Kinross Gold Corp. is increasing its bet in gold-rich Africa with a bid to buy the shares of Red Back Mining Inc. it doesn't already own in a share-swap deal valued at $7.1-billion (U.S.)
The friendly deal, announced late Monday, will strengthen Kinross's status among the world's biggest gold producers with a market capitalization of about $18-billion. With Red Back, Kinross's annual gold production is slated to reach 3.9 million ounces by 2015, up from and expected 2.2 million ounces this year.
It also allows Toronto-based Kinross to broaden its operations into Ghana and Mauritania in West Africa, an area many see as the fastest-growing region for gold production in the world.
The deal also highlights the risks gold companies are willing to take, venturing into new territories to add attractive gold properties to their portfolios. Global gold reserves are shrinking as major miners rush to capitalize on strong gold prices and struggle to increase production levels.
Redback shares have soared about five-fold over the past two years, and Kinross is paying a 21 per cent premium over the recent share price. When Kinross bought a 9.4 per cent stake in Red Back in May for $600-million, investors dumped Kinross shares amid worries it paid too much and could engage in a costly takeover that brought operational risk.
Kinross CEO Tye Burt dismissed those concerns Monday, saying the company has a "more comprehensive" understanding than the street, and believes the investment will pay off.
"The street perception will be one thing. I suggest reality will be more exciting," he said in an interview.
The deal was dubbed "Project Fenway," because "we knew it would be a home run," according to Mr. Burt. "We create a high-growth super senior gold company with a tremendous suite of projects," he said.
Kinross's initial move on Red Back also triggered speculation a bidding war could erupt.
Red Back operates the Chirano gold mine in Ghana and the Tasiast gold mine in Mauritania and has an exploration portfolio in West Africa, which Mr. Burt maintains is less risky than other countries on the continent.
Kinross had some investments in Sub-Saharan Africa about five years ago, but they were sold shortly after Mr. Burt joined the company.
The deal also strengthen ties between Mr. Burt and Vancouver-based mining mogul Lukas Lundin, head of the Lundin Group of Companies, which has interests in oil, diamonds, uranium and other metals in addition to Red Back.
Lundin and Red Back CEO Richard Clark will join the Kinross board.
"We weren't looking to get cashed out," Mr. Clark said in an interview Monday. " We were looking to do a deal where we could get a major lift."
The deal values Red Back shares at $30.50 (Canadian), a 21 per cent premium to its 20-day volume-weighed average price.
Under the terms of the deal, Red Back shareholders will receive 1.778 Kinross shares, plus 0.110 of a Kinross share purchase warrant for each Red Back share.
As part of the deal, Kinross will issue about 425 million shares and 26 million warrants. If the deal is approved following shareholder votes next month, Kinross shareholders will hold about 63 per cent of the combined company, and Red Back shareholders will hold the remaining 37 per cent.
The warrants are expected to be listed on the TSX and be exercisable for a four-year term at $21.30 (U.S.), about a 30 per cent premium to the closing price of Kinross shares on Friday.
The termination fee is $250 million (Canadian) for Kinross and $217 million for Red Back. Each side has a right to match a superior deal.
Last month, Kinross sold its Diavik diamond mine and reduced its equity interest in the operation's part-owner, Harry Winston Diamond Corp., after a near tripling of its initial $150-million investment within 16 months. It sold Harry Winston back its 40-per-cent interest in the Diavik mine partnership, the rest of which is owned by London-based Rio Tinto, the mine's operator. Kinross now owns an 8.5 per cent stake in Harry Winston, down from just under 20 per cent before.
The money went towards projects in places such as Russia, where Kinross has also expanded to find growth.
Earlier this year, Kinross agreed to pay $368-million for the Dvoinoye gold deposit and another gold property in eastern Russia, both near its huge Kupol mine. That deal is expected to close in the coming weeks.