Kinross Gold Corporation Has an Interesting Project in the Pipeline

An expansion feasibility study reveals that Tasiast will be a low-cost project, but it will need additional financing.

Vladimir Zernov
Vladimir Zernov
Apr 2, 2014 at 9:37AM
Energy, Materials, and Utilities

The results of Kinross Gold's (NYSE:KGC) Tasiast mine expansion feasibility study came at a time when the gold miner's shares found themselves under increasing pressure. Investors are worried that possible sanctions against Russia could endanger the companies' Russian business, which consists of the Kupol and Dvoinoye mines. This is possibly the main reason why market participants mostly ignored the positive results of the feasibility study. However, from a long-term point of view, expansion of Tasiast could be a notable driver of Kinross Gold's growth.

Tasiast expansion will be a low-cost project
According to the feasibility study, which was based on a $1,350 per ounce gold price assumption, the Tasiast expansion project will provide an average 848,000 ounces of gold in the first five years of production. Importantly, all-in sustaining costs are expected to average $792 per ounce, way below current gold prices. What's more, the numbers for the initial capital spending significantly improved compared with pre-feasibility estimates. Kinross Gold estimated that it will need $2.7 billion to start the project. Now the company targets initial capital expenditures of $1.6 billion.

While the project looks tempting, Kinross Gold will make a decision to proceed no earlier than at the beginning of 2015. The reason for this is clear – the gold price environment. The feasibility study assumes a $1,350 gold price, while current gold prices are below $1,300 per ounce. Lower prices decrease cash flows and make borrowing money more expensive.

In its latest $500 million bond offering, Kinross Gold got a 5.95% interest rate for its 10-year notes. Should the gold price trend lower, risks for gold producers will increase, and interest rates will increase too. In its attempt to preserve cash on the balance sheet, Kinross Gold lowered its capital spending program to $605 million this year. Other miners like IAMGOLD (NYSE:IAG) and Eldorado Gold (NYSE:EGO) are following the same path, reducing their capital expenditures in light of prolonged gold price softness. IAMGOLD recently went one step further and suspended its dividend to save cash.

However, even with the reduction in capital spending and cost discipline, Kinross Gold will not be able to start Tasiast expansion without external financing. The important factor is that first production from the project will come in 2018 should the company choose to start work in 2015. This is a significant period of time with big investment and no cash flows from the project. My bet is that the company might take a conservative approach and won't start the project should gold prices remain at current levels.

Possible sanctions on Russia affect current valuation
Currently, Russia is the most cost-efficient region for Kinross Gold. The Kupol and Dvoinoye mines are expected to produce 690,000 – 730,000 ounces of gold this year at cost of sales of $560-$590 per ounce. What's more, the recent devaluation of the Russian ruble could further decrease costs. Russia is expected to bring 27% of Kinross Gold's total production this year -- that's why possible sanctions unnerve investors.

It's difficult to predict whether new sanctions will be imposed or not, but currently it looks like the fears are exaggerated. Sanctions would have to be extremely severe to affect Kinross Gold's business in Russia, which is an unlikely scenario in my view.

Bottom line
Kinross Gold has a promising project in the pipeline, but it will have to borrow to start it. What's more, it is unlikely that the company will begin the work if gold prices remain at current levels. All in all, low gold prices and uncertainty about its business in Russia will continue to affect Kinross Gold's share performance.