Kinross Gold Corp.’s deal to sell half of its stake in the Cerro Casale deposit to Barrick Gold Corp. for US$475-million provides a valuation boost for Kinross shares. The agreement will give Barrick 75% of the Chilean copper-gold project, while Kinross’ stake will be reduced to 25%.
“This is a great result for Kinross as it attains a very reasonable price on 25% and the residual stake of 25% is right-sized for Kinross,” said Canaccord Adams analyst Steven Butler.
He noted that the consideration paid by Barrick is considerably higher than the $773-million it paid for Arizona Star’s 50% share of the project in 2007. This is considered a reflection of today’s higher gold and copper price environment.
The sale has raised the valuation Canaccord Adams has on the asset from US$400-million to US$795-million. It also had Mr. Butler hiking his price target on Kinross shares from US$27 to US$27.75.
Wellington West Capital Markets analyst Paolo Lostritto previously valued 50% of the project at US$899-million.
Accompanying the transaction were details of an updated feasibility study. It showed that capital costs for the project have escalated from Wellington’s estimate of US$3.6-billion to US$4.2-billion. However, Mr. Lostritto said the Barrick transaction dampens the negative higher capital costs associated with this project.
“The announced partial divestiture of Cerro Casale has monetized some value and helped diversify future development risk,” he told clients, reiterating a target price of $22 on Kinross shares.
Meanwhile, RBC Capital Markets analyst Stephen D. Walker downgraded Kinross from Outperform to Sector Perform and trimmed his price target from US$25 to US$21.
This reflects the analyst’s projected decline in cash flow per share for both 2010 and 2011 compared to 2009, along with a net asset value decline from US$15.50 per share to US$11.75.
“While Kinross has a number of high quality development projects that should ultimately create shareholder value, the near-term share price catalysts are limited,” Mr. Walker said in a note.
He expects Kinross shares to trade in the US$17 to US$21 range for the next 12 months and would be a buyer at the low end.