Dividends and explanations get Kinross rolling

All it took was a bigger dividend and a bit of explaining for Kinross Gold (K-T, KGC-N) to gather some  wind behind its back again.

The major gold producer had seen its market cap steadily erode since last September. On Sept. 8, 2011, its shares closed at $18.01, and by Jan. 19 they had fallen all the way down to $10.17. Ironically, a higher share price back in 2010 was partly responsible for the lower recent share price. 

     Speaking on a conference call following Kinross’ year-end results, chief executive Tye Burt explained the new accounting rules that contributed to the company’s large writedown — an event that had investors selling for the past few weeks. 

      Kinross gave the market a heads-up in late January that it would have to take a multi-billion-dollar, non-cash writedown on its purchase of Red Back Mining and its Tasiast gold property in Mauritania.

While the news confirmed investors’ suspicions that Kinross had overpaid for the world-class deposit, Burt explained the International Financial Reporting Standards’ accounting rules force companies to use their share price when an acquisition closes — not when it is announced — when entering the book value of new assets on a balance sheet.

Kinross’ share price climbed more than $2 between the time it announced the Red Back acquisition and the closing date.

The higher share price at close added another $1.2 billion to the asset’s book value, which reflected in turn with an overall goodwill figure of $5.2 billion.

A writedown is a non-cash balance sheet item deducted from goodwill associated with the acquisition. Goodwill appears on a company’s balance sheet as the difference between the fair asset value acquired and the price paid.

Accounting rules also stipulate that goodwill must be tested for impairment once a year. The impairment test helps determine whether the acquired asset’s fair value is significantly less than what was carried on the balance sheet.

Burt said lower market multiples at the end of 2011, a conservative US$1,250-per-oz.-gold price and the high price of the asset carried led to calculating the large writedown number.

But the writedown had more to do with the accounting metrics for testing impairment and less to do with project deficiencies.  “To give you an idea, if we used a US$1,430-per-oz. gold price in the fair value calculation, no impairment would have incurred,” Burt noted.

Burt acknowledged that the recent downward pressure on the stock concerned management, but said the company is squarely focused on its long-term prospects, and that those long-term goals will lead to enhanced cash flows, optimized cost structures and a portfolio of world-class mines that will bring higher market valuations.

In the meantime, management has added a sweetener to its poor market performance: Kinross announced a 33% increase to its semi-annual dividend, bringing it up to 8¢ per share from the 6¢ level.

The sweet-toothed market sent Kinross’ shares up 8%, or 79¢ higher to $11.44 on Feb. 16, the day of the conference call.