ST. LOUIS (MineFund.com) -- In just a few days, investors in Red Back [TSX:RBI] and Kinross [TSX:K | NYSE:KGC] will get the chance to pore over the raft of “fairness” opinions that came to the same conclusion that all such fairness opinions do – “it’s a great deal!”.

Kinross and Red back did a good job mopping up most of the potential dissent.

BMO Capital Markets, GMP Securities, and N M Rothschild & Sons are the direct advisors to Kinross. The Board added Morgan Stanley Canada for good measure as an “independent” voice. Red Back put its arms around Scotia Capital and CIBC World Markets. Altogether it ensures that the most important broker-dealer channels for mining capital are harmonizing from the same favorable hymn sheet.

What a pity that Kinross and Red Back didn’t take Warren Buffet’s recent advice for companies involved in M&A activity to commission outcome-based contrary opinions:

“When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: ‘Don’t ask the barber whether you need a haircut.’”

Now it remains to be seen how the competing firms that didn’t get into the fee bonanza will respond to the detail of the fairness opinions. There are certainly some early signs of divergence.

J.P. Morgan’s John Bridges only sees accretion if Red Back’s Tasiast deposit delivers 20 million reserve ounces. Our information suggests 10 million is more likely, but exploration is ongoing so it could well be more open-ended. However, remember that Randgold has had a long, hard and detailed reconnaissance around Red Back when it was much cheaper. Yet Randgold still preferred to chase down Moto’s mighty Kibali project even though it was in the D.R. Congo.

For further perspective, consider the sheer statistical challenge of 20 million ounces in a single deposit. At this time there are only 10 known deposits in the world with more than 20 million ounces of reserves. Tasiast presently ranks 64thin the world, so it has a long way to go to reach the rarefied levels.

The harshest criticism so far has come from Christopher Ecclestone of Hallgarten & Co. He slammed the proposed merger for the weak paper Kinross is offering and the expensive stock it is buying backed by assets Ecclestone described as “less than unique.”

Ecclestone’s research echoes more the buy side view, and we expect any sell-side criticism to be more diplomatic.

The two big Canadian institutions that missed out on the deal, TD Securities and National Bank Financial, have also looked askance at the deal. Analysts affiliated with those banks have warned of the dilution Kinross stockholders will suffer. National’s Tanya Jakusconek puts the net asset value erosion at some 15%.

The primary damage will come from Kinross shareholders having to give up more than a third of their company to Red Back after already dishing out a hefty amount of cash for some premium-priced stock in the latter.

Yet even Red Back shareholders might be starting to feel a little queasy. Red Back shares have only gained 9% since the transaction despite a $15/oz jump in the gold price. Yes, that discounts the gains before the deal was announced, but the market’s tepid response to date is hardly a sign of confidence.

Further, the mild sustained bid premium seems to indicate that there is no prospect of a richer offer. Anyway, Red Back management’s quick acceptance of the Kinross deal killed those prospects from the start and the tea leaves indicate that the original private placement of 24 million Red Back shares involved an unstated quid pro quo. Part of that was clearly that the cash portion of the coming bid was being “pre-paid”. But that may be a miscalculation on the part of Kinross since it was just recycling its cash. That is not a way to win unequivocal shareholder support.

Red Back shareholders cannot avoid needing to flip or swap a large portion of the Kinross stock they receive in exchange simply because of the valuation disparities and concomitant need for diversification. Similarly, Red Back and Kinross could not be more different in their corporate cultures; the Kinross culture will be imposed.

The risk is how to time such selling given that so much Kinross paper is likely to come on to the market in the wake of the conclusion of the deal; presuming it it goes through. The gold price is the key unknown factor, but the reality is that Kinross has shown diminishing sensitivity to the gold price. The situation has become worse since the deal was announced. It remains to be seen whether Kinross can rebound except over the long-term.

The key “recovery” metric to watch is the total bid value divided by the gold price. The ratio has settled around 5.5x, down from nearly 6x on the day the transaction was announced (see chart set). It’s not a reassuring sign thata rising gold price was insufficient to neutralize the loss of value in Kinross stock.

Kinross’ valuation disparity is stark compared with its peers. Although it ranks 6th in the world by market capitalization and production, and 8th by gold reserves, it ranks 45th by measure of its Implied Reserve Value (IRV). Indeed, its IRV is less than half the global average as it trades more like a discounted South African gold stock than a North American major.

Kinross shareholders are also facing the reality that they are buying a company with half the gold reserves per share. Already suffering a discount on their scrip, they are now faced with seeing gold-per-share declining from the current 2.18 grams to 1.49 grams under the proposed merged entity. That’s a lot of ground to make up on top of a stock price that is a long way short of the 52-week high.

Finally, Kinross shareholders also must face the fact that their company management is exceptionally well compensated compared with its peers. CEO Tye Burt was the second highest paid executive in the gold industry in 2009. Overall, the executive team took home more than 6% of Kinross’ entire annual net income – second only to the team at Randgold, but with only a fraction of the management effectiveness.