Kinross Says Costs Review May Require ‘Tough Decisions’

Kinross Gold Corp. Chief Executive Officer J. Paul Rollinson, a week into his job after his predecessor was fired, said he’s initiating a companywide review to cut costs that may require “tough decisions.”

“Given rising costs, I believe we need to get back to the fundamentals of our business,” Rollinson said yesterday in the company’s second-quarter earnings statement.

Kinross has tumbled 32 percent this year in Toronto after taking a $2.49 billion writedown on the Tasiast mine in Mauritania, which it bought as part of its C$8 billion ($8.07 billion) acquisition of Red Back Mining Inc. in September 2010. Kinross said Aug. 1 that Rollinson, previously vice president for corporate development, was replacing Tye Burt as CEO.

A change of leadership was needed to guide Toronto-based Kinross through its “capital and project optimization process,” the company said last week. Kinross, the third-largest Canadian gold producer, said in February it would use stricter criteria for spending and project approvals amid industrywide cost inflation and would delay development of mines in Ecuador and Chile.

The company yesterday raised its 2012 forecast range for the cost of sales to $690 to $725 per ounce of gold from $670 to $715 previously.

Kinross rose 2.4 percent to C$7.96 at the close in Toronto. Gold futures increased 0.3 percent to settle at $1,620.20 an ounce on the Comex in New York.

‘Serious Challenges’

The gold industry is facing “serious challenges” with rising costs and project delays that have led to an erosion of confidence from investors, Rollinson said today on the company’s earnings conference call.

“We can leave no stone unturned in an effort to cut waste and build free cash flow,” he said. “This value-driven approach may lead us to make some tough choices.”

Kinross also said yesterday it’s studying a “staged approach” to expanding Tasiast and will undertake a prefeasibility study for an expandable mill with an ore-processing capacity of about 30,000 tons a day. Existing studies for a 60,000-ton option will continue, it said.

Kinross said it’s also considering smaller options at its Lobo-Marte project in Chile.

‘Unattractive Projects’

The new cost-reduction initiative “could raise the odds of unattractive projects being shelved,” Alec Kodatsky, a Toronto-based analyst at Canadian Imperial Bank of Commerce, said in a note yesterday.

At Tasiast, “a staged approach appears the most prudent means to improve the odds of delivering the project on time and on budget and within the fiscal constraints of the company,” Kodatsky said. “Market uncertainty regarding the project will remain until greater clarity is gained,” he said.

Kinross’s second-quarter net income dropped to 13 cents from 22 cents a year earlier. Profit excluding an inventory impairment charge and other items was 14 cents a share, trailing the 17-cent average of 20 analysts’ estimates compiled by Bloomberg.

Sales climbed to $1.01 billion from $963.6 million. The average of seven estimates was for $1.02 billion.

The company isn’t the only gold producer to change leadership in the face of rising development costs. Canada’s Barrick Gold Corp., the world’s biggest producer of the metal, ousted CEO Aaron Regent and replaced him with Jamie Sokalsky in June.

Barrick said last month its biggest development project, the Pascua-Lama mine on the Chile-Argentina border, may cost as much as 60 percent more than previously estimated. It also pushed back the startup date by a year. Sokalsky said July 26 the company had begun a review of all its assets.

Goldcorp Inc. is the second-largest Canadian gold producer ranked by sales.

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