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Gold’s slide takes $2.4-billion toll on Kinross

The Tasiast gold mine in Mauritania. Kinross Gold announced Wednesday that it would delay a decision on whether to proceed with the construction of a new mill that processes the ore it mines at the West Africa mine.

kinross

Kinross Gold Corp. announced a $2.4-billion impairment charge because of lower gold price assumptions and a previously announced loss on an Ecuadorian project that the miner abandoned a few months ago.

The latest charge brings the company's writedowns to $8-billion over the past year and a half, exceeding Kinross's market capitalization of about $6.1-billion.

The company cancelled its next semi-annual dividend payment, and raised the possibility that it would scrap the dividend altogether, depending on factors such as market conditions and its balance sheet strength.

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Kinross also said Wednesday that it would delay a decision on whether to proceed with the construction of a new mill that processes the ore it mines at its Tasiast project in West Africa. That decision follows a commitment made just three months ago to proceed with the next phase of its expansion.

Kinross's woes are emblematic of a struggling industry hampered by a slew of multibillion-dollar writedowns, cost cuts and share price slumps. Kinross shares are now worth just $5.34 apiece, down 78 per cent from their post-crisis peak, while Barrick Gold Corp.'s have fallen to $17 each – a low that was, until very recently, last seen in 1992.

In many cases, gold miners are being punished for ambitious acquisitions they made when commodity prices began to rebound in the aftermath of the financial crisis. In 2010, Kinross bought Red Back Mining Inc. for $7.1-billion. Today, much of that acquisition has been written off.

To shake things up, Kinross replaced former chief executive officer Tye Burt with Paul Rollinson last year, hoping that a new CEO could help to clean up the mess. But gold prices have since taken a big tumble, falling from their high of $1,900 (U.S.) an ounce to $1,324, making the miner's projects much less profitable.

For that reason, analyst David Haughton at BMO Nesbitt Burns said just a few weeks ago that he expected the miner to delay the expansion of its Tasiast mill.

"At current gold prices, Tasiast is estimated to yield a 5-per-cent IRR [internal rate of return], which appears inadequate for the potential $2.9-billion (U.S.) investment," he wrote in a research note.

"Kinross has made good strides to improve the costs at the existing assets and has beat consensus earnings for three successive quarters. However, BMO Research forecasts balance sheet pressure at prevailing metal prices in the absence of further cost reductions, capital conservation and possibly lower dividend," he said.

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Analyst Alec Kodatsky at CIBC World Markets wrote in April that the once-promising Tasiast project "appears a pale shadow of past expectations" and that "abandoning the expansion of Tasiast places the company in a difficult position, but from a market perspective may prove more palatable than spending significant capital on an unloved project."

Because the project's capital expenditures have skyrocketed, Tasiast's net present value was just $1.1-billion at the time, and that was only when assuming a gold price of $1,500 an ounce.

Kinross lost $2.5-billion in the second quarter, largely stemming from the latest writeoff. Stripping out the charge, the company made $120-million.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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