TORONTO (miningweekly.com) – Kinross Gold CEO Tye Burt insisted on Tuesday that he and his team have a better idea than the market of what the gold-miner is getting with its acquisition of Red Back Mining, as some eyebrows were raised over the dilutive nature of the deal.

Kinross announced late on Monday that it will buy Red Back, which is based in Vancouver but owns two gold mines in West Africa, for about $7,1-billion in shares and warrants.

The smaller company has been a market favourite over the last year or so, as the firm continued to announce impressive exploration-driven growth at its two operations located in the fast-growing West Africa region.

The company announced a 64% increase in reserves at its Tasiast mine this year, to five-million ounces, and has said it expects to see further growth from both its mines.

But all the attention helped push the firm's share price up, and the announcement in May that Kinross had taken a stake of almost 10% in a private placement helped the stock even further.

Although Red Back shares have more than doubled in the last year, Kinross is still paying a premium of about 21% to Red Back's 20-day weighted average price, as well as the closing price on July 30.

But Burt emphasised on a conference call that the company has been doing intensive, on-the-ground due diligence work, and that all signs point to significant growth potential at Red Back's two mines.

He insisted that the deal is, in fact, value accretive.

“We have had six months of boots on the ground, carrying out our due diligence on Red Back assets, in particular, the Tasiast mine in Mauritania,” Burt told reporters on Tuesday morning.

“We have developed an understanding of the assets that we believe is much more comprehensive than the Street has.”

He told analysts earlier that Kinross would value Red Back at about $5-billion, based only on the current cash flow, cash reserves and resources and reserves that have already been declared at an NI 43-101 level.

The balance of the acquisition price is what Burt called the 'trust me' component: “which we are quite confident we can deliver on".

EXPANSION STUDY BY MID-2011

The merged company will have ten mines and four development projects, operating in eight countries.

Kinross expects to produce 2,2-million gold-equivalent ounces this year, while Red Back has forecast output of between 445 000 oz and 465 000 oz in 2010.

Looking ahead, based on analyst consensus estimates, the combined company would produce about 3,9-million ounces of gold by 2015, but Burt said on a conference call on Tuesday morning that he believes those numbers will be beaten.

Kinross is confident there is a lot more growth to come from the Red Back mines, especially Tasiast, but will have to wait until it has NI 43-101 numbers to back that up before making any projections, he said.

“We think the trajectory on those drilling results will continue, and we think the orebody will get a lot bigger at Tasiast, and much bigger at Chirano as well.”

Kinross plans to immediately start work on the potential to scale Tasiast up to a higher production level, and should have a prefeasibility study ready by mid-2011, Burt said.

He was reluctant to go into details on the potential scale of the expansion, but said it would likely involve the combination of heap-leach and milling and processing operations.

SHAREHOLDER APPROVAL

The deal requires the approval of both companies' shareholders, and there were some questions on Tuesday regarding whether Burt will get the votes he needs from his own investors.

However, he pointed out in a television interview on BNN that existing Kinross shareholders actually own almost 60% of Red Back.

“There is huge overlap in our shares. So we think that bodes well for both votes,” Burt said.

Assuming the deal closes, Kinross will be the fourth-biggest gold producer in the world by market capitalisation, after Barrick Gold, Goldcorp and Newmont Mining.

Shareholders from both Red Back and Kinross are expected to vote on the transaction in September, and the deal is expected to close by the end of that month, Burt said.

The deal has the backing of both boards, and Red Back shareholders will receive 1,778 Kinross common shares, plus 0,110 of a Kinross common share purchase warrant for each Red Back share held.

If the acquisition is completed, Red Back shareholders will own about 37% of the enlarged company.

The acquisition agreement provides for break fees of C$25- million, in the case of Kinross, and C$217-million, in the case of Red Back, which may deter any potential rival bidders.

Kinross owns mines in the US, Russia, Brazil and Chile.

Shares in the Toronto-based company fell 6,4% on Tuesday, to C$15,79 apiece by 16:10 on the TSX.

Red Back Mining rose 5,5%, to C$27,45 a share.

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