Kinross Gold is returning to Africa by buying a stake in Red Back a decision the company sees as pre-emptive in one of the fastest-growing mining regions in the world, but one that some investors worry is too expensive and piles on risk.
Shareholders drove down Kinross stock more than 4 per cent Wednesday on four times the average volume after the Toronto-based miner said it was paying $600-million for a 9.4-per-cent stake in Red Back Mining Ltd., which has mines in West Africa.
"We are getting a little flak," Kinross chief executive officer Tye Burt said in an interview.
He said the reaction is short-term and believes the deal will be better received as it matures and investors see how it addresses the issue of finding new growth amid shrinking global reserves.
"I dare say we have a bit more knowledge today than the market has and we decided to take a strategic next step," Mr. Burt said.
The Red Back investment is the kind of move many companies make before buying the entire company.
"Kinross described this transaction to us as a strategic acquisition, which in our view means they want more," Scotia Capital said in a note.
Mr. Burt wouldn't speculate on whether he is ready to make that move.
"It was a question of how much we wanted to put in the table as our first step into West Africa. We decided $600-million was an appropriate bet at this time. It gives us a front row seat on a very high growth area."
Kinross had some investments in Sub-Saharan Africa about five years ago, but they were sold shortly after Mr. Burt joined the company. He said Western Africa is considered less risky than other parts of the continent where other rival miners operate.
Some analysts say buying all of Red Back would be highly dilutive and don't expect such a move for some time, while others would have preferred an immediate takeover instead.
The Red Back investment is also seen by some as a shift from the company's strategy of buying earlier stage development projects that would decrease risk.
Kinross has operations in Russia which some investors already view as being a politically risky place to do business.
"The rationale behind the investment in RBI [Red Back]is unclear to us," TD analyst Greg Barnes said in a research note.
"We do not believe that investors are likely to view the purchase of RBI shares purely for investment purposes as a sound strategy for a gold mining company."
The investment also appeared expensive to some, even though Kinross appeared to take advantage of a recent selloff of Vancouver-based Red Back, a long rumoured takeover candidate, whose shares have risen steadily in recent months.
"We believe that, on every measure, Kinross is paying top dollar for their foothold in Red Back, and in our opinion, the money could have been better spent elsewhere," Scotia Capital said in a research note.
Mr. Burt said the money is better invested in Red Back than sitting in T-bills, where it was invested after the company recently sold down its stake in the Cerro Casale project for $454.3-million to Barrick Gold Corp.
The Red Back investment is the first such deal Kinross has done with the Lundin Group of Companies, which has Red Back under its umbrella.
Lukas Lundin and Kinross board member Catherine McLeod-Seltzer are investors in Lucara Diamond Corp., which also falls under the Lundin company banner.
Red Back owns and operates the Chirano Gold Mine in Ghana and the Tasiast Gold Mine in Mauritania and has an exploration portfolio in West Africa.
Kinross has eight mines in the United States, Chile, Brazil and Russia.