By Peter Koven
National Post / Financial Post, Toronto
Monday, April 29, 2013
http://business.financialpost.com/2013/04/29/kinross-gold-tasiast/
TORONTO -- After two and
a half years of work at its troubled Tasiast
project, Kinross Gold Corp. still has a lot to prove.
On Monday Kinross
released a long-awaited pre-feasibility study on the proposed expansion of
Mauritania-based Tasiast. The company called the
results "encouraging" and elected to move ahead with a full
feasibility study. But analysts and investors were far from thrilled.
Put simply, the study
results did not confirm that the project would generate a strong return on
investment. Instead, they confirmed a lot of work still needs to be done.
The initial cost to get Tasiast up and running would be US$2.7 billion,
according to the study. While the proposed mine would produce roughly 830,000
ounces of gold a year at low costs, the estimated net present value is only
US$1.1-billion at a gold price of US$1,500 an ounce, while the internal rate
of return (IRR) is a meagre 11%.
That is a low IRR for
such a large and high-risk project, especially given that the assumed gold
price is higher than the current one. At lower gold prices, analysts
estimated that the numbers get significantly weaker.
"A US$2.7 billion
investment to generate US$1.1 billion in West Africa is unattractive,"
Stifel Nicolaus analyst George Topping wrote in a note. He believes that
pressing on with a "weak" project in a rough market is not a wise
move and is "detrimental to market confidence in the company.
On a conference call,
chief executive Paul Rollinson stated repeatedly that this is only a
pre-feasibility study and there are opportunities to improve the economics of
the project. One possibility is to use natural gas instead of heavy oil as an
energy source, as Mauritania has vast quantities of offshore gas that have
not been tapped. "At some point, this gas will come to shore," he
said.
But he also maintained a
cautious outlook on Tasiast, stating that Toronto-based Kinross would not do
anything to threaten its balance sheet.
"The priority for us
is balance sheet strength," he promised.
Kinross will not make a
construction decision on the Tasiast expansion until the feasibility study is
finished next year, so there is plenty of time to find ways to improve
returns.
Kinross picked up Tasiast
in 2010 when it acquired Red Back Mining Inc. for a whopping US$7.1 billion.
Remarkably, that is higher than Kinross' current market value. Tasiast was
supposed to become one of the company's crown jewels but instead became a headache
as capital costs soared higher and it was mostly written down. The problems
at Tasiast were a key factor behind the firing of former CEO Tye Burt last
year.
Kinross initially hoped
to process 60,000 tonnes of ore per day at Tasiast but downsized those plans
because of cost pressures. The pre-feasibility study concluded that the best
option is to process 38,000 tonnes per day.
Greg Barnes, an analyst
at TD Securities, wrote that the project economics at Tasiast should improve
after US$600 million is spent to upgrade infrastructure this year. However,
he noted that many questions remain and investors will remain cautious until
they see firmer numbers. The stock has plummeted 43% this year.
"As more money is
invested into the project as a sunk cost, the project will become
increasingly attractive," Mr. Topping wrote. "However, this defeats
the purpose of economic studies, which is obviously to avoid the sunk cost on
weak projects in the first place."
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