Kinross Gold's $7.1-billion (U.S.) move to buy the rest of Red Back Mining is raising some eyebrows, for timing and price.
Kinross is paying a high price, analysts said, which should serve to keep rival bidders at bay, with only Newmont Mining having the heft to step in.
The price Kinross chief executive officer Tye Burt is dangling in his zeal to grab Red Backs' African prospects is so high, however, analysts are beginning to raise the prospect that Kinross shareholders may not approve the deal.
Kinross is looking at dilution of net asset value that's estimated to be in the 10-15 per cent rang given the difference in valuation between the companies. Some of that was priced in as a deal was anticipated after Kinross took a toehold in May, but shares of Kinross are getting whacked again Tuesday morning.
"We view the odds of a superior offer as relatively low. However, there is a possibility that the transaction may not be approved by Kinross shareholders given the dilutive nature of the transaction," Canaccord Genuity analyst Steve Butler said in his note on the deal.
Greg Barnes of TD Securities echoed that, though he said he expected Kinross can carry the day.
"The question that overhangs the transaction now is whether or not Kinross shareholders will approve it - a majority vote by Kinross shareholders is required - our guess is that at the end of the day, they are likely to," Mr. Barnes said.
National Bank Financial's Tanya Jakusconek similarly raised the dilution as an issue.
"We are surprised Kinross decided to act now given its current valuation and given the amount of dilution Kinross would experience in the transaction," which she estimated to be 15 per cent on a net asset value basis.
"As far as other players that may come in and make an offer - we believe that Newmont would be the only other company which could make an offer. We calculate that if it were to make an offer of the same amount (excluding break fee) it would be about 5% dilutive to their NAV (currently $31.50/sh)."
In some respects, Kinross set itself up for this problem by taking its toehold position in Red Back in May. Kinross got 24 million shares of Red Back in a private placement, and Canaccord Genuity's Mr. Butler points out that in the wake of that transaction Kinross has underperformed the S&P/TSX Global Gold Index by 9.4% while Red Back has outperformed the index by 8.4%.
That opened a yawning valuation gap that made the dilution in the deal announced Tuesday more pronounced. A worthy tradeoff given the deal security the private placement gives Kinross? Only fast growth in reserves and production from the African mines that Red Back has will make it so, and Mr. Burt will have to sell that to his investor base.
"If the Red Back transaction is approved by both sets of shareholders we believe that the combined company is more attractive, albeit Kinross shareholders will suffer significant near-term dilution," said Mr. Barnes of TD.