Kinross grapples with Tasiast

Unpopular mergers are behind some tough news for two of Canada’s largest gold miners.

On the same day that Barrick Gold’s (ABX-T, ABX-N) top manager was ousted partly for his role in a share-price-depressing takeover, another unpopular merger continued to haunt Kinross Gold (K-T, KGC-N).

June 6 began with an announcement that Barrick’s president CEO Aaron Regent had been replaced by the company’s chief financial officer Jamie Sokalsky. Regent’s tenure was largely defined by the $7.3-billion acquisition of Equinox Minerals and its Zambian copper assets  — a move that many market participants considered overpriced and out of step with Barrick’s alleged gold focus.

Down the road at Kinross headquarters, management was contending with more bad news from the former apple of its acquisition eye: Tasiast.

The company has already weathered negative sentiment over its expensive takeover of Red Back Mining and its Tasiast gold project in Mauritania.

While that merger wrapped up in September 2010, it grabbed fresh headlines earlier this year when the gold miner took a $2.49-billion writedown on the assets acquired in the deal. Kinross’ share price has fallen steadily since the acquisition: in September 2010 its shares closed as high as $19.43, but in Toronto on June 6, those same shares traded for $8.84.

Although investor dissatisfaction over the acquisition had to do with the price Kinross agreed to pay, other issues at the site are creeping to the surface.

The latest burr under the company’s saddle comes in the form of a labour dispute at Tasiast.

While the company is in the midst of studying ­expansions at the site, Tasiast is already a considerable operating mine, with 200,000 oz. gold production last year. Reaching such production totals this year will be tough to do, however, if illegal strikes keep cropping up at the mine.

The latest strike, which was the second in a little over a year, resulted in mining and milling operations being halted after 600 workers walked off. The stoppage lasted four days.

 To date, Kinross has been adept at keeping stoppages brief. The previous May 2011 strike lasted just one day.

Despite these issues, Kinross is touting Tasiast’s long-term potential. While it is studying the best method to mine lower-grade material at the site, its considerable mineral resources do bode well for the project’s future.

Tasiast has proven and probable reserves of 128.9 million tonnes grading 1.8 grams gold for 7.5 million oz. gold, measured and indicated resources of 403 million tonnes grading 0.86 gram gold for 11.1 million oz. and inferred resources of 78 million tonnes grading 0.74 grams for 1.9 million oz.

But the project has been plagued by delays in its expansion plans, largely due to rising project costs.
In its effort to focus more of its attention on Mauritania, Kinross announced last month that it would sell its 50% stake in the Serra Grande Crixas gold mine in Brazil to AngloGold Ashanti (AU-N) for $220 million in cash.

The divestiture marks the latest in a series of sales by Kinross as it focuses on core assets in a bid to control costs and deal with fallout from the US$2.49-billion writedown at Tasiast.

Last year Kinross sold its 8.5% stake in diamond miner Harry Winston Diamond (HW-T, HWD-N) for US$100 million, which followed the 2010 sale of its 22.5% interest in a partnership, holding Harry Winston’s 40% interest in a joint-venture controlling the Diavik Diamond mines.

Kinross reported its first-­quarter results in early May, revealing a year-on-year average cost increase to US$742 per oz. gold from the US$545 per oz. the company recorded in first-quarter 2011. Revenues rose by 11% to US$1.04 billion, while net earnings jumped 16% to US$203 million despite a 6% production decrease to 604,250 equivalent oz. gold.

Kinross’s share of proven and probable reserves at Crixas clocked in at around 375,000 oz. gold. According to BMO Capital Markets analyst David Haughton, Crixas was projected to contribute 74,000 oz. gold to Kinross’ total output during 2012, at a cost of US$746 per oz.

“The sale of the stake in Crixas does not materially alter the Kinross production profile,” Haughton writes in May 29 research note. “Nor does it affect Kinross’ cash cost outlook . . . [the company] maintains a significant presence in Brazil through its Paracatu mine . . . [the sale] appears logical for all parties.”

Crixas comprises three underground mines — Mina Nova, Mina Palmeiras and Mina III — and includes a dedicated processing plant. The AngloGold-run operation has produced 3.5 million oz. gold during its lifespan.

BMO Capital Markets analysts speculate Kinross may consider selling other non-core assets, including a 50% interest in the Round Mountain gold mine the company holds with Barrick in Nevada, which BMO analysts value at US$437 million; its 25% stake in the Cerro Casale project in Chile valued at US$398 million, again with partner Barrick; and its wholly owned Kettle River-Buckhorn gold mine in Washington State, valued at US$313 million.

“The sale of Crixas demonstrates a strategy to focus on core assets and to ease cash-flow pressures during the current project-development phase,” Haughton notes.

Kinross president and CEO Tye Burt apparently agrees. With shares plunging 53% over the past nine months, Burt says it’s time for the company to focus on the development of its key growth assets.

Kinross’ growth catalysts include its operational review at Tasiast, its high-grade Dvoinoye gold deposit 100 km north of its Kupol operation in Russia’s Far East, its new Lobo-Marte investment in northern Chile and its Fruta del Norte gold project in southeastern Ecuador.

“Crixas is a non-operated, non-core asset for Kinross,” Burt says. “Its divestiture is consistent with our strategy of portfolio optimization, and focusing our resources on the company’s core operations and priority projects.”

Kinross shares initially jumped 14¢ on news of the Crixas sale, but market enthusiasm tapered off at midday, and the company closed down 1.7% at $8.28. Kinross has, however, benefitted from a recent rebound in gold prices, with shares up 7%, or 54¢ over the past two weeks. BMO Capital Markets maintains an “outperform” rating on the company with a $14.50 target price.

For AngloGold, the transaction  augments its growing presence in the Americas. Acquiring 100% ownership in Crixas — which AngloGold already operates — will boost the company’s annual attributable production in Brazil to 500,000 oz. gold and increase its total output in the Americas to more than 1 million oz. gold annually.

“This deal further simplifies our portfolio and gives us greater exposure to Brazil, where we’ve had significant success in growing our production, as well as our reserve and resource base,” CEO Mark Cutifani comments. “We see long-term, lower-risk potential from [Crixas], which is a key component of our strategy to grow the contribution from the Americas.”

AngloGold will fund the US$220-million purchase from existing cash reserves and debt facilities.

In early May the company released its first-quarter results, which included a doubling of year-on-year adjusted earnings totalling US$429 million, or $1.11 per share.

AngloGold’s board recently approved US$1.9 billion in capital investment over the next five years to expand operations at its Cripple Creek and Victor gold mine in Colorado, as well as to develop its Mongbwalu and
Kibali projects in the Democratic Republic of the Congo.

AngloGold’s shares remained relatively flat in New York following the Crixas news, with the company closing down 1.69% at $35.57 per share. AngloGold has also benefited from a resurgence in gold prices, with company shares up 11.2%, or $3.62 since mid-May.