Hi Buddy and all: here is a report from canacord. it repeats some info, but also has some additional stuff:
* Kinross Gold (K : TSE : $5.20 : Issued 127.0M ) / Amax Gold (AU :
NYSE : US$2.15 : Issued 114.8M)
Kinross Gold and Amax Gold announced that they entered into a merger
agreement, which we generally view as a mildly positive long-term step
forward for both companies. It should provide a solid platform from
which the new Kinross can grow. However, the merger does not come
without substantial costs, which causes us to maintain our REDUCE
recommendation on the shares of both companies, and on the combined
entity if this agreement is finalized as expected before the end of
June. In order to understand why we have a reduce recommendation on
the merged company, we will provide our rational as to why we have a
reduce recommendation on each individual company, and our analysis of
the merged company's production, costs, gold price realizations, cash
flow and earnings. However, before we proceed, we will briefly detail
the salient points of the agreement, as follows:
* Amax shareholders will receive 0.8 Kinross share for each Amax share.
Amax has 114.8M common shares outstanding, which should result in the
issuance of 91.84M K shares.
* Cyprus Amax (CYM-N), which owns 58.8% of Amax Gold and would own 31%
of the merged company if this merger occurs, will receive 35M K shares
for US$135M. These proceeds will be used to offset Amax Gold's
US$73.3M demand loan from Cyprus Amax, and for the repayment of
additional debt. Cyprus Amax also receives approximately 10M 3-year
warrants to purchase common shares of Kinross at a price equal to 150%
of Kinross common shares on the closing of the merger. This has the
potential of increasing Cyprus Amax's interest in Kinross by about
3.4%, but Cyprus Amax has entered into a 5-year standstill agreement
with Kinross.
* Separately, but necessary for the health of the balance sheet of the
new merged company, Kinross entered into a "bought deal" financing
arrangement with an underwriting syndicate led by CIBC Wood Gundy
Securities Inc. for 34.65M K subscription rights for C$5.05 per
subscription right, each representing the right to receive one common
share from treasury upon closing of the merger. Kinross has granted
an over-allotment option until the closing date of the equity offering
to purchase an additional 10% of the issued subscription rights
representing common shares. It appears as if this over-allotment will
likely be subscribed.
Upon conclusion of the merger, we estimate that in 1998 Kinross will
have the following:
* 1.2M ozs. of gold production compared with 0.5M ozs. prior to the
merger.
* Total cash costs of about US$210/oz. compared with about US$240/oz.
if the merger does not happen.
* Total production costs of about US$315/oz. compared with about
US$303/oz. if the merger does not happen.
* All-in costs of about US$345/oz. compared with about US$342/oz. if
the merger does not happen.
* 10.1M ozs. of reserves compared with 2.9M ozs. prior to the merger.
* About 27M ozs. of reserves and resources compared with 12.3M gold
equiv. ozs. prior to the merger.
* About 291.9M common shares outstanding compared with 126.9M prior to
the merger.
* About US$200M in long-term debt compared with US$46.9M prior to the
merger.
* About US$135M in cash compared with US$205M prior to the merger.
Note that the increase in debt and shares outstanding were necessary
to complete this merger agreement since Amax had about US$500M in debt
consisting of US$345.7M in long-term debt, US$73.3M on a demand loan
by Cyprus Amax as discussed above, and US$81.4M in current maturities
on long-term debt. While Kinross's balance sheet would remain healthy
after the conclusion of the agreement, albeit somewhat weaker than it
would be if the merger does not happen, we view the huge increase in K
shares outstanding as somewhat onerous. In Kinross's defense,
however, it has much better potential for long-term growth with three
core mines than it did with just one.
A Review Of Kinross Gold
A review of the pre-merged Kinross and Amax provide insights on why we
have our REDUCE ratings on the shares of both companies individually,
and as a merged Company as well. We view the pre-merged Kinross as
having two key assets-the Hoyle Pond mine in Timmins, Ontario, and a
strong balance sheet with US$190.3M in cash and just US$46.9M in
convertible debt as of the end of 1997. Many of Kinross's other mines
and assets have had weak performances, which is exemplified by the
US$90.3M of pre-tax writedowns incurred in 1997. The majority of
these writedowns were taken against the following assets:
* US$35.7M against the carrying value of the Macassa mine in Kirkland
Lake, Ontario following a series of rockbursts on April 12, 1997.
This created uncertainty about the viability of mining the lower
levels of this underground mine.
* US$22.5M against the carrying value of the Goldbanks project in
Nevada, which had an average proven and probable reserve grade of 0.65
g/t, a possible reserve grade of just 0.47 g/t, and a drill indicated
resource grade of 0.94 g/t at the end of 1996.
* US$13.5M against the carrying value of the QR mine in British
Columbia, which is set to close in March 1998 because of a pit wall
failure, a small amount of remaining gold mineralization, high costs
and low gold prices.
Moreover, we are concerned that Kinross may incur an additional
writedown at DeLamar if gold does not recover. This mine currently
has a carrying value of about US$23M. Moreover, if the merger
proceeds as planned, the new Kinross may have additional writedowns
because of high total production costs. A review of Amax Gold should
provide a clear indication of why we have this view.
A Review Of Amax Gold
Amax Gold has two core mines, and three other mines, two of which are
nearing the depletion of their reserves. The two core mines are Fort
Knox in Alaska and 50%-owned Kubaka in Russia, which commenced
commercial production in 1997. Given their very low total cash costs
in 1997 of US$170/oz. and US$175/oz., respectively, and their high
respective annual production rates of 380,000 ozs. and 230,000 ozs.
expected in 1998, these mines should be strong cornerstones of any
gold mining company.
However, their non-cash charges are very large, which has resulted in
their total production costs being high. For example, Fort Knox's
total production costs averaged US$342/oz. in 1997, fully double its
total cash costs, while Kubaka's total production costs averaged
US$275/oz., US$100/oz. above its total cash costs. Amax's other asset
that should continue to produce beyond 1998 is its 50%-owned Refugio
mine in Chile, which has had certain mechanical start-up difficulties
and weather related (El Nino) problems since it began commercial
production in 1996. As such, while its 1997 production of 73,543
equity ozs. and total cash costs and total production costs of
US$341/oz. and US$438/oz., respectively, have suffered, the results
should not be viewed as likely to continue ahead. Rather, we believe
this mine should produce about 100,000 equity ozs. in 1998 at total
cash costs and total production costs of about US$260/oz. and
US$360/oz., respectively. The other two mines, Hayden Hill and
Guanaco, which are scheduled to close in 1998, should produce about
25,000 ozs. each. There is very little carrying value remaining on
either of these mines.
A review of the remaining Amax mines-Fort Knox, Kubaka, and Refugio,
suggest that while their average total cash costs should be relatively
low, their total production costs are likely to remain high-unless
reserves are substantially increased, or the carrying value on these
assets is reduced. Therein is the additional risk of owning these
mines. The carrying value of Fort Knox is US$497M, on Kubaka it is
US$120M, and on Refugio it is US$87M.
Kinross and Amax have estimated that their 1998 gold output should be
about 1.2M ozs. at total cash costs of US$210/oz. We agree with these
estimates. However, total production costs should be about
US$315/oz., while all-in costs, which include G&A, exploration, and
interest expenses, should be about US$345/oz. If gold prices average
US$300/oz., the merged company should realize about US$323/oz. on its
gold sales, and if it averages US$325/oz., it should realize US$344/oz.
Given these estimates we believe Kinross will likely be cash flow
positive, but earnings negative from operations in 1998.
Larry Strauss (416) 869-3092
I am hoping that some of the TA experts out there might like to comment...
thanks, joe |
