Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
The $1.4 billion acquisition of Great Bear Resources (TSX: GBR) by Kinross Gold (TSX: K; NYSE: KGC) is credit negative for Kinross, credit ratings agency Moody’s Investors Service said in a recent note.
VP and senior analyst for Moody’s, Jamie Koutsoukis, views the December 8 announcement as credit negative because it will increase Kinross’s leverage, reduce available liquidity, and introduce potential project execution risk.
“Kinross’ ratings, however, remain unchanged because credit metrics will remain strong for the ‘Baa3’ rating, and the company has indicated it will use future cash flow to repay, drawing on its credit facility that will be used to fund part of the acquisition,” said Koutsoukis.
Under the transaction terms, the upfront payment of about $1.4 billion will be payable at the election of Great Bear shareholders in cash and Kinross common shares, up to maximums of 75% cash or 40% Kinross shares.
Great Bear Resources does not have debt on its balance sheet. Kinross said it intends to pay using its cash balance and availability under its revolving credit facility, which combined were $2.1 billion as of September 30.
Under the maximum cash consideration scenario, Kinross would be required to pay cash of $1.07 billion for the acquisition. With money on the balance sheet of $586 million as of September 30, Kinross would increase the debt by $480 million, and pro forma leverage would rise to 1.1x from 0.8x, which is very strong for the rating.
Available liquidity would fall by half (from $2.1 billion). However, at about $1 billion, it remains strong, and at current gold prices, the company will generate strong free cash flow ($356 million for the 12 months that ended September 2021).
According to Moody’s calculations, under the maximum share consideration scenario, Kinross would be required to pay about $850 million in cash. The amount drawn on the facility would be about $270 million, with pro forma leverage 1x.
“The Dixie project at this point is simply a discovered deposit with multiple deposits on the property. It would likely require at least five to seven years until production, should Kinross proceed with the development. The acquisition will not contribute cash flow over the near to medium term,” said Koutsoukis.
“The project requires a scoping level study be completed, followed by a pre-feasibility and feasibility study before the potential construction period.”
Depending on the size and scope of the project, if sanctioned, which will determine the cost, Kinross will be required to fund the construction in addition to the purchase price.
Koutsoukis cautions that there is execution risk typical with large mining projects such as the one envisioned for Dixie. This might include issues with contracting, logistics and procurement, resulting in capital cost overruns and timing delays.
Positively affecting Kinross’s credit, however, the acquisition provides a substantial development opportunity to sustain its longer-term production profile.
Further, the Dixie project is located in Canada, a tier 1 mining jurisdiction, which, if developed, would reduce Kinross’ proportional exposure to higher-risk jurisdictions.
“We expect that if Kinross were to develop Dixie, it would maintain its historically conservative financial policies,” said Koutsoukis.
In the wake of the acquisition announcement on December 8, Kinross shares slumped 11%, bringing its 30-day share price down by more than 23% to C$6.68 apiece. Kinross has a market capitalization of $5 billion (C$6.4 billion).
Conversely, Great Bear shares are up more than 30% at C$28.47, capitalizing it at $1.3 billion (C$1.65 billion).
