More Gold Company Mergers Ahead after Kinross Deal

TORONTO (Reuters) – A $7.1 billion bid for Red Back Mining (TSX:RBI), a Canadian-based company active in Africa, has a stable of other mid-tiered gold miners dreaming of similar takeover approaches from larger rivals.

Kinross Gold Corp (TSX:K) made the all-stock offer on August 2, saying Red Back’s two mines would help propel its annual output to about 2.6 million ounces by the end of 2010 and about 3.9 million ounces by 2015, making it a comfortable top-tier gold producer.

The expected output acquired in the deal, though well below the nearly 7.5 million ounces a year produced by No.1 Barrick Gold (ABX.TO), would put Kinross closer to rivals like Newmont Mining (NEM.N), with more than 5 million ounces, and Goldcorp Inc (G.TO), at around 2.4 million ounces.

“Certainly the others have to be asking themselves: ‘Have I constructed the list of companies that I want? Have I done sufficient due diligence and am I ready to go out and make a purchase here?’” said Adam Graf, an analyst with Dahlman Rose in New York. “And: ‘If I wait any longer are the prices going to be bid up, or am I going to lose my opportunity?’”

Candidates who might look for growth through acquisition could include companies like Barrick, Goldcorp, Agnico Eagle (AEM.TO) or Yamana Gold (YRI.TO), to name a handful.

The list of companies who might be attractive takeover targets is even longer, including Guyana Goldfields (GUY.TO), Exeter (XRC.TO), International Tower Hill (ITH.TO), Vista Gold Corp (VGZ.A), Osisko (OSK.TO), Detour (DGC.TO), Seabridge (SEA.TO) and NovaGold (NG.TO). All of them have big projects that might fit better in the portfolios of larger companies.

“I’m waiting for the big flurry, I still don’t think we’ve seen it,” said Graf.

Investment bankers at Canada’s BMO Capital Markets, a unit of the Bank of Montreal (BMO.TO) and which leads league tables in gold mining deals this year, say a lot of it comes down to timing.

The Kinross deal comes at a moment in the production cycle where new producers are emerging after years of drilling, and larger companies need to replace dwindling reserves.

It also comes at a time when the price of gold is at all-time highs, and the costs of building mines from scratch has skyrocketed along with the high prices of commodities and even labor.

“If you think of the build-versus-buy decision that executives typically face before they do an M&A … the impetus and the reason to buy has shifted to buy-versus-build,” said Andre Hidi, who heads the global mergers and acquisitions group at BMO, the lead adviser to Kinross in the Red Back deal.

BMO could not comment directly on the deal, but Egizio Bianchini, an investment banker and the head of global metals and mining investment for the firm, said chief executives at gold companies have been confident of the strength of the market for some time, even before analysts became comfortable with today’s prices.

“We’re at a stage now where there’s a very robust number of companies that are looking to put mines into production, probably about as robust a roster as we’ve had in a long time,” said Bianchini.

“It’s an environment that right now, for most companies, is conducive to M&A activity,” he said.

The Kinross deal was the latest of at least three major deals in gold mining so far this year.

Around the time Red Back shareholders are voting on Kinross’ offer, Australia’s Newcrest Mining (NCM.AX) will complete an $8 billion acquisition of local rival Lihir Gold (LGL.AX) to create the world’s No. 4 listed gold miner.

At least four other top gold companies also looked at the Lihir books, sources have said, including AngloGold Ashanti (ANGJ.J), Barrick and Newmont.

For Peter Marrone, chief executive at Yamana Gold, more consolidation will likely occur as stock valuations at larger companies improve.

“What we’ve seen over the past year is a significant share price appreciation of the smaller companies, the juniors and development stage companies, but not yet for the more senior companies,” he told Reuters. “As that paradigm shifts, and it will shift, I believe there will be a buying opportunity and consolidation in the industry.”

The sweet spot?

The main players say keep your eye out for takeovers in the $500 million to $2.5 billion range.

(Editing by Frank McGurty)