Kinross Gold Corp. is swinging the axe.
On the heels of massive cost escalation in the gold sector, Canada’s third-largest gold miner said last night it is launching a sweeping cost-cutting campaign to improve its cash flow.
The announcement comes after a warning last week by Barrick Gold Corp., the world’s largest gold producer, that a key mine it is building in Chile will cost billions of dollars more than originally projected.
Kinross chief executive officer J. Paul Rollinson, who was installed last week when the miner sacked former boss Tye Burt, suggested in his first public statements since taking the helm that the company may have to take another writedown on its troubled gold mine in Mauritania, which the company purchased in an expensive and controversial deal in 2010.
“I believe we need to get back to the fundamentals of our business,” Mr. Rollinson said, who promised a “company-wide” cost-cutting plan.
“This may require tough decisions in a number of areas to ensure that we maximize free cash flow and shareholder returns.”
Canada’s big gold miners are coming under increasing pressure from shareholders to fix a disconnect between share prices and the elevated prices for the bullion they produce, and are demanding that companies emphasize returns over growth for growth’s sake.
At $1,616 (U.S.) per ounce, gold is not far from its record high – but gold stocks such as Barrick and Kinross have lagged far behind the metal itself as the cost of building new mines balloons.
Kinross’s new approach “means striking the right balance between the objective of growing the business and generating free cash flow,” Mr. Rollinson said in a statement that accompanied the company’s second-quarter results.
The pledge is a near echo of promises made by Barrick when it reported a 60-per-cent rise in costs at a key mine in Chile on July 26 and chief executive officer Jamie Sokalsky said he had “initiated a thorough review of our mines and projects to evaluate their rates of return and ability to generate free cash.”
Rising costs have become the overriding concern of the mining industry in recent months, particularly in the areas of labour, energy and consumables. Slipping metals prices are putting further pressure on margins.
Kinross said in its report that production costs of sales per gold equivalent ounce were $725 (U.S.) in the quarter, compared to $569 for the same period last year – a 27-per-cent jump.
At Tasiast, the giant gold deposit Kinross acquired with the $7.1-billion (U.S.) takeover of Red Back Mining two years ago, performance was hurt by lower-than-expected mill gold grades. Red Back was the largest acquisition in the company’s 19-year history and was to transform the Toronto-based company into one of the fastest-growing gold miners in the world.
But the deal lost its glow when Kinross was forced to write down $2.49-billion on the Tasiast project, marking the biggest loss in its history.
In its earnings report on Wednesday, Kinross said it was reviewing the construction of a smaller, 30,000-tonne-per-day mill at Tasiast, as compared to the 60,000 tonne-per-day mill, and that that might require them to do an “impairment” test.
“They are probably telling you that it is not nearly as good as they originally thought,” said George Topping, an analyst with Stifel Nicolaus in Toronto. “They are warning you that they may have to take another writedown.”
Kinross reported adjusted net earnings of $156-million, compared with $222.6-million in the second quarter last year.