Tuesday, August 3, 2010

Kinross purchases Red Back Mining Inc.

 Kinross Gold Corp. on Monday said it agreed to take over Red Back Mining Inc. in an equity deal that values Red Back Mining at $7.1 billion. The merger requires approval from at least two-thirds of votes cast at a special Red Back Mining investor meeting slated for September. The deal underscores the lasting lure of commodities, particularly gold, for investors still feeling skittish about the health of the global economy.

For proof, look to China. The country’s central bank said this week that it will extend financial support to gold producers, including backing foreign acquisitions, Bloomberg reported. Closer to home, investor John Paulson also is scooping up big positions in gold, and his Paulson & Co. holds about a 4.7% stake in Kinross, according to LionShares.

For Toronto-based Kinross, the attraction is Red Back’s two major gold mining projects in West Africa, the Chirano mine in Ghana and the Tasiast mine in Mauritania, along with exploration efforts in those countries.

Investors don’t seem as gold-obsessed, with Kinross shares down about 4.7% on the Big Board as analysts are warning about the hefty pricetag. Red Back shares, already trading near all time highs, rose 7.9% to C$28.07, still under the C$30.50 value of the Kinross bid.

Bank of America Merrill Lynch estimates the deal effectively costs $1,303 for each gold equivalent ounce, while August contracts for gold on the New York Mercantile Exchange are changing hands are around 1,185.80 a troy ounce. The price of gold is up about 24% in the last year, though an ETF tracking the stocks of gold producers [[GDX]] is up around 5% so far this year.

Meanwhile, there are new headlines every day about climbing prices for other commodities. The Wall Street Journal reported this week that our bacon fix is getting more expensive because of higher U.S. prices for pork bellies. Hot weather in Russia and crop problems elsewhere also are sparking dramatic price increases for wheat.

Gold historically is a place where people stash money when times are tough. Gold prices, which peaked earlier this summer at a record $1,265 an ounce, have proven susceptible to investor moods. When equity markets are more stable, gold tends to sink as more money flows into growth assets.

Monday was an odd time to announce a gold deal, as equity indexes rallied. But with continued fears of a stagnating economy, the gold rush looks to last awhile longer.

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