Toronto-based Kinross Gold Corp. is offloading its Russian mining and exploration assets in a sale that will provide a fresh test of the extent of Western sanctions.
Highland Gold Mining Ltd., one of Russia’s largest gold miners, which once had billionaire oligarch Roman Abramovich as a major shareholder, has agreed to pay US$680 million for the Kinross mining complex that would have accounted for 13 percent of its 2022 gold. production.
The sale price is lower than many analysts’ estimates, but investors warmly welcomed it: Kinross agreed to put the mine on care and maintenance last month after widespread sanctions against Russia forced many Western companies out of the mine. country.
Kinross shares rose 1.6 percent to $7.63 on the TSX.
Under the deal, Kinross would receive $100 million in cash at closing, but the remaining $580 million would be paid in six separate annual installments between now and 2027. The deal requires final approval from the Russian government.
“It is unclear how a sale would work and how the funds would be transferred to Kinross given the sanctions currently in place,” Credit Suisse analyst Tariq Fahad wrote Tuesday morning. “That said, any consideration for Kinross’s Russian assets would present an advantage, as investors currently place little or no value on Russian assets.”
Fahad pegged the total value of the mines at $893 million, or about 12 percent of the company’s net asset value.
He added that “the silver lining of the disorderly exit from Russia” is that Kinross’ portfolio is now skewed toward the Americas, which could result in a “better long-term valuation” because it is seen as a less risky jurisdiction that is sometimes at a higher trading multiple.
Kinross would go from producing 58 percent of its portfolio in the Americas to 66 percent, with the rest 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 selling price of US$637 an ounce.
At the end of last year, the company reported that it had identified 1,185,000 ounces in proven and probable reserves at its Russian mine, located in the far east of the country. Still, its 2022 production was scheduled 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 spokesman for Kinross, downplayed the importance of the mine in the company’s portfolio, writing by email that the Kupol mine was scheduled to reach the end of its life in 2025.
“Now it is mining narrower veins and lower grades,” Diaz wrote.
CIBC analyst Anita Soni wrote on Monday that the sale of the Russian assets will have a mixed impact on Kinross’ financial position: free cash flow is expected to decline 35% in 2022 to $469 million, but at the same Time to time, the company may be free of tens of millions of dollars in expected capital expenditures in 2023.
Meanwhile, the company is facing a huge debt load after completing a $1.8 billion acquisition of Great Bear Resources, a prospective company exploring for gold in Ontario that is still far from production.
Given its expected net debt of $2.5 billion, Soni wrote, “we believe any free cash flow generated will be allocated to debt reduction first.”
Kinross said Highland would pay a total of $400 million in cash for the Kupol mine and surrounding exploration licenses, including $100 million at closing.
The rest would be paid as follows: US$150 million in 2023; US$100 in 2024; and US$50 million in 2025.
Kinross said it would also receive $280 million in cash for its Udinsk project, including $80 million in 2025, $100 million in 2026 and $100 million in 2027.
He said the deferred payments would be secured by pledges of shares, financial guarantees and an escrow account.
Russian oligarch Abramovich, who has allegedly been involved in Russia-Ukraine peace talks and whose ties to Canada include a 29 percent stake in EVRAZ plc, the steel and mining company with subsidiary operations in Alberta and Saskatchewan, was a once a major shareholder. in Highland Gold, the company that buys the Kinross assets.
But in 2020, Abramovich and his business partners sold a 40 percent stake in Highland to Fortiana Holdings Limited, a Cyprus-registered company of Vladislav Sviblov with interests in Siberian zinc and gold projects.
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Highland operates mines in four regions of Russia, including the Chukotka region, where Kinross operates in the far east of the country.
A Highland spokeswoman wrote by email that Sviblov is now “the sole beneficiary” and that the company does not disclose its gold production or offer guidance.
But he said the company plans to offset the expected decline in Kupol’s output in the coming years by processing ore from Kekura, one of its mines, located 100 miles away.
“There are strong synergies between these two assets,” the Highland spokesperson wrote by email. “Combining the two operations into one will allow us to maintain the level of gold production at Kupol, with no losses at Kekura, for more than 10 years.”