Kinross Gold Corp. (KGC), Canada's third-largest producer by revenue, took a big non-cash charge of $2.3 billion on assets and goodwill and suspended its semi-annual dividend after sharp decline in gold prices.
Headquartered in Toronto, Canada, Kinross is currently the world's fifth largest producer of the yellow metal. The company has majority ownership interest in and operates 8 mines in Canada, Brazil, Russia, Ecuador, Chile, Ghana, Mauritania, and the United States. Kinross is also a 50% owner and operator of Round Mountain mine in the U.S.
The Toronto based Kinross said that the impairment charge of $2.3 billion was largely related to lower short-term and long-term gold price assumptions. Gold miners in the past two months have announced billions in write-downs after the metal's steepest quarterly drop in London trading in more than nine decades.
Barrick Gold (ABX), the biggest producer of the metal, recorded the largest write-down of the summer. The company took a charge of $8.7 billion, including $5.1 billion related to company's delayed Pascua-Lama gold mine in South America, $2.3 billion in goodwill impairments, and $1.3 billion in other asset impairment charges.
Newcrest Mining's (NCMGF.PK), one of Australia's largest gold miners, took the second biggest charge of $5.5 billion. Similarly Newmont (NEM), Goldcorp (GG), and AngloGold Ashanti (AU) all posted huge impairment charges linking to the plunging gold prices in 2Q.
Kinross identified both the decline in the gold price and the decision to defer potential construction at Tasiast as indicators of potential impairment. The company performed impairment using a $1,300 per ounce gold price, compared with $1,500 per ounce used in the year-end 2012 assessment, and took an after tax non-cash impairment charge of $2.3 billion. In addition, the company also decided to cease further development of its Fruta del Norte ("FDN") project in Ecuador and wrote off $720 million of the carrying value of its Ecuadorean asset.
Although the company's decision on Tasiast expansion should be seen as a positive, as the current economics are not attractive enough for KGC to proceed with the project. However, at the same time the lack of measurable growth prospects for the company place it at a disadvantage compared to its peers. With Lobo-Marte's timeline extended and development ceased at FDN, the other organic growth opportunities also seem limited for Kinross.
Citing company's increased focus on capital reduction and cash conversion in the current lower gold price as the reason, Kinross deferred a decision on whether to proceed with an expansion of its Tasiast mine in Mauritania to 2015 at the earliest. KGC will move forward with the feasibility study on a 38,000 ton per day (tpd) mill expansion, expected to be completed in 1Q14; however, a decision will not be made until at least 2015 as to whether or not to proceed beyond that point.
Fruta del Norte Project Ceased
As announced previously in June, the company has ceased further development of the Fruta del Norte project in Ecuador after negotiations failed with the government on exploitation and investment protection arrangements. As a result, KGC wrote off the $720 million carrying value of asset, composed entirely of property, plant and equipment.
Kinross and the government of Ecuador were unable to agree on certain key economic and legal terms, which balance the interest of all stakeholders. Therefore, KGC concluded that it is not in the interest of the company and its shareholders to invest further in developing FDN.
The announcement didn't come as a surprise, given the two-year long unsuccessful negotiations between the government and Kinross, and the company's repeated indications that it would not pursue development of FDN if favorable terms were not reached.
With its decision to cease development of FDN, the company also announced that it has extended its debt maturities. Kinross has moved its $1.5 billion revolver and $1 billion term loan to 2018 and to 2017 respectively. The company now has no debt maturities prior to 2016.
To improve liquidity and balance sheet strength in the current weak gold price environment, the company has suspended its semi-annual dividend. Kinross decided to cancel its semi-annual dividend of 8 cents a share because of volatility in the gold price and to protect its liquidity, said CEO, J. Paul Rollinson. He further said, "We have a strong balance sheet and we wanted to keep it that way, that's the bottom line."
The company said that further decisions regarding the dividend would be based on market conditions, balance sheet strength and liquidity, operating performance and cost reductions.
KGC reported adjusted earnings of $0.10 per share, beating consensus estimates of $0.07 per share. The beat was due to better-than-expected gold equivalent production and cash production costs. The company produced 655,000 gold equivalent ounces in the quarter at total cash costs of $737 per gold equivalent ounce.
Headline EPS of -$2.17 was adjusted for after-tax non-cash impairment charge of $2.3 billion related to lower gold prices, the decision to defer a construction decision for the Tasiast expansion until 2015, and ceased development of the Fruta del Norte project.
The company reiterated its 2013 production guidance of 2.4-2.6 million ounces and also kept unchanged cash cost and all-in sustaining cost guidance for the year. KGC lowered its capital expenditure guidance to $1.45 billion (from $1.6 billion) and exploration spending to $130 million (from $160 million). The company has launched a cost review and expects to announce further savings along with an updated capital budget with its 3Q13 results.
Kinross has total liquidity of $2.7 billion, which includes $1.2 billion in cash and $1.5 billion in available credit facilities. The company also extended the maturity dates on its $1.5 billion credit facility and the $1.0 billion term loan to 2018 and 2017, respectively. With these extensions, Kinross has no debt maturities prior to 2016.
Investment Thesis & Conclusion
We are bearish on KGC. Tasiast was supposed to push Kinross into the big leagues, but unfortunately the purchase coincided with the break in gold's upward movement and a related fall in gold equity multiples limiting the mine's ability to fund the big development. With Tasiast expansion postponed and FDN ceased, Kinross does not have meaningful growth projects in the pipeline. The company offers limited production growth in the near-term and negative free cash flow is expected in the next few years as the company develops its Tasiast mine.
Although the company's decision on Tasiast expansion should be seen as a positive, as the current economics are not attractive enough for KGC to proceed with the project. However, at the same time, the lack of measurable growth prospects for the company place it at a disadvantage compared to its peers. With Lobo-Marte's timeline extended and development ceased at FDN, the other organic growth opportunities also seem limited for Kinross. The decision to suspend the dividend is also as negative by the dividend-seeking investors and puts further pressure on the stock.
Have a good day!