The US$1.4 billion acquisition of Nice Bear Sources (TSX: GBR) by Kinross Gold Corp (TSX: Ok; NYSE: KGC) is credit score destructive for Kinross, credit score rankings company Moody’s Traders Service mentioned in a latest credit score word.
VP and senior analyst for Moody’s, Jamie Koutsoukis, views the December 8 announcement as credit score destructive as a result of it can improve Kinross’s leverage, scale back accessible liquidity, and introduce potential mission execution threat.
“Kinross’ rankings, nevertheless, stay unchanged as a result of credit score metrics will stay sturdy for the ‘Baa3’ ranking, and the corporate has indicated it can use future money move to repay, drawing on its credit score facility that shall be used to fund a part of the acquisition,” mentioned Koutsoukis.
Beneath the transaction phrases, the upfront fee of about US$1.4 billion shall be payable on the election of Nice Bear shareholders in money and Kinross widespread shares, as much as maximums of 75% money or 40% Kinross shares.
Nice Bear doesn’t have debt on its stability sheet. Kinross mentioned it intends to pay utilizing its money stability and availability below its revolving credit score facility, which mixed have been US$2.1 billion at September 30.
Beneath the utmost money consideration state of affairs, Kinross can be required to pay money of US$1.07 billion for the acquisition. With cash on the stability sheet of $586 million as of September 30, Kinross would improve the debt by $480 million, and professional forma leverage would rise to 1.1x from 0.8x, which could be very sturdy for the ranking.
Accessible liquidity would fall by half (from US$2.1 billion). Nevertheless, at about US$1 billion, it stays sturdy, and at present gold costs, the corporate will generate sturdy free money move (US$356 million for the 12 months that ended September 2021).
In response to Moody’s calculations, below the utmost share consideration state of affairs, Kinross can be required to pay about US$850 million in money. The quantity drawn on the ability can be about US$270 million, with professional forma leverage 1x.
“The Dixie mission at this level is solely a found deposit with a number of deposits on the property. It will possible require no less than 5 to seven years till manufacturing, ought to Kinross proceed with the event. The acquisition won’t contribute money move over the close to to medium time period,” mentioned Koutsoukis.
“The mission requires a scoping stage research be accomplished, adopted by a pre-feasibility and feasibility research earlier than the potential building interval.”
Relying on the dimensions and scope of the mission, if sanctioned, which can decide the associated fee, Kinross shall be required to fund the development along with the acquisition worth.
Koutsoukis cautions that there’s execution threat typical with massive mining initiatives such because the one envisioned for Dixie. This would possibly embrace points with contracting, logistics and procurement, leading to capital value overruns and timing delays.
Positively affecting Kinross’s credit score, nevertheless, the acquisition offers a considerable growth alternative to maintain its longer-term manufacturing profile.
Additional, the Dixie mission is positioned in Canada, a tier 1 mining jurisdiction, which, if developed, would cut back Kinross’ proportional publicity to higher-risk jurisdictions. “We count on that if Kinross have been to develop Dixie, it will keep its traditionally conservative monetary insurance policies,” mentioned Koutsoukis.
Within the wake of the acquisition announcement on December 8, Kinross shares slumped 11%, bringing its 30-day share worth down by greater than 23% to $6.68 apiece. Kinross has a market capitalization of $6.4 billion ($5 billion).
Conversely, Nice Bear shares are up greater than 30% at $28.47, capitalizing it at $1.65 billion (US$1.3 billion).