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A 2007 handout photo the Tasiast Gold Mine in Mauritania, then owned by Red Back Mining Ltd., which is now part of Kinross Gold.

Handout

There's no way Red Back Mining investors could have expected this.

When Kinross Gold Corp. offered to buy Red Back in a $7.1-billion deal in 2010, the target's investors jumped at the chance, voting 99 per cent in favour of the acquisition. This was the first big mining deal since the financial crisis, and a 21 per cent premium seemed sexy for a sector still stuck in a lull.

Instead of getting cash up front, Red Back investors were happy to take payment in the form of Kinross shares. That decision ultimately proved disastrous for those who believed in the merged company's long-term value. On the day the deal was announced, Kinross traded near $16 (U.S.). Today its stock is worth roughly $4.

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To compare, Equinox Minerals investors took cash when Barrick Gold Corp. paid $7.3-billion to buy their company in 2012 – good for them, bad for Barrick.

As if the Kinross share decision wasn't frustrating enough, Red Back investors were given an extra sweetener to vote in favour of the deal, in the form of Kinross warrants. These warrants came with an exercise price of $21.30, giving their holders the right to buy Kinross shares at this price. The thinking was that the merged company would surely rise in value, and the warrants would eventually let the investors buy extra shares at discounted prices.

On Wednesday Kinross put out a news release kindly reminding the warrant-holders that their securities expire in one month. The sad part that went unmentioned: The warrants have next to no value. It would take a miracle for Kinross's stock to climb enough in one month for the warrants to be in-the-money – meaning investors would be able to buy shares at $21.30 and then turn around and sell their shares in the market at a higher value.

None of this is news to the warrant-holders. Kinross's shares started their downward spiral in the second half of 2011, and have hovered around $4 for the past six months. But for those of us who have moved on, their expiry serve as a reminder that "value-creation" is sometimes just a buzzword.

Kinross itself has acknowledged the blunder, in the form of non-cash writeoffs. Over two consecutive fiscal years the miner took impairment charges amounting to $5.6-billion directly related to Red Back's Tasiast project in Mauritania.

Those writeoffs came after six different investment banks advised the two miners on the acquisition, and after Kinross's then-CEO Tye Burt said this in a statement: "This is a transformational opportunity. By combining Kinross' world-class mines, growth projects and proven ability in mine development with the potential of Red Back's assets, we are creating a gold growth powerhouse. The significant upside in reserves that we believe exists at Red Back, and Kinross' ability to accelerate that potential, makes this an outstanding prospect for shareholders of both companies."

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