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Why Investors Are Wary about Kinross’s Acquisitions Strategy

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Kinross’s acquisitions

Kinross Gold (KGC) has a history of growing through acquisitions. At the same time, it has a history of making poor acquisitions that lead to huge write-downs.

In 2008, Kinross acquired Aurelian Resources and its Fruta del Norte gold project in Ecuador for $1.2 billion. However, it failed to reach an agreement with the Ecuadoran government regarding the economic and legal terms for the project. This led the company to cancel the project and write down $720 million on its value in 2013.

This occurred after the company had spent $225 million on the asset. Kinross ultimately sold off the project to Lundin Gold at a steep discount for $240 million in cash and equity in 2014.

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Acquisition of Red Back Mining

Kinross acquired Red Back Mining Inc. in 2010 for $7.1 billion. Tasiast and a 90% stake in Chirano were part of that acquisition. Since then, the company has written down almost all of the value of acquisition as Tasiast’s potential development has diminished.

The Red Back deal and the Equinox Minerals deal by Barrick Gold (ABX) have become reminiscent of the ill-fated acquisitions made by the miners at the peak of the cycle.

Acquisition-led impairments

Since 2008, these acquisition-led impairments have crossed the $11 billion mark.

According to Paul Rollinson, Kinross’s CEO, “I don’t know a single mining company in the world that’s managed to maintain and grow from just internal exploration. So, I think M&A is part of the fabric of mining. It’s always going to be there. And I think we, like everyone else in our size category, have a process where we keep an eye on what’s out there.”

Although Kinross needs an acquisition to fill the gap in its production profile, given company’s poor track record of execution on developments, investors have solid reasons to be concerned about its future acquisition strategy.

Among its peers, Goldcorp (GG) has a prudent M&A strategy, while Barrick Gold (ABX) has also seen large write-downs. Newmont Mining (NEM) also has its share of write-downs.

Investors can get access to the gold sector by investing in the VanEck Vectors Gold Miners ETF (GDX). GDX invests in intermediate and senior gold producers. Goldcorp accounts for 7.20% of its holdings. The SPDR Gold Trust ETF (GLD) tracks spot gold prices.

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