* Share price has fallen by nearly half since Sept
* Bankers say low valuation should attract interest
* Problems at some mines seen as obstacle to offer
By Pav Jordan and Euan Rocha
TORONTO, March 18 (Reuters) - Cost overruns and a massive writedown have knocked Kinross Gold’s stock so low that some bankers see it as Canada’s biggest potential takeover play, though obstacles to a bid for the senior gold producer may be too big to surmount.
Kinross, the world’s seventh-largest gold miner, owns some huge, largely unexploited assets spread across four continents, making it an appealing target for bigger players who are always on the hunt for deposits to replenish their reserves.
Despite a huge reserve base its stock, which traded for nearly C$19 at the start of 2011, closed at C$9.90 on Friday as mounting concerns about the cost of developing its flagship project sapped investor confidence.
“We haven’t seen anyone make a move on Kinross yet, but to me, I would think that for anyone who wants a company with a lot of growth assets, this makes a lot of sense,” said Stifel Nicolaus analyst George Topping. “It’s the cheapest senior by a long shot.”
Bankers point to Barrick Gold and Goldcorp, Canada’s top two gold miners, as companies with the means to consider an acquisition. U.S.-based gold mining giant Newmont Mining Corp was also named as a possible buyer.
On an in situ basis, the proven and probable gold reserves of Kinross are being valued by the market at less than $200 an ounce, well under Barrick’s reserves at some $325 per ounce and even Newmont and Goldcorp at about $275 and $580 an ounce. Alt hough this does not factor in capital and operating costs, it highlights the appeal for potential bidders.
At the BMO Global Metals and Mining Conference in Hollywood, Florida, last month, the future of Kinross was the subject of much speculation, from the meeting rooms to the bars.
Kinross Chief Executive Tye Burt got the ball rolling early, saying the company may consider selling its 50 percent stake in the Crixas underground gold mine in Brazil and its 25 percent stake in the Cerro Casale gold-silver-copper project in Chile.
“It was insane how many people were talking about a Kinross breakup at that conference,” said one U.S. investment banker focused on the resource sector who spoke off the record because of company policy.
But despite these selling points, bankers and analysts said that the factors keeping the stock appetizingly cheap may also drive prospective buyers away.
The main obstacles are the Tasiast gold mine in Mauritania and Chirano mine in Ghana, brought into the Kinross fold with considerable fanfare in its blockbuster $7.1 billion acquisition of Red Back Mining in 2010.
The assets have gone from being a blessing to a bane for the company, which has seen its market capitalization shaved nearly by half since September as concerns have mounted over the cost of developing Tasiast and other projects.
Kinross earlier this year said it would take a massive $2.94 billion non-cash goodwill impairment charge related to its acquisition of the Tasiast and Chirano mines.
“On a per ounce basis of reserves, they paid through the nose for Tasiast,” Morningstar analyst Min Tang-Varner said of the asset, which now accounts for over 20 percent of the miner’s combined gold reserves and resources.
“Time has passed and the market is just getting antsy,” she said. “They’ve paid a steep price for it and we haven’t seen anything that really justifies the acquisition price paid out.”
Bankers said any acquisition approach for Kinross would likely have to be friendly because prospective buyers will want to see data on Tasiast before tabling an offer.
Kinross declined to comment about the takeover speculation.
“We would note that these rumors result from our share price being undervalued, which in turn suggests that Kinross currently presents a significant buying opportunity,” said Steve Mitchell, the miner’s head of corporate communications.
Potential suitors for Kinross also have their own situations to consider before making a bid.
Barrick, the world’s top gold miner, is still integrating the assets of copper miner Equinox, which it acquired for more than $7 billion less than a year ago. Another major takeover may not be well received by shareholders.
While some like Goldcorp’s prospects as a buyer, skeptics note that the current assets of Kinross have much higher average operating costs. This means an acquisition would move Goldcorp up the cost curve, an unattractive prospect in a sector that is fighting to keep costs in check.
Goldcorp Chief Executive Chuck Jeannes has also stressed that his company intends to focus on growth in low-risk mining jurisdictions. The most promising Kinross assets are in more politically risky places like Ecuador and Russia.
Newmont, the world’s second-largest gold miner, could be a more likely suitor, as the company may want new assets to sink its teeth into given setbacks on projects like Hope Bay in the Canadian Arctic and Conga in Peru.
Barrick, Goldcorp and Newmont all declined comment for this story, or were not immediately reachable.
In the end, the fate of Kinross may be decided by a handful of big institutional shareholders, who together control 20 to 30 percent of the stock in each of the four miners. If the Kinross share price stays depressed these investors could nudge management toward a deal.
Kinross typically holds its annual shareholder meeting in the first week of May. It has yet to set a date for this year.
“You can expect some shareholder activism in this case,” said one Toronto-based investment banker, who declined to be identified because of company policy.