Editorial: Is Kinross's bid for Aurelian brilliant or nutty?

By John Cumming

The biggest story of July is the surprise bid by Kinross Gold (K-T, KGC-N) for Aurelian Resources and its prized Fruta del Norte gold discovery, part of the junior's Condor project in southeastern Ecuador.

In a deal reminiscent of Barrick Gold's daring takeover of Arequipa Resources in 1996, Kinross is offering Aurelian shareholders about $1.2 billion in shares and warrants, or about US$85 per oz. for the 13.7 million oz. gold drilled out so far at the Fruta del Norte deposit.

Last October, Aurelian tallied an inferred 58.9 million tonnes at Fruta del Norte grading 7.23 grams gold and 11.8 grams silver per tonne. Aurelian discovered the deposit in early 2006 and it now ranks as one of the top mineral discoveries of the new millennium.

Kinross's offer is about a 63% premium but it's roughly 20% off highs reached as recently as January.

The deal is fascinating for many reasons, especially the timing: share prices of gold juniors are now in a deep lull, and those active in Ecuador have been particularly hard hit since April, when the Ecuadorian government shocked miners by ordering all mineral exploration activity to cease and announcing that the country's mining code would be completely revamped, probably to the detriment of foreign explorers.

Typically a junior in Aurelian's position would reflexively fend off such a low-ball offer as Kinross's, but Aurelian's directors all favour it. Aurelian's take-the-money-and-run approach gives the strong impression that its board and officers, with their extensive experience in Ecuador, think the new mining code may deeply hurt the company.

Kinross's board, obviously, is entirely in the other camp. Kinross president and CEO Tye Burt kept saying during a conference call with analysts that Kinross is comfortable doing this deal because Ecuador is "headed in the right direction," though he admitted there's "a big subjective element."

While Kinross has been just as active in Ecuador as Aurelian, albeit in a low-key way, Burt and Kinross haven't really given any specific reasons why the company is so optimistic about what the new mining code has in store.

You can understand the strategy: if Kinross is too convincing that Ecuador's really an okay place to do business, Aurelian shareholders might get second thoughts about selling out so quickly.

Instead, the message for Kinross shareholders is that Burt's the alpha dog here, and you should just follow him into this if your gut tells you to trust him. Fair enough.

Kinross certainly showed a highly attuned ability to judge political risk with its courageous and successful takeover of Bema Gold in February 2007. The move allowed Kinross to get its hands on the junior's spectacular Kupol gold-silver deposit in rough-and tumble Russia, where few North American miners dare to tread.

Despite some analysts' opinions, it's hard for us to see a competing bid for Aurelian emerge, with such prickly geopolitics involved. (But, then again, we didn't see this one coming.)

It may take quite some time to fully realize which company -- Kinross or Aurelian -- comes out the true winner of this extraordinary deal.

And this story shows how the political risk inherent in a project like Fruta del Norte takes on entirely different meanings whether its value represents 100% or 10% of the value of your company, as would be the case with Aurelian and Kinross, respectively.

Like Inco did at Voisey's Bay, Kinross could easily sit on this project for years, write it down, wait out different governments and still come out a winner by developing it ten years down the road when gold trades at US$2,000 per oz.

The folks at Aurelian just don't have the luxury of playing around with those kinds of timelines, and that's why this deal works so well for both sides.

Now let's just hope the Ecuadorian government is sensible and takes its cues from Peru and Chile and not Venezuela and Bolivia as it finalizes its new mineral policies.

Despite Burt's soothing words, the extreme hostility the government has shown foreign oil and gas companies in the country in recent years still leaves us wary.