Kinross Gold (TSX: K; NYSE: KGC) says it plans to strengthen its medium-term production and cash flow profile with the US$93.7 million acquisition of the Peak Gold project in Alaska, 400 km southeast of its Fort Knox mine.
The open-pit project, which is expected to start production in 2024, will be "a low-risk 'tuck-in'" to leverage the company's existing mill and infrastructure at its Fort Knox mine, and is forecast to produce a total of 1 million oz. gold-equivalent over four and a half years at mining grades of 6 grams per tonne, Kinross said.
The company intends to blend the project's higher-grade ore with the lower-grade ore at Fort Knox to reduce its average life-of-mine all-in sustaining costs by about US$70 per gold-equivalent oz., Kinross said in a Sept. 30 news release.
Peak Gold is owned by Royal Alaska LLC (40%), a subsidiary of Royal Gold (NASDAQ: RGLD), and Core Alaska (60%), a subsidiary of Contango (US:OTC: CTGO).
Under the deal, Kinross will purchase 40% of the project by acquiring Royal Alaska from Royal Gold for a total cash consideration of US$49.2 million and will acquire 30% from Core Alaska for US$44.5 million (which includes US$32.4 million cash and shares of Contango purchased from Royal Gold).
Once the transaction is complete, Contango will hold the remaining 30% of the project. Kinross expects to receive a management fee and toll mill Contango's 30% of ore mined.
According to a 2018 preliminary economic assessment, the project has measured and indicated resources of 1.2 million oz. gold at a grade of 4.1 grams gold per tonne and inferred resources of 116,000 oz. gold at a grade of 2.7 grams gold per tonne.
Based on preliminary estimates, Kinross expects initial capex of about US$110 million and a one-year construction period. The gold miner forecasts all-in sustaining costs in the range of US$750 per oz. gold-equivalent.
Kinross conducted site visits to the project last year and noted in its statement that there are "numerous exploration targets" within Peak Gold's 2,732-sq.-km land package that could "potentially increase mine life."
Jackie Przybylowski of BMO Capital Markets described the deal as a "win-win."
"The project make sense to Kinross: it's relatively close to the Fort Knox mine and can make use of Kinross' existing Alaska infrastructure," she commented in a research note. "It also makes sense to Royal Gold: as a royalty/streaming company, construction and operations are not its core focus. Royal Gold will retain a 3% NSR."
Brian MacArthur, who covers Royal Gold for Raymond James, also believes the deal makes sense.
"We view these transactions positively as they monetize a non-core business and allow Royal Gold to focus on its core royalty and streaming business while maintaining exposure to the Peak Gold project through the existing 3% NSR royalty on all metals, the incremental 28% NSR royalty on silver in the current resource area, and the higher 3% NSR royalty on all metals on the exploration properties owned by Contango," the mining analyst commented in a research note to clients. "Furthermore, the project is being sold to a regional operator, which, in our view, could allow development of the project faster and in a capital-efficient way, allowing Royal Gold to receive royalty payments in a more timely manner."