Kinross to Invest $820 Million to Tread Water on Production

LAGOS (Capital Markets in Africa) – Kinross Gold Corp. is spending more than $800 million to essentially tread water as — like many miners — it faces a future in which new gold assets are increasingly difficult to find and costly to develop.

The Canadian miner said Monday it will move ahead with expansions at mines in Mauritania and Nevada as part of efforts to maintain its production and lower costs.

Construction for the Phase Two expansion of the Tasiast mine in Mauritania will begin early next year, Toronto-based Kinross said in a statement. The company also intends to re-invest in its Round Mountain mine in Nevada to extend its life by five years.

“It certainly will be one of the strongest mines in our portfolio,” Chief Executive Officer Paul Rollinson said of Tasiast in a phone interview Monday just ahead of the release. “We’re taking last year’s production and with the Phase Two production will basically quadruple it.”

The new production should stabilize Kinross’s global production at about 2.5 million ounces a year, roughly where it has been, Rollinson said.

Around the world, gold miners have been scrambling to secure new production as existing mines approach the end of their lives. But with the low-hanging fruit already picked, and gold prices still far below the lofty heights seen five years ago, securing profitable new production is a struggle. Some in the industry believe output may not increase for years.

The Phase Two Tasiast expansion will bring the African mine’s average annual production to 634,000 ounces for the 10-year life of the project, with commercial production expected to begin in 2020, Kinross said. Average all-in-sustaining costs in that period will be $720 an ounce, it said. Annual output will be highest in the first five years, with the mine producing an average of 812,000 ounces at costs of $655.

Capital Costs
Initial plant and infrastructure capital costs for Phase Two will be about $590 million, less than the $620 million estimate in last year’s pre-feasibility study.

Kinross fell 2.7 percent to C$5.72 at 9:30 a.m. in Toronto, as gold futures declined 0.7 percent on the Comex in New York. The miner’s shares have increased 38 percent this year, while gold has gained 14 percent.

Rollinson has said Tasiast has the potential to become the global miner’s best asset, redeeming a history of cost overruns and, more recently, a short shutdown at the site. Kinross had taken more than $5.5 billion in write downs on the asset, which it acquired as part of its purchase of Red Back Mining Inc. in 2010.

In March 2016, the company said it would go ahead with the first phase of Tasiast’s expansion, only to temporarily suspend existing operations three months later after the Ministry of Labor banned some expatriate workers from the site, saying their work permits were invalid.

Phase One
Kinross said in Monday’s statement that Tasiast’s Phase One expansion is on time and on budget, with full commercial production expected in the second quarter of next year.

The miner said it maintains a “cooperative and constructive” relationship with the government and that the second phase of expansion will generate significant economic benefits for Mauritania. The country’s Minister of Petroleum, Energy & Mines is quoted in the statement saying the government supports the expansion.

Kinross also plans to move forward with a series of investments at its Round Mountain mine, pending completion of permits. The so-called Phase W expansion, with initial capital expenditures of $230 million, will add five years to the Nevada mine’s life, or 1.5 million ounces, at lower costs, the company said.

Double Down
In 2015 the miner doubled-down on Round Mountain, buying the half of the mine it didn’t already own from Toronto-based Barrick Gold Corp. as part of a bigger deal that allowed it to buy 100 percent of Barrick’s Bald Mountain mine, also in Nevada. There were concerns the company had overpaid; at the time, Andrew Kaip, an analyst at BMO Capital Markets, valued the assets at $440 million, significantly less that the $610 million Kinross paid.

“Subsequent to that acquisition, Kinross has done a good job of showing that there was more value at Bald Mountain than the market was aware,” Kaip said by phone last week.

The big question for investors continues to be the extent to which Kinross can stem or compensate for production declines at one of the company’s largest mines, Alaska’s Fort Knox, Kaip said. “My view is that this is a company that has one more acquisition to make. And that acquisition will help a decline in production stemming from Fort Knox running out of ore to process.”

Kinross’ long-term corporate credit rating was cut to junk in February, with Standard & Poor’s citing its “comparatively higher cost structure.” Rollinson said in the interview he is talking to the credit agencies to change its ratings.

“We seem to be a little bit stuck here with those guys,” Rollinson said, noting that the company has paid down debt, increased its cash and hit its operational targets for the past five years. “From a pure credit metric perspective we don’t see it. So we’re pushing.”

Source: Bloomberg Business News