Kinross Gold Corporation’s (KGC - Free Report) fully-owned subsidiary, Kinross Brasil Mineracao, has announced the acquisition of two hydroelectric power plants located in Brazil from a subsidiary of Gerdau SA for $257 million. The two plants — Barra dos Coqueiros and Cacu — are expected to secure a long-term power supply for Kinross’ Paracatu mine, which will lower production costs over the life of mine.
Per the company, the deal is expected to be partly funded with debt financing of roughly $200 million and the balance from its existing liquidity. Kinross had total liquidity of roughly $2.6 billion at the end of 2017.
Kinross expects the acquisition to lower its production cost of sales by roughly $80 per ounce over the mine life. It will generate a levered internal rate of return in the band of 15-30%, depending on the final terms of a planned debt financing.
The deal will also considerably de-risk supply chain as it is expected to secure just about 70% of Paracatu’s anticipated power requirements at a low, fixed cost, while the remaining 30% power demand is expected to be fulfilled by third-party suppliers under fixed-term power purchase agreements. This will lower market exposure for a key input in an environment where Kinross expects input costs to rise. Installed capacity of Barra dos and Cacu are 90 MW and 65 MW, respectively. Moreover, strategic investment in core asset will further enhance and strengthen Paracatu, which is a cornerstone asset in the company’s portfolio.
Notably, the Brazilian legislation allows companies to enjoy reduced power tariffs if they generate their own power supply. Due to reduced tariffs, Kinross expects to save roughly $15 per ounce, which is part of the total expected savings of around $80 per ounce of production costs over the mine life.
Subject to regulatory approvals and the satisfaction of other precedent conditions, the deal is expected to close in about three-to-six months.
Shares of Kinross have moved up 2.6% over a year, outperforming the 9.9% decline recorded by its industry.
Zacks Rank & Stocks to Consider
Kinross currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the basic materials space are Steel Dynamics, Inc. (STLD - Free Report) , The Mosaic Company (MOS - Free Report) and United States Steel Corporation (X - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Steel Dynamics has an expected long-term earnings growth rate of 12%. Its shares have soared 36.4% over the last six months.
Mosaic has an expected long-term earnings growth rate of 9.5%. Its shares have moved up 28.7% over the past six months.
U.S. Steel has an expected long-term earnings growth rate of 8%. Its shares have rallied 64.2% over the last six months.
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