TORONTO (CP) -- Kinross Gold Corp. (K) is taking over Aurelian Resources Inc. (ARU) in a $1.2 billion transaction that one analyst says has likely left Kinross shareholders "a little mystified" because it expands the Toronto company's operations in a risky South American country.
The all-stock transaction valued at $1.2 billion will expand Kinross' development properties, adding a major project in Ecuador - in particular the Fruta del Norte deposit, which contains an estimated 13.7 million ounces of contained gold and 22.4 million ounces of silver.
But analyst John Ing, president of Maison Placements in Toronto, said there is still some question as to whether the government of Ecuador will permit the mine.
"There have been pronouncements from the country that threaten the viability of the project," said Ing. "Kinross, however, feels otherwise and has made a grand paper bid for the shares."
"So while obviously Kinross feels that they got a good price, they did pay a pretty healthy premium for those shares. I think that given the risk, given the premium, it's a steep price for this project."
The president and CEO of Kinross, an experienced mine operator in South America, said he doesn't see a drawback to the transaction.
"We believe that the transaction has the potential to add an asset with a great future to a portfolio that Kinross is operating today in a country that we see headed in the right direction," Tye Burt said on a conference call with analysts.
"We think this transaction plays to our core strengths in responsible mining and commitment to corporate and social responsibility. It adds to our pipeline of growth and is accretive to (net asset value). All-in-all, then, a win-win-win" for Aurelian shareholders, Kinross and Ecuador.
The companies announced Thursday that each Aurelian share is to be exchanged for 0.317 of a Kinross common share and 0.1429 of a five-year warrant to buy a share at $32.
Kinross expects to issue 47 million shares to cover the transaction, about eight per cent of its current total outstanding.
Based on the recent trading price of Kinross stock, the companies value the offer at $8.20 per Aurelian share, a premium of about 60 per cent.
The Aurelian board has endorsed the deal, which will add a major gold deposit in Ecuador to the Kinross development portfolio.
Aurelian estimates an inferred resource at Fruta del Norte of 58.9 million tonnes of ore grading 7.23 grams per tonne of gold.
Kinross and Aurelian "are of the view that recent initiatives by the government of Ecuador, including public statements by President Correa, and the Ministry of Mines and Petroleum, indicate that Ecuador is becoming increasingly open to responsible mining," the companies stated.
In recent months, Aurelian had suspended operations at the Ecuadorian project and cut most of its workforce there as the government assessed its mining policies. Other foreign miners were also affected by the policy review.
Shares in Kinross dropped $1.06, about 5% in early trading on the Toronto Stock Exchange, while Aurelian shares jumped $2.87, 13.8% to $7.32.
(c) The Canadian Press 2008