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 acquisitive nature of Kinross Gold Corporation (KGC) has taken it to the door step of Red Back Mining Incorporated (RBI) which appears to be a very good acquisition in terms of providing a pipeline of mining opportunities for Kinross. As usual with the predator in these situations the stock price of Kinross reflects a fair amount of trepidation in the mood of the investor, than both management teams would have liked to see.
As the chart above clearly depicts the stock price is heading south and note at a time when gold prices are heading north, so whats the problem. The problem is one of perception, in our humble opinion, in that this is an all paper deal whereby Kinross exchanges stock for assets. This type of deal is dilutive in that an enormous number of shares will need to be issued to meet the $7.00 billion dollar plus asking price for Red Back Mining. The market capitalization of Kinross currently stands at $10.68 billion so Kinross is about to almost double its size. If this deal goes through then there will be a period of digestion, or indigestion, as the two companies are amalgamated and the new management team search for economies of scale, etc.
As both management teams set about the task of selling this deal to the investment community we came across this clip on BNN who talked to Richard Clark, CEO, Red Back Mining, about the takeover. Its worth a watch just to see why Red Back wants this deal as oppose to maybe a deal with one of the other majors. However, it didn’t do a lot for us as holders of Kinross stock and we must try and assess how Kinross will perform over the next twelve months. We are expecting gold prices to improve dramatically but the question is:
‘Will Kinross reflect the rally in precious metals or are we in for twelve months or so of consolidation.’
If our cash could be deployed more effectively elsewhere then maybe we ought to reduce our stake in Kinross and put the cash to work in a stock or an options play that might offer better returns over the twelve months ahead of us.
Stay on your toes these are treacherous waters so take care.
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