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The intense competition for the very early-stage Great Bear, which has no proven gold reserves in the Dixie Project, shows how rare large gold finds are taking place around the world.handout
Five major mining companies are engaged in an intense bidding war for Red Lake exploration company Great Bear Resources Ltd, with Kinross Gold Corp finally emerging the winner last week.
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Canadian heavyweights Barrick Gold Corp and Agnico Eagle Mines Ltd, as well as Australia’s Evolution Mining Ltd and Newcrest Mining Ltd, were given the opportunity to bid on Great Bear, three sources familiar with the talks said. Parties were given access to confidential data on the Great Bear, site visits were made at Red Lake in Northwestern Ontario, and nearly all formal proposals were made.
The sources have not been identified because they were not authorized to speak publicly on the matter. Kinross, Barrick, Agnico and Evolution declined to comment. Newcrest did not respond to a request for a statement.
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“I can’t really comment on the internal details of the Kinross transaction, other than to confirm that it was multi-party,” Great Bear chief executive Chris Taylor wrote in an e-mail to The Granthshala.
The intense competition for the very early-stage Great Bear, which has no proven gold reserves in the Dixie Project, shows how rare large gold finds are being discovered around the world, and the biggest mining companies are going to secure them. Huh.
Kinross, Canada’s second-largest gold miner by production, announced on December 8 that it had entered into a friendly agreement with Great Bear to acquire the firm for $1.8 billion in cash and stock, which would be its There is a premium of 26.5 percent over the market value. The proposed purchase of Great Bear is one of the most expensive ever for an exploration company.
After the deal was announced, Kinross shares fell more than 10 percent, with some investors concerned the company is paying more for a junior explorer with a deposit that could be disappointing.
History has shown that, especially in Red Lake, which is known for its uncertain geology, buying early-stage companies can be risky. In 2008, Goldcorp Inc., a former high-flyer in the global gold industry, purchased Gold Eagle Mines Ltd for $1.5 billion. Like the Great Bear, the Gold Eagle had promising drill results, but no reserves. The acquisition ended in disaster for Goldcorp, which was unable to prove that the land contained large mineable reserves.
Kinross is keen to point out that, unlike Goldcorp, which “bought out of a panic” Gold Eagle, it took time, and did its homework on a property that’s already extensively drilled.
The Great Bear, which was co-founded by structural geologists Chris Taylor and Bob Singh, has drilled nearly 800 holes in Dixie and identified five separate gold finds. Preliminary work suggests that a large body of gold may be widely dispersed and uniform.
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The geology appears to have more in common with Barrick’s directly-to-mine Hemlow operation in Northwestern Ontario than with Red Lake’s generally isolated scattered gold deposits. Kinross spent three years working hard at Great Bear, and looked at hundreds of other potential acquisition targets before zeroing in on the growth company.
“We have enough data here to make a very convincing call,” Kinross CEO Paul Rawlinson said in an interview with The Granthshala last week.
RBC Dominion Securities Inc. analyst Josh Wolfson said Kinross’s motivation to go all-in on Great Bear was also driven by fear of missing out (FOMO). Kinross officials insisted that there was good reason to act now, as opposed to wait a few years until the geology of the Great Bear was confirmed. Kinross felt that Great Bear’s valuation was likely to climb so high, it would be out of reach, and that larger competitors such as Barrick would have the upper hand with a US$5 billion cash war chest.
“Kinross has discussed in their meetings that if this asset was more advanced, and better defined, it would not be something they would have been able to compete on,” Mr. Wolfson said.
Some analysts have speculated that Barrick, or one of the other bidders, may still come out with a higher takeover offer for Great Bears. However, that thesis also has its fair share of skeptics.
“No one will come out on top. Nobody,” said Pierre Lassonde, co-founder and president emeritus with Franco Nevada Corp., the world’s largest mining royalty company.
Barrick’s CEO Mark Bristow has long preached the gospel of the merits of acquisitions without a share price premium and has slammed the industry for its past mistakes of paying rich premiums in M&A. Barrick, who came on top of Kinross’s already advanced bid, will be in a one-off on that strategy, Mr Lasonde said.
Shares of Great Bear have recently traded well below the acquisition price, suggesting that most investors believe there will be no further bids.
Early estimates of Kinross’ return on investment if it lands the Great Bear are heavily mixed. Kinross has formulated a vision that envisages the introduction of a large open pit in Dixie, and eventually a transition to high-grade underground mining.
Tanya Jakusconek with Scotia Capital Inc. said in a report to clients that it would take Kinross five to eight years to break even on acquisitions, and that she sees “single digit” returns on investment based on open pit mining.
Meanwhile, RBC’s Mr. Wolfson sees Kinross finally mining nine million ounces of gold from an open pit and underground. He has predicted returns of 6 to 8 per cent.
“It’s too low,” said Hai van Le, managing director of Sattva Global Advisors in Vancouver. At least the industry would like to see an expected return of 20 per cent. In this way, contingencies are covered as well as inflation, which has caused many large Canadian mine constructions to exceed budget in recent years.
Kinross has long traded at a discount to peers such as Agnico, due to heavy exposure to riskier markets including Russia and West Africa. But the Great Bears acquisition could change all that. Mr Lassonde predicts that not only will the acquisition work, it will lead to a wholesale “re-rating” of Kinross’s shares to elite status.
Investors will have to wait years to find out whether Mr. Lassonde’s prediction comes true. Kinross last week pushed the deadline for the first resource estimate on Dixie by nearly a year. And the open pit “starter mine,” if it becomes one, will not be in operation until 2029, management predicts.
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