Toronto-based Kinross Gold Corp. is unloading its Russian mine and exploration assets in a sale that will provide a new test of the reach of western sanctions.
Highland Gold Mining Ltd., one of the largest Russian gold miners, which once counted billionaire oligarch Roman Abramovich as a major shareholder, has agreed to pay US$680 million for the Kinross mine complex that would have accounted for 13 per cent of its 2022 gold production.
The sale price is lower than many analysts’ estimated value, but was greeted warmly by investors: Kinross agreed to put the mine on care and maintenance last month after widespread sanctions against Russia forced many western companies to exit the country.
Kinross shares rose 1.6 per cent to $7.63 on the TSX.
Under the deal, Kinross would receive US$100 million in cash upon closing, but the remaining US$580 million would be paid in six separate annual payments between now and 2027. The deal requires final approval from the Russian government.
“It is unclear how a sale would work and how funds would be transferred to Kinross given the sanctions currently in place,” Tariq Fahad, an analyst at Credit Suisse, wrote on Tuesday morning. “That said, any consideration for Kinross’s Russian assets would present upside as investors are currently assigning minimal or no value for the Russian assets.”
Fahad pegged the total value of the mines at US$893 million, or about 12 per cent of the company’s net asset value.
He added the “the silver lining to the messy exit from Russia” is that Kinross’s portfolio is now skewed to the Americas, which could result in a “better valuation longer-term” because it is considered a less risky jurisdiction that sometimes results in a higher trading multiple.
Kinross would go from producing 58 per cent of its portfolio in the Americas to 66 per cent, with the remainder of its gold production coming from West Africa — if the sale goes through as planned this year. No closing date was given.
Kinross has been operating in Russia for 25 years, and Kupol has been its star gold mine: In 2021, it produced 481,108 ounces of gold at a cost of sales of US$637 per ounce.
As of late last year, the company reported that it had identified 1,185,000 ounces in proven and probable reserves at its Russian mine site, located in the far east of the country. Still, its 2022 production was slated to decline by 27 per cent to 350,000 ounces and costs of sales were expected to rise 36.5 per cent to US$870 per ounce.
Louie Diaz, a Kinross spokesman, downplayed the importance of the mine in the company’s portfolio, writing via email that the Kupol mine was slated to reach its end of life in 2025.
“It is now mining narrower veins and lower grades,” Diaz wrote.
Anita Soni, an analyst at CIBC, wrote on Monday that the sale of the Russian assets will have a mixed impact on Kinross’s financial position: free cash flow is expected to decline by 35 per cent in 2022 to US$469 million, but at the same time the company may be off the hook for tens of millions of dollars in expected capital expenditures in 2023.
Meanwhile, the company is facing a high debt load after completing a $1.8-billion acquisition of Great Bear Resources, a prospective company exploring for gold in Ontario that remains years away from production.
Given its expected net debt of US$2.5 billion, Soni wrote, “we believe that any free cash flow generated will first be allocated to the reduction of debt.”
Kinross said Highland would pay US$400 million cash in total for the Kupol mine and surrounding exploration licenses, including $100 million upon closing.
The remainder would be paid as follows — US$150 million in 2023; US$100 in 2024; and US$50 million in 2025.
Kinross said it also would receive US$280 million cash for its Udinsk project, including US$80 million in 2025, US$100 in 2026, and $100 million in 2027.
It said the deferred payments would be secured by share pledges, financial guarantees and an escrow account.
Russian oligarch Abramovich — who has reportedly been involved in peace talks between Russia and Ukraine, and whose ties to Canada include a 29 per cent stake in EVRAZ plc, the steel and mining company with subsidiary operations in Alberta and Saskatchewan — was once a major shareholder in Highland Gold, the company buying the assets from Kinross.
But in 2020, Abramovich and his business partners sold a 40 per cent stake in Highland to Fortiana Holdings Limited, a Cyprus-registered company of Vladislav Sviblov with interests in zinc and gold projects in Siberia.
Highland operates mines in four regions in Russia, including the Chukotka region where Kinross operates in the far east of the country.
A spokeswoman for Highland wrote via email that Sviblov is now “the only beneficiary” and that the company does not disclose its gold production or offer guidance.
But she said the company plans to make up for the expected decline in production from Kupol in coming years by processing ore from Kekura, one of its mines, located 160 kilometres away.
“There are strong synergies between these two assets,” the Highland spokesperson wrote by email. “Combining the two into one operation will allow us to maintain the level of gold production at Kupol, without any losses at Kekura, for more than 10 years.”
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