Kinross Gold Corp. is taking another massive charge on its African operations, slashing the value of its flagship growth properties to a fraction of the $7.1-billion it paid to acquire them just two years ago.
The Toronto-based miner said on Wednesday it would take an impairment charge of $3.206-billion (U.S.) on 2012 earnings, most of it attributable to the Tasiast project in Mauritania amid soaring capital and operating costs that have hit the entire mining industry.
That comes on top of a $2.49-billion charge on the assets a year ago. Altogether, Kinross has now cut nearly 80 per cent of the value of its takeover of Red Back Mining in 2011, which included Tasiast and Chirano, another mine in West Africa.
"It's pretty darn sad that a company can be that wrong on an acquisition," said George Topping, an analyst with Stifel Nicolaus in Toronto.
"I think they're pretty much telling you that they think it [the acquisition] is worth $1.5-billion, between Tasiast and Chirano, the two mines that they bought."
The company, however, books the value of the Tasiast and Chirano mines at $2.5-billion and $1.7-billion, respectively, as of Dec. 31.
Tasiast represents the company's key growth driver. The new charge at Kinross is massive, but it is also just the latest in a string of casualties in a global mining industry dealing with the most severe cost escalation in decades at the same time that commodity prices teeter and pause after a decade-long climb.
The Red Back takeover was the largest for the company and was the brainchild of former chief executive officer Tye Burt, fired six months ago as investors clamoured for change, complaining about a share price that is still lower today. than when he left.
The non-cash charge comes as the project value is reduced from earlier estimates, in part as operating and capital costs rise and in part as Kinross changed the mine plan to process about half as much gold as originally planned.
The impairment test for 2012 was based on a 30,000-tonnes-per-day mill model, compared to a 60,000-tonnes-per-day model used when it announced the first charge a year ago, shocking investors. According to analysts, the charges announced this week essentially mean Kinross will have about half the mine it thought it did at the same cost of construction.
As harsh as that may be, the charge at Tasiast could finally reset expectations about the company and give its new chief executive officer, J. Paul Rollinson, a clean slate from which to rise.
Mr. Rollinson said in an interview with The Globe and Mail on Wednesday that the writeoff, a snapshot in time of the valuation of the project, was largely the result of broader capital and operating cost travails in the gold industry.
"The whole global mining industry was rushing to have a capital build-out and, as a result there was a lot of cost overruns, delays and disappointments," he said by telephone. "There was a huge competition for everything, for tires, for steel, for grinding media, for engineers, for geologists."
To be sure, upon taking over from Mr. Burt at the end of last summer, Mr. Rollinson embarked on company-wide cost-cutting measures, slashing hundreds of millions from capital spending in 2012. He said on Wednesday that similar cost savings could be expected in 2013.
"Notwithstanding that charge, we see a lot of gold at Tasiast," Mr. Rollinson said. "Tasiast is a core asset for us. It will be a big producer for many years in a prospective region."