VANCOUVER — It’s not particularly hyperbolic to label Kinross Gold’s (TSX: K; NYSE: KGC) experience with the Tasiast gold operation in northwestern Mauritania, West Africa, a total disaster. The company has spent the past five years trying to engineer a viable expansion plan at the mine, and it has written off a large amount of the $7.1-billion it spent to acquire the asset from Lukas Lundin’s Red Back Mining in 2010.
When Kinross fired Tye Burt in mid-2012, and promoted investment banker J. Paul Rollinson as president and CEO, it was apparent that the Tasiast acquisition and valuation had a lot to do with the management change. Fast forward to March 30, however, and the company says it has found the key to unlocking the mine’s potential.
During a well-attended event in Toronto, management unveiled a US$1.5-billion, two-phase plan at Tasiast that includes a feasibility study on an initial, 12,000-tonnes-per-day expansion, and a prefeasibility study on a second phase that would propel the mine to a rate of 30,000 tonnes per day.
“I like to say Tasiast was originally a small mill designed to chase small open-pits. What it will be going forward is completely different because we now have a massive amount of gold in a large open pit,” Rollinson said, adding that the company is proceeding with the first expansion phase.
“It’s higher grade, but it’s harder material. The challenge over the past few years has involved finding the right size of mill capacity to deal with the new geometry, volume and hardness. Keep in mind we’re talking brownfield here; the pit looks great and I don’t think you would recognize the mill compared to one year ago,” he added.
Kinross has been operating an 8,000 tonne per day mill and dump leach at Tasiast that generated 219,045 oz. gold in 2015, at cost of sales of US$1,021 per oz. The initial expansion would boost the mine’s annual production to 409,000 oz. at all-in sustaining costs of US$760 per oz.
Kinross’ plans are based on proven and probable reserves of 132 million tonnes grading 1.9 grams gold per tonne for 8.32 million contained oz. The company has not accounted for measured and indicated resources of 75 million tonnes of 1.3 grams gold for 3.2 million contained oz.
The initial expansion will cost US$728 million, which includes US$300 million in capital expenditures and US$428 million in capital stripping over the next three years. Kinross reports that construction to install incremental crushing and grinding capacity to the existing carbon-in-leach circuit, which includes an oversized semi-autogenous grinding mill and gyratory crusher, will begin immediately.
“This is a situation where the quote ‘necessity is the mother of all invention’ really applies. Through our past two studies at Tasiast the gold price just kept getting lower, and we were forced to hit the pause button for balance sheet reasons,” Rollinson explained.
”We sent our team back to the drawing board and we’ve come up with an excellent approach for the time we’re in right now. I think the two-phase strategy offers the perfect balance for the current gold price environment and market challenges. For the phase-one capital we’ll double our production and significantly decrease operating costs, and I think if you look at that profile we will have a very good mine here,” he continues.
Assuming a US$1,200 per oz. gold price, the phase one project carries a 20% internal rate of return (IRR) and a US$635 million net present value (NPV) at a 5% discount rate.
A decision on the second expansion phase will likely not come until the end of 2017. Rollinson says the company will first evaluate the strength of its balance sheet, operating performance, and the state of gold markets.
The plan involves boosting throughput by 18,000 tonnes per day via replacing two ball mills, increasing incremental power generation to the power plant, additional leaching and thickening capacity, and mine fleet expansion. The price tag for the second stage is estimated at US$739 million, which includes US$620 million in capital expenditures and US$119 million in stripping.
Assuming Kinross proceeds with the 30,000-tonnes-per-day plan, Tasiast would produce around 777,000 oz. gold annually at all-in sustaining costs of US$665 per oz. The combined investment features a US$885 million NPV and a 17% IRR.
“We’ll proceed under a similar model in phase two, where we’ll be doubling production and dropping operating costs. Only this time the end product would have a world-class profile based on mine life and annual production,” Rollinson commented. “Of course the big break-through was in terms of capital expenditures. The smaller scale was definitely a contributor, but we’re also using existing infrastructure. I’ve said before that we were going to be building a new house, but now we’re renovating. Finally, the market conditions today are much better for building a mine than they were four years ago.”
Kinross’ previous plan was released in late 2014, and involved a US$1.6 billion investment to boost Tasiast to 38,000 tonnes per day. The capital number may look relatively similar, but the previous estimates excluded pre-stripping costs.
The company has a pro-forma cash balance of US$700 million and US$1.5 billion available on its revolving credit facility. Kinross will have no debt maturities until mid-2019, following the scheduled repayment of US$250 million in senior notes later this year.
BMO Capital Markets analyst Andrew Kaip says Kinross “delivered on the Tasiast re-think,” and noted that “[phase one] has potential to meaningfully impact [the mine’s] cost structure and lower [its] cost positioning in the context of the company’s overall portfolio.”
BMO Research maintains an “outperform” rating on Kinross along with a $3.75 per share price target. Kaip added that the “decision to approve [phase two] is also supported by the view that future resource conversion and growth will extend mine life beyond the current study.”
Kinross shares have traded within a 52-week range of $1.79 and $4.63, and jumped 13% following the Tasiast news to close at $4.50 per share on March 30. Kinross has 1.24 billion shares outstanding for a $5.69 billion market capitalization. It expects to produce between 2.7 million and 2.9 million oz. gold equivalent in 2016, at all-in sustaining costs ranging from US$890 to US$990 per oz.