lines of a report that looked at seven potential suitors for Kinross before concluding that only Barrick Gold would fit just right.

Kinross shares closed at around $8 a share on Thursday, compared to about $18 a share in September. In the same time period, Barrick shares have come down from close to $55 a share to about $35 a share.

"You know, Kinross is extraordinarily cheap, even compared to Barrick, which has also fallen," Stifel Nicolaus analyst George Topping said about the thesis that Barrick could buy Kinross. "Over the next five years, we think Barrick will be lucky to eke out 9 per cent growth, whereas Kinross ought to be able to have 24 per cent growth."

Barrick has some $13-billion of debt on its balance sheet, however, and Mr. Topping said that would likely rule out an all-cash offer for Kinross, if it were to occur.

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Kinross's production profile will jump once Tasiast and other projects go into production and could make it an attractive target for Barrick, which is seen struggling to grow its large production profile with current assets.

Mr. Rajszel said Kinross's development assets would help Barrick grow its gold production by over 30 per cent through 2016, compared to less than 20 per cent without Kinross.

Kinross would also fit into the acquisition style at Barrick, a company that grew to its massive size today through blockbuster takeovers, like the $10-billion takeover of Placer Dome Inc.

That takeover brought Barrick ownership of the massive Pueblo Viejo deposit in Dominican Republic that is due to start production in coming months.

At the time of that acquisition Placer Dome was taking its time on a development decision around Pueblo Viejo, just as Kinross has struggled to identify the final shape of its Tasiast mine.

"I think it makes a lot of sense and I think there are a lot of parallels between this deal and the deal Barrick did in 2005/06 with Placer Dome," Mr. Rajszel said.

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Kinross and Barrick declined comment on the Veritas report and its contents.

"I think the percentage is definitely higher than what's implied by Kinross's stock and certainly given Barrick's valuation it looks like its implied."

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