Red Back (TSE:RBI), Deal Could Punish Kinross (NYSE:KGC) for Some Time

There shouldn't be much doubt about the Kinross Gold Corp. (NYSE:KGC) acquisition of Red Back Mining (TSE:RBI) is a good deal over the long term, but in the near term, which could mean a year or longer, Kinross could take some punishment, along with their shareholders, although it could be viewed as a buying opportunity.

Kinross has dropped to 52-week lows recently, as the market digests the effects of the deal on Kinross going forward, which are deeper than the management of the two companies had seemingly anticipated, although Red Back, the recipient of the bid, has done well as companies in these situations tend to do.

The major problem is the terms of the deal, where Red Back is valued at $7 billion, which will be financed with paper. Kinross stock will be exchanged for the assets of Red Back.

That means a significant dilution of the stock of Kinross, and that doesn't include the costs and effects of the merger of the two companies, which usually always include unintended and unidentifiable consequences.

For long term investors, this shouldn't be a problem, as the deal is a good one in that regard, and should add a lot of value to Kinross going forward.

But for those with short-term horizons, there is a lot to be concerned with, and the stock could continue to drop or go nowhere for some time to come, as it has in this high gold price environment.

Kinross was at $15.51, gaining $0.34, or 2.21 percent at 3:45 PM EDT.