Vancouver – Kinross Gold (K-T, KGC-N) is stepping up the pace of consolidation in the North American gold mining industry, launching a friendly $3.5-billion bid to acquire Bema Gold (BGO-T, BGO-N, BAU-L), a move that analysts said could still draw competing offers.
The all stock transaction appears to be driven by the bigger is better mantra as well as the prospect of future production from Bema’s $425-million Kupol gold project in Russia, which is headed for startup in mid 2008.
The two companies are already familiar with each other, through their joint ownership of the Refugio gold mine in northern Chile.
As part of the deal, Bema chief executive officer Clive Johnson will head a new exploration company that will acquire $20 million worth of assets from Bema.
Kinross will have the right to acquire a 10 per cent stake, while retaining the option to double its interest if the company is taken public.
Its assets will include Petrex (Proprietary), which has properties in South Africa, an exploration joint venture in northern Colombia with AngloGold Ashanti (AU-N) plus an exploration alliance in Russia’s far northeastern Chukotka Region.
In conference calls with financial analysts Monday, Kinross chief executive officer Tye Burt described the Bema deal as a “win-win” situation that dramatically raises his Toronto company’s gold resources to over 50 million ozs.
That’s up 38 per cent from 2005.
“We will have a well-balanced gold reserve profile with 39 per cent in Chile, 37 per cent in Brazil, 16 per cent in North America and 8 per cent in Russia,” he said.
Mr. Johnson echoed that view saying he is attracted by the growth potential of the combined company. “We look forward to discussing this opportunity with our shareholders, which we think is good value,” he said.
Kinross currently ranks as the world’s eighth largest gold producer. Output from Kupol is expected to push the combined company’s annual gold production to 2.8 million ozs. in 2009, up from 1.8 million this year.
The deal has already been approved by the boards of both companies and will be completed through a plan of arrangement in which each share of Bema will be exchanged for 0.441 of a Kinross share.
Kinross says the offer values Bema at $6.61 a share, a 34 per cent premium to the average price of a Bema share in the 20 trading days before the deal was announced.
Shares of Kinross fell $1.46 to $13.53 on the Toronto Stock Exchange Monday, while Bema rose 49 cents to $5.27.
Given that Barrick Gold (ABX-T, ABX-N) swallowed Placer Dome last year and Goldcorp (G-T, GG-N) has just completed its buyout of Glamis Gold (GLG-T, GLG-N), analysts said the offer comes as no surprise.
“This is a deal that makes a lot of sense for both companies and one we thought was likely,” said Richard Gray of Blackmont Capital in Toronto.
The price of the offer implies that Kinross is paying 1.32 times his estimated net asset value of $4.40 (U.S.) for Bema Mr. Gray said, meaning the deal will likely be accretive to Kinross’ net asset value.
Mr. Gray believes a competing offer is possible given the attractiveness of Kupol and the size of Bema’s Cerro Casale gold-copper deposit in northern Chile.
But another analyst isn’t so sure. “I’d be surprised if another player comes forward,” said John Ing, President of Maison Placements Canada in Toronto.
In order to close, the deal must clear a number of regulatory hurdles, including the approval of at least two thirds of the votes cast by Bema shareholders at a meeting to be held in January.
Upon completion, 61 per cent of the combined company will be held by the existing shareholders of Kinross and 39 per cent by existing shareholders of Bema.
Bema has agreed to pay a break fee of $79 million under certain circumstances and Kinross has the right to match competing offers, the companies said.