Gold producer offers premium for junior

Kinross Gold Corp. is making good on its promise to return to Canada.

The gold producer entered into a definitive agreement with Underworld Resources Inc. March 16 to acquire 100 percent of the junior's outstanding common shares not already owned by Kinross for stock and cash valued at C$139.2 million.

Kinross already owns 8.5 percent of Underworld's shares (on a fully-diluted basis). Underworld is the owner of the highly prospective White Gold property, which hosts a substantial new gold discovery 95 kilometers south of Dawson City in central Yukon Territory.

Fulfilling many predictions, the major tendered a friendly takeover bid for Underworld March 11, offering 0.141 of a Kinross common share, plus C1 cent in cash for every outstanding common share of the junior's stock. The offer represents an implied offer price of about C$2.62 per common share, based on the March 10, closing price of C$18.54 per Kinross common share on the Toronto Stock Exchange.

The companies said Kinross' offer represents an attractive and immediate premium of 36 percent over the March 10 closing price and a premium of about 50.2 percent based on the volume-weighted average prices of Underworld's common shares and Kinross' common shares, for the 20 trading days that ended March 10.

Underworld's directors, after receiving the recommendation of a special committee of independent directors that is overseeing the transaction process, unanimously determined that the offer is in the best interests of Underworld and Underworld's shareholders. They also unanimously recommended that Underworld shareholders tender their common shares to the offer. Underworld's management also agreed to support the offer.

Offer details in mail

The companies said full details of the offer was included in a formal offer and take-over bid circular it finished mailing to Underworld shareholders March 19. The offer expires at 5 p.m. (Pacific Time) April 26. It is subject to several conditions, including acceptance by shareholders (including those holding any shares issuable on exercise of options or warrants) which, together with the common shares and warrants directly or indirectly owned by Kinross, constitute at least two-thirds of the junior's outstanding common shares (calculated on a fully diluted basis) and the receipt of all necessary regulatory approvals.

It is expected that if Kinross acquires at least two-thirds of the outstanding common shares, it will take steps to acquire all outstanding Underworld shares not acquired pursuant to the offer.

If 100 percent of the common shares are acquired, Kinross expects to issue about 6.8 million common shares pursuant to the transaction (based on the fully-diluted share capital of Underworld), representing about 1 percent of Kinross' current outstanding common shares.

"The Kinross offer brings substantial technical and financial resources to the White Gold property, which will further rapidly advance the project," said Underworld Chairman Michael Williams. "We feel the Kinross offer provides immediate value to our shareholders."

Underworld's financial adviser Canaccord Financial Ltd. provided an oral opinion to the junior's directors that the consideration offered is fair, from a financial point of view, to Underworld's shareholders.

Kinross bid anticipated

Given that Kinross owned a sizable stake of Underworld, Shawn Ryan, the prospector who discovered the White Gold property, said in mid-January the he could "read between the lines" and recognize that Kinross had a keen interest in acquiring the White Gold property and would be the chief contender in an increasing likely takeover.

Ryan sold the White Gold claims to Underworld in 2007 for shares of the junior mining company and exploration spending commitments along with other considerations.

"Kinross is a Canadian mining company, and it wants a mine in Canada," Ryan said. "I think things are going to happen sooner rather than later. I don't think it will drag on another year."

Kinross has invested in roughly a dozen juniors that are exploring for gold in the Tintina Gold Belt, the prolific 145-million-acre (58.7-million-hectare) mineral region that hosts Kinross' Fort Knox Gold Mine and huge gold deposits including Donlin Creek and Livengood in Alaska as well as significant gold showings in Yukon Territory, including White Gold.

Earlier, Kinross had said its investment in Underworld shares was part of a strategy of partnering with promising junior companies to maximize the gold producer's exposure to new prospects and experienced explorers for a relatively small capital outlay.

Out of the last 42 gold deposits that have been developed around the world, Ryan said 11 are the same size as the White Gold property.

"Mining companies are finding it is cheaper and faster to put more modest-sized gold deposits into production, and they are going after them in a big way," he said.

Industry analysts and observers say Kinross' purchase offer is an indication not only of how attractive the White Gold property is as an investment, but also how enticing Yukon Territory is currently as a jurisdiction for mining investments.

Resource established and growing

In January Underworld reported initial resource estimates for the Golden Saddle and Arc deposits at the White Gold property south of Dawson City, Yukon Territory.

At Golden Saddle, Underworld estimated 1,004,570 ounces at an average grade of 3.2 grams per metric ton gold in indicated resources and 407,413 ounces at an average grade of 2.5 g/t gold in inferred resources.

At Golden Saddle, drill holes completed on approximately 50-meter by 50-meter collar spacing were used to establish the resource. An overall deposit 580 meters in strike length and up to 560 meters in down-dip length has been defined. Golden Saddle remains open to expansion along strike to the northeast, and down dip to the northwest. Strength of alteration and mineralization increases in intensity to the northeast. The most northeasterly and deepest holes completed to date include holes WD09-101, which intersected 4.86 g/t gold over 23.38 meters and WD09-103 which intersected 5.07 g/t gold over 25.38 meters.

At the Arc zone, the initial resource estimate includes 170,470 ounces at an average grade of 1.2 g/t gold in the inferred category. A total of 15 holes at approximately 100-meter by 100-meter collar spacing and a single wireframe were used to establish the resource.

The resource estimates were undertaken by SRK Consulting (Canada) Inc. and are based on data in 13,260 samples from 96 drill holes in the Golden Saddle and Arc areas. Indicated and inferred resources were categorized as open pit or underground utilizing 10 meter by 10 meter by 10 meter blocks at 0.5 g/t gold and 2.0 g/t gold cut-off grades, respectively, and utilizing a Whittle shell model.

The resources were estimated from a total mineral inventory of nearly 1.5 million ounces averaging 2.71 g/t gold at the Golden Saddle Deposit, and 170,470 ounces averaging 1.21 g/t gold at the Arc Deposit.

Nearby gold identified

Further, Underworld reported discovery Jan. 27 of a 40-kilometer, or 25-mile, long trend of gold prospects and anomalous gold in soil geochemistry at the JP Ross and Maisy May Property. This trend exhibits similar geologic and geochemical characteristics to the White Gold Trend, which hosts the Golden Saddle and Arc Deposits. Within the trend, Underworld said it identified a "Golden Saddle" style geochemical signature that is underlain by similar host rocks.

The junior said it intended to aggressively drill test this area as part of a broader exploration program at White Gold during the 2010 field season.

The JP Ross trend is road accessible, located about 65 kilometers, or 40 miles, south of Dawson City, Yukon, and 35 kilometers, or 22 miles, north of the White Gold Trend. Underworld recently completed additional claim staking, expanding this claim group to 312 square kilometers, or 121 square miles.

The JP Ross trend includes the headwaters to multiple active, and past producing placer operations, including: Henderson, Maisy May and Black Hills creeks. Production records from the Yukon Geological Survey (2009) report more than 177,689 ounces of gold mined from these operations.

During 2009, Underworld collected more than 6,200 soil samples on the property, primarily "ridge and spur" reconnaissance lines. Four soil grids were completed over select target areas, including the Frenzy, Marnie, Vertigo and Spellbound prospects. This work has identified a 40-kilometer, or 25-mile, long and up to 12-kilometer, or 7.5-mile, wide area of anomalous gold and pathfinder elements. The northwest trend at JP Ross is a parallel orientation to the 9.5-kilometer or 6-mile, long by 3.5-kilometer or 2-mile, wide trend at White Gold.

The Frenzy gold-in-soil anomaly measures 2.7 kilometers by 1.0 kilometer, or 1.5 miles by 0.6 mile, consists of 459 samples with an average grade of 18 parts per billion gold, ranging from trace to 1,142 ppb gold. The prospect is underlain by similar host rocks to the Golden Saddle Deposit, with a similar geochemical signature. As a comparison, the Golden Saddle soil anomaly measures 1.8 kilometers by 0.9 kilometer, or 1 mile by 0.5 mile, and consists of 348 samples, which outlines a u-shaped anomaly with an average grade of 22 ppb gold, ranging from trace to 364 ppb gold.

The ridge and spur sampling has identified numerous areas for additional grid soil sampling, including Sabotage Ridge, which is a 1,600-meter-long, single ridge line gold with soil samples ranging from trace to 132 ppb gold averaging 23 ppb. Samples for the entire property range from trace to 2,200 ppb gold, averaging 5 ppb.

The JP Ross and Maisy May area is underlain by similar rock types and structures to the White Gold property, including metamorphosed mafic volcanic, intermediate intrusive and sedimentary rocks, as well as mid-Cretaceous to Early Tertiary plutons and volcanics. At White Gold, the Golden Saddle deposit is hosted within a metavolcanic sequence, and the Arc Deposit is hosted with sedimentary rocks.

Due to poor exposure of bedrock in the White Gold District, soil sampling is the primary reconnaissance exploration tool used by Underworld.

Underworld President Adrian Fleming said the soil geochemical results for JP Ross vindicate the exploration approach that the junior used, and are similar or of larger magnitude when compared to the footprint of the Golden Saddle Deposit.

They "confirm the potential of the White Gold District to host multiple occurrences of gold mineralization," he said.

Underworld said it planned to set up an additional exploration camp at JP Ross to complete further soil sampling, trenching and diamond drilling during the 2010 field season.

Kinross has not said yet whether it will follow through on Underworld's exploration plans.