Kinross’ $2.7B expansion plan at Tasiast raises more questions

VANCOUVER — Kinross Gold (K-T, KGC-N) has endured plenty of criticism since acquiring Red Back Mining and its Tasiast gold project for a hefty US$7.1 billion three years ago. And the company provided markets with more questions than answers on April 29, with a US$2.7-billion prefeasibility study that did little to quell doubts about the project’s expansion potential.

Tasiast sits in the northwestern reaches of Mauritania and has given Kinross a perpetual headache since its acquistion — including a US$3.1-billion writedown on the asset in last year’s fourth quarter. But the company is sitting on a lot of gold at the site, with the study modelling 10 million recoverable oz. at an average grade of 1.41 grams gold per tonne, assuming a US$1,200 per oz. gold price.

Kinross says the pit shell is modelled around proven and probable reserves that total 150 million tonnes grading 1.66 grams gold per tonne for 8 million contained oz., as well as 226 million tonnes of measured and indicated resources grading 0.93 gram gold for 6.8 million contained oz. gold.

Despite the impressive in-situ gold numbers, Kinross will have to find a way to make Tasiast’s return investment more attractive. The company’s current model assumes a 30,000-tonne-per-day operation that would produce 475,000 oz. gold per year over a 20-year mine life, at cash costs of US$700 per oz. gold.

The production profile seems attractive, but after factoring in the US$2.7-billion development cost, Tasiast only carries an 11% internal rate of return (IRR) and US$1.1-billion net present value (NPV) at a 5% discount rate.

Perhaps more alarmingly, Kinross based its study on a US$1,500 gold price, which is well above the spot price of gold at press time.

But CEO Paul Rollinson pointed out during a conference call that there was a lot of room for optimization prior to a full feasibility study, including implementation of a lower-cost natural gas generated power, as well as further exploration upside and the possibility of converting more measured-and-indicated resources into reserves.

“The objective of the prefeasibility study is to narrow the direction we’re going to take,” Rollinson said when asked about Tasiast’s sensitivity to gold prices. “I don’t see a lot of merit in discussing those at this time . . . we’ve been given a number and we reported the results. The key here is that we’re going to do more work and look to find more value. We think what we have definitely supports a feasibility study — and that’s a more appropriate time to have this kind of a discussion.”

One adjustment Kinross revealed is its plan to boost throughput from 30,000 tonnes per day to 38,000 tonnes per day in the next stage of its study. The company had originally modelled a 60,000-tonne-per-day mine and looked at the possibility of incorporating an existing 8,000-tonne-per-day mill into its operations, but determined the 38,000-tonne-per-day operation would “provide the optimum economics for an expanded project.”

Kinross hopes to advance Tasiast and improve its economics by building out a large part of its infrastructure over 2013 as feasibility work continues. Rollinson says Kinross will spend US$624 million on the project this year.

“We are investing in infrastructure this year — which would be required under any scenario — so that when you look beyond [this year], the capital that’s remaining is primarily all related to the mill. There are a lot of moving parts that we’ll be looking at, and we’ll reassess next year, on a look-forward basis, as to whether or not we proceed.”

One of the major moving parts for Kinross will be the progress it sees in Mauritania’s fledgling natural gas industry. Mauritania has a lot of offshore gas reserves, but Rollinson says “there is a cost to getting the gas to shore — and that would come not from the government, but from an oil and gas company. In my opinion, it’s not an ‘if,’ it’s a ‘when.’ At some point this gas makes it to shore. We are at the table and we are obviously keenly interested because of the potential benefits.”

Kinross will be making an expansion decision while trying to strengthen its balance sheet.

The company had US$2 billion in cash and equivalents at the end of 2012, which was more than offset by US$2.6 billion in debt.

Assuming scheduled debt repayments, Kinross will likely need to raise another US$1.8 billion  to fund Tasiast under its current development model.

On the Tasiast news, shares cratered 43%, or $4.17, and traded around $5.49 over the next few days. Kinross has 1.1 billion shares outstanding for a $6.4-billion press-time market capitalization.