Kinross makes $728 Million bet on West Africa mine to cut costs

Kinross Gold Corp. will go ahead with the expansion of its troubled Tasiast gold mine in Mauritania which it says will swell annual production by 87 percent and help bring down costs.

The West African mine will reach full production of 409,000 ounces by the end of the first quarter of 2018 when the first phase is complete, the Toronto-based company said Wednesday in a statement. Kinross will make a decision about whether to proceed with the second stage of expansion — which would increase production to 777,000 ounces — toward the end of 2017, Chief Executive Officer J. Paul Rollinson said in a telephone interview after the release.

“Phase one doubles production and drops costs,” Rollinson said. “Phase two doubles production again and drops costs even further.” He added that after the second expansion, “this would become the best mine in our portfolio.”

Once the first part of the expansion is complete, Tasiast will have all-in-sustaining costs of $760 an ounce. That compares with production costs around $1,400 an ounce today, Rollinson said.

Dropping Costs

“It’s going to struggle until that expansion is complete,” he said. “We are not making money there at today’s prices.” If phase two is completed, costs would drop to $665 an ounce in 2020, the company said.

Phase one of the expansion will require initial capital spending of about $300 million, plus an estimated $428 million in costs for stripping for a total cost of $728 million, Rollinson said. As a result, Kinross’s capital expenditure guidance for 2016 will rise to $755 million from the $595 million forecast last month.

Developing the open-pit mine is essential to keeping Kinross’s production levels stable, Andrew Kaip, an analyst at BMO Capital Markets, said by phone before the statement was released. The company’s Fort Knox operation in Alaska and Round Mountain mine in Nevada are both nearing the end of their lives, he said.

“They need to find a way to offset production at those two operations, and this is a big part of that exercise,” Kaip said from Toronto.

Possible Expansions

Last year, Kinross bought the half of Round Mountain that it didn’t already own from Barrick Gold Corp. and is looking at ways to extend the mine’s life.

If Kinross “does nothing” with the mine, it will be depleted in 2025, but an expansion at that site is also looking more likely, Rollinson said. Three years ago, expanding the site would likely have required a gold price of $1,700 an ounce, Rollinson said. “Phase W today is probably $1,300,” he said, referring to the name of the proposed Round Mountain expansion. “That’s just good engineering and hard work by the team to bring costs down.”

In 2015, Round Mountain produced 197,818 ounces of gold equivalent.

Fort Knox is expected to end production in 2020. In 2015, it produced 401,553 ounces of gold equivalent. Kinross is also looking at options to extend that mine’s life, Rollinson said.

‘Exciting Things’

“We’ve got some exciting things going on at Fort Knox,” Rollinson. “It’s too early to get into it with the market but I feel pretty good that we’re going to be able to show Fort Knox as an another anchor tenant.”

Kinross acquired Tasiast as part of a 2010 acquisition of Red Back Mining Inc.

Hit by cost overruns, the mine was written down in 2012, fueling speculation Kinross would become a takeover target after paying too much for its West Africa foray. While the stock has rallied 75 percent this year along with a recovery in gold prices, it’s still down more than 70 percent since the Red Back deal.

Kinross fell 0.5 percent to C$4.39 at 10:40 a.m. in Toronto.

In February, the company’s credit rating was cut to junk by Standard & Poor’s amid a wave of mining downgrades. It recently raised $288 million in a public offering that included an option to underwriters to buy shares. The money was used to reduce debt.

Falling Ratio

Kinross has spoken to S&P but can’t control what the rating agency does, Rollinson said. The company’s trailing net debt to bank covenant ratio was 1.7 after the acquisition of Barrick assets. If gold stays at $1,200 an ounce, it will finish the year “at less than one” he said. “We have a very strong balance sheet.”

The phase one expansion of Tasiast can be fully funded from the company’s $700 million cash position and $1.5 billion revolving credit facility, Rollinson said.

Kinross’s total debt stood at $1.98 billion at the end of 2015, according to Bloomberg data. BMO estimates the company will finish 2016 with $900 million in net debt, which would represent roughly 0.6 times earnings before interest, tax, depreciation and amortization, Kaip said.

“They don’t have a tremendous amount of debt due over the next couple of years so they can actually go ahead with expansion at Tasiast,” Kaip said.

Rollinson also didn’t rule out making more acquisitions in the future to boost growth.

“We still have that flexibility. We don’t need to do anything but if something like a Bald were to come along, we’d have to look at it,” he said.

– Bloomberg