Kinross CEO Shakeup Signals Breakup or Sale of Gold Miner

Kinross Gold Corp.’s switch to a new chief executive officer is fueling speculation Canada’s fourth-biggest gold miner will be broken up or sold.

Kinross, which has lost 34 percent of its market value this year, announced Aug. 1 that J. Paul Rollinson, previously vice president for corporate development, would replace Tye Burt. The CEO for more than seven years, Burt led Kinross in four takeovers, including the C$8 billion ($8 billion) acquisition of Red Back Mining Inc. in 2010 that led to a C$2.49 billion writedown 17 months later.

Gold miners struggling with rising costs at multibillion-dollar projects may be tempted to acquire Kinross or buy parts of it, Adam Graf, a New York-based analyst at Dahlman Rose & Co., said in a telephone interview.

“I think the majors have to be scratching their heads and saying, I don’t want to buy anything that’s pre-production because my shareholders don’t have the patience for it,” Graf said. “Someone buying Kinross or breaking up Kinross a la Placer Dome could be on the minds of some of the larger mining companies.”

Barrick Gold Corp. acquired competitor Placer Dome Inc. for $10.2 billion in March 2006 to become the world’s biggest gold producer. As part of the deal, Goldcorp Inc. paid about $1.6 billion for some of Placer’s assets in Canada. Barrick and Goldcorp are now the two largest Canada-based gold producers by market value, followed by Yamana Gold Inc.

‘Extract Value’

Rollinson, a former investment banker with a background in geology and mining engineering, needs to present a clear plan to get the best value from the assets of his Toronto-based company, said Greg Orrell, president of Orrell Capital Management.

“It’s certainly all on the table for them,” Orrell, who manages about $200 million including Kinross shares, said yesterday by phone. “They’ve got to figure out what’s the best way to rationalize that asset base going forward and extract value.”

Steve Mitchell, a Kinross spokesman, declined to comment beyond a statement on Aug. 1, when Kinross said the CEO change was needed to guide the company through its “capital and project optimization process.” Rollinson wasn’t available to comment, Mitchell said.

Kinross’s decline this year in Toronto compares with a 20 percent drop in the 59-member S&P/TSX Global Gold Sector Index. The company, which trades at 0.7 times book value, said in January it was reviewing scheduling and development plans for an expansion at Red Back’s Tasiast mine in Mauritania after it compiled more data on the gold deposit.

Development Delays

In February, it announced the writedown on Tasiast and said it would delay development of mines in Ecuador and Chile.

The CEO change may indicate that there is bad news on the way regarding the Mauritanian mine, Anita Soni, an analyst at Credit Suisse AG, said in a note. The expansion project may cost as much as $4 billion, compared with Kinross’s previous forecast of $3.2 billion to $3.7 billion, she said.

Burt “staked his reputation on Tasiast” when he asked investors to trust him that it was worth the purchase price, Soni said. Kinross shareholders approved the Red Back deal, even with a recommendation by investor adviser RiskMetrics Group Inc. that they vote against the acquisition because production would have to be “significantly higher” than market consensus to break even.

Asset Rationalization

“We believe Mr. Rollinson has been hired to lead the asset rationalization and restructuring process for Kinross which may include a divestment of Tasiast,” Soni said.

Before the Red Back acquisition, Kinross acquired Bema Gold Corp. in 2007 for C$3.7 billion in shares to add assets in Russia and Chile. The following year, the company bought Aurelian Resources Inc., also for stock, for its Fruta del Norte project in Ecuador. Under Burt, Kinross also acquired Underworld Resources Inc., which owned a project in the Yukon, for C$90.76 million in 2010.

Development has yet to begin on Fruta del Norte while the company negotiates investment terms with the Ecuadorean government.

“The things that they’ve done don’t give any confidence to investors that they have the capability to run the company,” Orrell said. “They just got to the point where there was no confidence through the organization and through the whole investment community right on down.”

Potential Buyers

To be sure, anyone looking to buy or break up Kinross would probably need the support of the company, which may not be interested in offers, Barry Allan, a Toronto-based analyst at Mackie Research, said in a phone interview.

The pool of potential buyers is also limited, John Goldsmith, portfolio manager at Montrusco Bolton Investments in Toronto, which manages C$5 billion in assets, said by phone.

“There’s no slam-dunk suitor that would come in and be happy with absolutely everything,” he said.

Kinross, which also has operations in the U.S., Brazil and Ghana, has forecast production this year of 2.6 million to 2.8 million of so-called gold-equivalent ounces, which includes silver production.

Kinross’s CEO announcement comes less than two months since Toronto-based Barrick ousted CEO Aaron Regent and replaced him with Jamie Sokalsky, who had been chief financial officer, after the company said it was “disappointed” by its share-price performance.

‘Production Gaps’

Barrick, which reported earnings July 26, said at the time its biggest development project, the Pascua-Lama mine on the Chile-Argentina border, may cost 50 to 60 percent more and would start up a year later than expected.

“Barrick has foreshadowed what their own major project has done on a capital cost line in a remote location,” Mackie’s Allan said. “What does this mean for Tasiast?”

Kinross rose 2.5 percent to C$7.75 at 4:17 p.m. in Toronto. Barrick gained 1.2 percent to C$32.83.

Newmont Mining Corp., the biggest U.S.-based gold producer, could be a potential buyer of Kinross or some of its assets, Allan said.

“Newmont really hasn’t done anything much over the last number of years to bridge their own production gaps,” he said.

Rollinson may look at selling projects like Lobo-Marte or the company’s 25 percent stake in Barrick’s Cerro Casale project, both in Chile, David West, an analyst at Salman Partners in Vancouver, said by phone.

“They may decide to trim some of the flesh off, and that would include Lobo-Marte and Cerro Casale,” West said. Potential buyers for the assets could include Chinese companies, he said.

Provide Continuity

Rollinson, 50, joined Kinross as executive vice president of new investments in September 2008. Before that, he was deputy head of investment banking at Scotia Capital, a unit of Toronto-based Bank of Nova Scotia. Rollinson, like Burt, also worked at Deutsche Bank AG and BMO Nesbitt Burns.

The appointment of a new CEO “would have been a lot more positive if they had gone external,” West said. “Maybe a change in culture would have been healthy at this point,” he said. Considering that Rollinson was previously head of corporate development, “there’s some questions as to just what role he had in these acquisitions,” that were negatively viewed by the market, he said.

Still, Rollinson’s familiarity with Kinross’s assets and management team should provide continuity and mean less disruption for the development of its projects, David Haughton, an analyst at BMO Capital Markets said in a note yesterday.

‘Different Personality’

“Kinross is building a substantial asset on another continent in a really challenged region and hiring internally is important here,” Don Poirier, vice-president of corporate development at Hecla Mining Co., a U.S. silver producer, said in a telephone interview. “With Kinross well into a big capital spend, Paul knows the people and where to get things done without making a fundamental error.”

Rollinson is a “different personality to a Tye Burt, in the sense that he’s more of a conservative, practical type personality,” Allan said. “Tye Burt is ‘command and control.’ Paul is much more about looking at how do we best get it done.”

It may be some time before Rollinson makes any significant changes, Goldsmith said.

“If I was running the show, I would be cleaning stuff up, cutting the chaff as much as I possibly could, and then see where are we going, what do we want to do with this asset, is this asset a core asset for us?” Goldsmith said.

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