Kinross Gold Corp., the gold company with the cheapest shares among large producers, is working with BNP Paribas SA to arrange financing this year for a $1.6 billion expansion project in Mauritania.
The third-largest Canadian gold miner has taken more than $5.5 billion of writedowns on its Tasiast operation since its acquisition as part of an C$8.2 billion ($7.6 billion) purchase in 2010 of Red Back Mining Inc. Chief Executive Officer Paul Rollinson, who took over from Tye Burt two years ago, is trying to get funding to justify making Tasiast the company’s biggest mine.
“We think we’ll get pretty good terms,” Rollinson, 52, said last week in an interview at the company’s Toronto headquarters. “It just takes longer to structure when you’re working through government agencies and their systems and approval processes.”
The company expects to finalize the Tasiast financing toward the end of the year, Rollinson said. The lenders may include multilateral credit agencies, such as the World Bank’s International Finance Corp., and the funding may total about $700 million to $750 million, he said.
The company won’t make a final decision on the expansion until early 2015, he said. The project was delayed after Rollinson ordered fresh studies to reassess the design.
“My theme there is, take the time to get it right,” he said. “Bigger isn’t always better.”
The company was the third-worst performer this year on the 30-company Philadelphia Stock Exchange Gold and Silver Index amid the perceived risks related to its operations in Russia, where Kinross gets about a quarter of its production. Russia’s relations with the rest of the world are deteriorating four months after its annexation of Ukraine’s Crimea region sparked Europe’s biggest geopolitical crisis since the end of the Cold War.
Rollinson is among CEOs at the world’s largest producers seeking to restore discipline after years of commodity-price increases. In addition to sending Tasiast back to the drawing board, Rollinson has suspended the dividend, halted a higher-cost mine and slashed annual spending plans by 69 percent since he took over.
The latest design for Tasiast is for a smaller project with an estimated cost of $1.6 billion, although Rollinson is hoping he can make further cuts to costs. The company will fund the rest of the expansion itself, he said.
‘Opportunity to Transform’
The company, which also operates mines in the U.S., Brazil, Chile and Ghana, has a lot riding on the expansion.
“It has the opportunity to transform Tasiast from what’s a smaller, higher-cost producer currently in the portfolio, to our largest producer at close to the lowest cost,” Rollinson said.
The CEO said he wants to eliminate as much risk as possible before officially approving the expansion. The company is negotiating a few smaller issues with the government in the meantime, such as labor regulations, Rollinson said.
Tasiast project financing would be an important milestone for Kinross, said Pawel Rajszel, a Toronto-based analyst at Veritas Investment Research Corp., who has a sell rating on the shares.
“If they do get this project financing going, depending on the terms and depending on how much capital Kinross would still have to put at risk, that could make the project significantly more appealing and potentially boost their valuation,” Rajszel said in a telephone interview.
Cesaltine Gregorio, a BNP Paribas spokeswoman, said by phone yesterday she wasn’t immediately able to comment on the Paris-based bank’s involvement in the financing talks.
While Rollinson says he’s pleased with the company’s progress after meeting operational forecasts for seven straight quarters, investors haven’t shown the same enthusiasm. Kinross had the lowest price to book value ratio among 20 global gold producers bigger than $3 billion through yesterday.
Kinross fell 1.3 percent to C$4.42 at the close in Toronto. The shares have declined 4.9 percent this year.
The company has “excellent” relations with the Russian government and has been working in the country for almost 20 years, he said, pointing out that its eastern Russian mines -- Kupol and Dvoinoye -- are closer to Toronto than Moscow. The mining operations haven’t been affected by the political tensions, he said.
Still, with about 27 percent of the company’s 2014 output forecast to come from Russia, the geopolitical risk has been an issue for investors and has hurt its share price, Rollinson said. When Kinross unveiled its new plan for the Tasiast expansion this year, Rollinson found he couldn’t get through a conversation without getting questions about Russia.
“What we felt we had was good news, a lot of hard work, millions of man hours, and all people wanted to do was talk about Russia,” he said, three days before the July 17 downing of Malaysian Flight 17 in eastern Ukraine exacerbated tensions between Russia and the rest of the world.
Canada has imposed financial sanctions and travel bans on Russian officials. The government also recalled its ambassador to Moscow, suspended military cooperation and pledged financial aid to Ukraine.
The company has had a “constructive” dialogue with the Canadian government, Rollinson said. He attended the St. Petersburg Economic Forum in May even after Canadian Minister of International Trade Ed Fast asked business executives not to go.
“We just said look, we are miners, we hope there’s a peaceful solution to the situation,” Rollinson said. “We just ask for caution, please consider unintended consequences if you were to proceed with more sanctions, and think about who you might really be hurting.”