uploads/2018/02/Power-plants-1.png

Kinross Gold’s Power Plant Acquisition in Brazil to Add Value

By

Updated

Acquisition of power plants

Along with releasing its 2017 results, Kinross Gold (KGC) also announced an acquisition of two hydroelectric power plants in Brazil from a subsidiary of Gerdau (GGB). The rationale behind this acquisition is to secure long-term, low-cost power for its Paracatu mine in Brazil. This power should lower the overall production costs for the company’s Paracatu mine over its mine-life. Both the plants have been in operation since 2010 and have a total installed capacity of 155 megawatts.

The consideration for this transaction is $257 million. KGC expects to fund this acquisition through a debt financing of approximately $200 million and existing liquidity.

Article continues below advertisement

Rationale behind the acquisition

  • The acquisition should lower Paracatu’s production costs by ~$80 per ounce over the life of the mine.
  • The company expects to generate a levered internal rate of return of ~15%–30%. The more accurate returns will depend on the terms of debt financing.
  • This acquisition becomes much more significant as Paracatu is the largest power consumer for the company, and KGC expects input costs to rise in Brazil. These plants would secure ~70% of Paracatu’s anticipated power needs for life at low, fixed costs.
  • The acquisition could also benefit the company as Brazilian legislation reduces power tariffs to companies that generate their own power supply.

Kinross expects the acquisition to close in three to six months.

In 2015, Kinross Gold acquired 100% of the Bald Mountain gold mine and the remaining 50% of the Round Mountain gold mine in Nevada from Barrick Gold (ABX). These mines are now very accretive for Kinross in terms of present production and future production and cost reduction potential. Kinross’s other peers (GDX) Newmont Mining (NEM) and Yamana Gold (AUY) have also made such deals, which have benefitted their production profiles as well as their geographic exposure.

Advertisement

More From Market Realist