Kinross makes move on Ecuador
ANDY HOFFMAN







In a nervy bid to secure one of the world's largest untapped gold deposits, Kinross Gold Corp. is leaping into politically risky Ecuador with a $1.2-billion offer for Aurelian Resources Inc.


The proposed all-stock deal amounts to an audacious bet that the South American country will reverse course and embrace foreign investment in its fledgling mining industry.


At the same time, experts believe the senior gold producer's takeover bid for the development company could spur a new era of consolidation in the junior mining sector, which has languished amid dismal credit conditions despite record commodity prices.


"In our business, you go where the gold is," Kinross chief executive officer Tye Burt said yesterday in an interview.


If successful, the friendly deal will give Kinross control of what many consider the gold discovery of the decade.


Aurelian's Fruta del Norte (FDN) deposit is believed to contain more than 13 million ounces of gold as well as 22 million ounces of silver.


Yet the politics of Ecuador and its left-leaning president Rafael Correa has mired the project in uncertainty.


The country halted all mining and exploration in April as it set to work drafting a new mining code, leaving the industry to speculate on what conditions, taxes and royalties will be imposed on foreign mining firms.


Even without clear direction on the terms of Ecuador's new mining law or when it might be implemented, Kinross believes the situation in Ecuador will improve.


"We're the first major gold mining company to look at going into Ecuador in some size," Mr. Burt said.


"Sure, it may be a little early on the political side, but it's also an attractive opportunity and the timing was right for the deal."


For Aurelian shareholders, the takeover offer is a bittersweet denouement to what has been a tumultuous ride. Offering 0.317 Kinross shares and 0.1429 of a Kinross warrant for each Aurelian share, Kinross said the bid values the Toronto-based junior at a 63-per-cent premium, or $8.20 a share, based on the average share price of the last 20 days.


Aurelian shares changed hands for more than $10 each in November, but lost more than half their value in April on Ecuador's surprise decision to temporarily ban mining and revoke hundreds of mining concessions.


"We've been much higher, but the situation in Ecuador changed in recent months. We have to live with that new reality," Aurelian president and CEO Patrick Anderson said in an interview.


Mr. Anderson co-discovered Fruta del Norte with fellow geologist Keith Barron in 2001. The company's board has accepted the Kinross offer.


"We think it's the right deal. This mitigates our shareholders' risks while we still get an opportunity to participate in the upside of the FDN project, other potential discoveries on the concession, and Kinross's whole portfolio," Mr. Anderson said.


The proposed deal sent Kinross shares skidding lower by more than 10 per cent yesterday, as investors fretted about dilution and increased political risk.


With three new mines starting up this year, including the Kupol mine in Russia, Kinross boasts impressive short-term growth prospects but a declining production profile after 2012.


"The market could take a dim view of this transaction, given that the company is layering political risk (Ecuador) on top of already existing political risk (Russia)," TD Newcrest analyst Greg Barnes wrote in a report.


The analyst cited Toronto's Barrick Gold Corp. and Denver's Newmont Mining Corp. as possible rival bidders. Amid a dearth of large gold discoveries, major gold miners have struggled to increase production.


Kinross has a right to match rival bids and is entitled to a $42-million break fee if Aurelian accepts another offer. Kinross is also buying $71-million worth of Aurelian shares in a private placement that will proceed, regardless of whether the proposed takeover closes.


"The risk that there is another bid is quite a real one. You look at the break fee and the private placement and it certainly looks like Kinross is trying to protect themselves from a competing bid," said Charles Oliver, a portfolio manager at Sprott Asset Management, which owns about 10 million Aurelian shares.


The fund manager is hoping the bid signals better times for the struggling junior mining sector.


"The market may not be willing to buy the junior names but at some point in time the big-cap guys are going to start buying. You're starting to see more of it," Mr. Oliver said.


Mr. Burt acknowledged that much of the junior mining sector is currently trading at attractive share-price valuations that could spur a series of takeover bids from large producers.


"We're happy to lead the parade," he said.


KINROSS GOLD (K)


Close: $18.70 down $2.14


AURELIAN RESOURCES (ARU)


Close: $6.31 up $1.86