Kinross cuts Tasiast expansion costs

Kinross Gold (TSX: K; NYSE: KGC) has slashed the projected start-up costs of a mill expansion project at its Tasiast gold mine in Mauritania by 41% to US$1.6 billion, as shown in a new feasibility study, but intends to wait until 2015 before making a construction decision. 

The study envisions replacing the existing 8,000-tonne-per-day mill with a new 38,000-tonne-per-day mill. Over the first five years, starting in 2018, the expanded open-pit mine could produce 848,000 oz. gold a year at all-in costs of US$792 per oz. Production over the 12-year mine life would average 664,000 oz. a year at all-in costs of US$780 per oz.

“The mill expansion will transform Tasiast into the largest mine in our portfolio, and as the study forecasts, from one of our highest-cost operations to among our lowest,” said Kinross CEO J. Paul Rollinson on a conference call. 

During the first five years, the head grade should be 2.09 grams gold per tonne, and over the mine life decline to 1.76 grams gold. Overall mill recovery would be 93% with a waste-to-ore strip ratio of 5.92. 

Projected costs to get the mine up and running are US$1.6 billion, including a US$182-million contingency. The initial investment will go towards building a new mill, crusher and an incremental 85-megawatt power plant on-site, as well as buying more mining equipment. Payback is estimated within three years. 

In comparison, an April 2013 prefeasibility study (PFS) anticipated start-up costs of US$2.7 billion for a 30,000-tonne-per-day mill, producing 475,000 oz. a year at all-in sustaining costs of US$910 per oz. over a slightly longer mine life. 

Rollinson says the US$1 billion in cost reductions are due to three factors. First, Kinross removed US$330 million in infrastructure investments made in 2013 from the expansion capital, where it built several facilities, including a truck stop, warehouse and water-treatment plant. Second, it saved US$277 million by deferring construction of a seawater plant to later in the mine life due to lower anticipated water demand. Third, it eliminated US$493 million by identifying 230 cost-saving initiatives to optimize the project’s design, scope and execution strategy. 

Analysts note while the headline reduction is US$1 billion, the “real” savings are US$500 million, or 18%, due to the 230 cost-saving initiatives, describing the other reductions as sunk or deferred capital. 

Rollinson says the expansion plan “potentially provides an attractive incredible case for a new 38,000-tonne-per-day mill” that could boost Kinross’ production profile, lower overall costs and generate cash flow.  

The mine, expected to take three years to build, should generate US$2.5 billion in free cash flow over its life. Some US$600 million in direct payments in the form of taxes, royalties and duties from the mine will go to the government during this time. 

Using a US$1,350 per oz. gold price and 5% discount rate, the Tasiast expansion has a 17% internal rate of return (IRR) and a US$1.2-billion net present value after taxes, compared to an 11% IRR and US$1.1-billion NPV at a US$1,500 per oz. gold price in the PFS. 

The improved prospects resulted from lower start-up costs, an optimized mine plan and improved operating costs, Rollinson notes. The mine plan used reserves of 9.6 million oz. gold, compared to 6.5 million oz. earlier. 

While the expansion is attractive, Rollinson says Kinross will not make a “go-ahead decision until 2015, at the earliest.” 

Meanwhile, it will work on enhancing Tasiast’s prospects, improving investment conditions in Mauritania and financing options. The gold price will also play a factor in the decision. 

Kinross received the project by acquiring Red Back Mining for US$7.1 billion in 2010. Since then, the miner has written down most of Tasiast’s value. 

Last year, the mine produced 248,000 equivalent oz. gold.