When you buy a share in Canada's Kinross Gold Corp., you are not just betting on gold prices; you are betting on the outcome of the great geopolitical standoff between the West and Vladimir Putin's Russia, which may or many not evolve into a new Cold War.
So far, the bet has gone massively in Mr. Putin's favour – Kinross shares are so low that they seem to be awarding virtually no value to Kinross's two big, and profitable, gold mines in Russia's far east. In 2010, Kinross was a $20 stock. Today, it trades at about $3.20 and has been as low as $2.27.
But haven't all gold companies been slaughtered along with the gold price?
Yes, but Toronto-based Kinross is in a submarine class all of its own and when its executives and shareholders are in a masochistic mood, they call up a few Goldcorp charts. Vancouver's Goldcorp Inc. is of roughly equal size yet its market value is more than four times higher than Kinross's ($18.5-billion versus $3.6-billion). Eldorado Gold Corp., whose production is less than a third of Kinross's, is worth $5-billion. Ouch! Whip us again! Kinross's problem can be summed up in one wretched word: Russia.
"We're getting doubly hammered because of the gold price and the situation in Russia," says Kinross CEO Paul Rollinson, who was in London this week trying to convince investors and brokers that the economic sanctions against Russia were not endangering Kinross's mines.
The effort had at least partial success. In Toronto trading on Tuesday, after Mr. Rollinson finished his investor therapy sessions, Kinross shares rose more than 10 per cent, a far bigger gain than its rivals', reducing the one-year loss to 34 per cent.
Mr. Rollinson meets me at the St. James bar of the elegant Sofitel hotel, the former Cox & Co. bank building, from 1923, at Waterloo Place, near Piccadilly. The bar is dark, buzzy, expensive – a glass of plonk costs £10 or about $17.50 – but uses some wit to distance itself from the building's dour past. The ceiling features a massive portrait of a rooster clad in a red coat military uniform.
Mr. Rollinson, 52, orders a glass of Chablis; it's late afternoon and too early to eat. He looks like a miner. He is stocky, with close-cropped hair, and seems powerful enough to hurl a gold ingot over a truck. But his demeanour is anything but aggressive. He's rather soft spoken, swears only a bit and professes outright fear of journalists. He rarely gives interviews.
Wearing blue jeans and a black sweater – he has shed the blue suit he wore to the investor meetings – the boss of one of the world's biggest gold companies comes across as a charming rube who doesn't flaunt his wealth. In Toronto, he drives an old Dodge pickup truck to work.
But first appearances can be deceptive. Evidently, Mr. Rollinson has defused a potentially dire situation with Putin & Co. as the sanctions chew into the Russian economy and Canadian Prime Minister Stephen Harper ramps up the anti-Putin rhetoric, as he did last week at Group of 20 meeting in Australia. At a private leaders' schmoozer, Mr. Harper, according his spokesman, met Mr. Putin and said, "You need to get out of Ukraine."
If Mr. Putin is mad at Canada in general and Mr. Harper in particular, he's not taking it out on Kinross, which is the biggest Canadian investor in Russia. "For us, it's situation normal in Russia," Mr. Rollinson says. "We continue to operate as we always have."
But the share price suggests investors fear that Mr. Putin might be tempted to retaliate against investors from countries, like Canada, that are enthusiastic cheerleaders of using sanctions as financial weapons.
The not-so-subtle threat exists. In September, a draft law was submitted to the Duma, the Russian parliament, that would allow the seizure of foreign assets on Russian territory as compensation for a Russian whose property is seized in foreign states. The draft law came after Italian tax police seized about €30-billion ($41.8-billion) of assets belonging to Russian billionaire and Putin ally Arkady Rotenberg, who was targeted by U.S. and European Union sanctions.
The so-called Rotenberg law helped to knock 15 per cent off Kinross shares that month, a pace that more than doubled in October.
Mr. Rollinson, a mining geologist turned investment banker, had never been a CEO before Tye Burt was ousted as Kinross's boss in August, 2012. At the time, gold was trading at about $1,650 (U.S.) an ounce – it's now below $1,200 – and gold mining shares were still rather buoyant, with the notable exception of Kinross. The company was getting slaughtered by billions of dollars of writedowns on Mr. Burt's showpiece, a $7-billion (Canadian) acquisition in 2010 of Red Back Mining, whose main asset was the potentially enormous Tasiast gold mine in Mauritania.
Talk about a baptism by fire. Mr. Rollinson had to figure out whether to develop Tasiast or put it into hot, dusty storage in the desert, a decision that will finally be made early next year. A few months later, gold prices began to slide, then plummet, sending Mr. Rollinson and his team on a cost-crunching campaign that has yet to end.
In mid-2013, another deal from the Tye Burt era, the $800-million (U.S.) all-share purchase of Aurelian Resources, turned sour when the Ecuadorean government insisted on a 70-per-cent windfall profits tax on Aurelian's Fruta del Nord project.
Exasperated, Kinross gave up trying to strike a non-punitive tax deal and unloaded the project on Lundin Group's Fortress Minerals for a mere $240-million.
Then came the Ukraine crisis, Russia's seizure of Crimea, the rising body count in eastern Ukraine and the sanctions against Russia. In an instant, Kinross's Russian mines, responsible for about a third of the company's expected gold production this year of 2.6 million to 2.7 million ounces, went from glittering asset to potential geopolitical target.
Since then, Kinross has been working hard to protect its Russian mines, an effort that has seen the company recruit lobbyists in Ottawa and meet with Russian president Dmitry Medvedev (Kinross is the only Canadian member of the 51-company Foreign Investment Advisory Council, whose chairman is Mr. Medvedev).
Life used to be simple for Mr. Rollinson, whose idea of a good time is fishing and walking his dog, not guessing whether the incoming Republican Congress in the United States will hit Russia with new sanctions.
Mr. Rollinson was born in Britain and emigrated to Canada with his family when he was 5 – his father was an engineer who found work with the company that later became Cameco, the uranium miner. He earned geology and mining degrees from Laurentian and McGill universities and opted for a career in exploration geology, since he loved the wilds of Canada.
"My wife Sally is a geologist, too; we both worked in exploration and we met in northern Quebec," he says. "There were no women in my undergrad, no women in my master's and the first woman I met in the bush I married … Our first dates were in helicopters."
Exploration meant living in tents for most of the year, which can be awkward when you're about to get married and start a family. So Mr. Rollinson shifted to mining investment banking and loved it. Working for BMO Nesbitt Burns, Deutsche Bank and Scotia Capital, he travelled from Africa to the Andes to visit mining projects.
In 2008, Tye Burt, an investment banker himself, offered him a job at Kinross. They knew each other because Mr. Rollinson had advised Kinross on the acquisition of Bema Gold, which owned the Kupol gold project in eastern Russia.
At Kinross, he was responsible for non-gold diversification and made the profitable investment in diamond company Harry Winston.
Moving up the ladder, he became corporate development boss and, when the hideous writedowns on the Red Back purchase (a deal that he had supported) killed Mr. Burt's career, he found himself running the show. That meant he had to manage a crisis that was getting worse by the day.
Mr. Rollinson had to make some hard decisions. The first was not to bet the company on expensive projects in a falling market. Instead, the focus would be on protecting the balance sheet and putting the company on a Greek-style austerity regime. Fruta del Nord was jettisoned and production at one mine, in Chile, was stopped. Capital expenditures went from $2.2-billion in 2012 to a forecast $675-million or less this year. The dividend was suspended. Haunting management as gold prices fell was a debt covenant that, if breached, could see the company's lenders insist on loan repayment in full. The spending reductions have removed the covenant threat, ensuring that Kinross now has one of the healthiest balance sheets in an ailing industry.
Which brings us back to the Tasiast mine. Kinross will soon announce whether the mine will undergo a $1.5-billion-plus expansion that would allow production to rise to close to 850,000 ounces a year, from 200,000. To get there, the mine would need a new mill, electricity supplies and a 160-kilometre water pipeline from the ocean.
Mr. Rollinson won't say whether he's set to ditch the Tasiast expansion, but I would guess from his body language and his stated goal of coddling Kinross's balance sheet like a newborn baby that it's a no go.
"If I am 20 months into a construction project and the gold price tanks and my EBITDA [earnings before interest, taxes, depreciation and amortization] goes down, I don't want to put our balance sheet at risk, so we're thinking hard about this project," he says.
"The gold is in the ground, it's not going anywhere."
But if Tasiast is put into limbo, where will Kinross find growth? And if there is no growth, why would anyone buy Kinross shares as opposed to a gold exchange traded fund?
Apparently, I've asked the right question and Mr. Rollinson has the right answer: A strong balance sheet would allow Kinross to pounce on unloved gold companies or gold projects and – surprise! – any purchases would not be in Africa or Russia. "I'd look opportunistically," he says, adding that only 50 per cent of Kinross's production in the Americas, and none in Canada. "In an ideal world, we'd rebalance geographically. I would say the Americas would be a priority for us."
In the meantime, Russia is a problem because it's weighing down the share price. Can he find an elegant way out of Russia? Mr. Rollinson has been asked this question a million times by investors and analysts and has careful, measured answers: Not now, the timing isn't right and, besides, the Russian mines are profitable and we're getting our cash out without any problem. "We have a good relationship with the government and they view us as a poster child example of how to do business in Russia," he says. "Why would I throw it away? I would rather stay and have the political situation improve."
In reality, Kinross has a good insurance policy. The two Russian mines are wholly owned, have all their permits and employ 2,200 in a remote part of the world.
If the Kremlin were to make life difficult for Kinross, it's not just Kinross itself that would suffer; so would Russia's far east. He says his meeting in mid-October with Mr. Medvedev, the Russian president, gave him no reason to fear that Kinross's mines might emerge as collateral damage in the sanctions war. "They value foreign investors," he says. "We talked about how business and politics don't mix."
And with that, Mr. Rollinson goes from reluctant interviewee to father. The eldest of his three daughters, Ailsa, lives in London, where she works in a boutique hotel. He is looking forward to a relaxing dinner with her as his gold world suffers anxiety spasms.
Rollinson's Top Ten
Favourite book:The Flashman series, by George MacDonald Fraser
Movie: Westerns, especially True Grit
Band: the Tragically Hip
Buys suits from: Holt Renfrew
Restaurant: Le Select Bistro, Toronto
Drives: 2008 Dodge Ram pickup, black
Sports: Fishing and skiing
Ski spot: Osler Bluff Ski Club, Blue Mountains, Ontario
Holiday destination: Costa Rica, Pacific side
Charity: Emily's House, Toronto's first pediatric palliative care hospice, supported by his wife Sally