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Kinross Gold’s Mauritanian desert storm


The Tasiast gold mine in the Mauritanian desert was the biggest acquisition in Kinross Gold Corp.’s (K-T8.26-0.08-0.96%) 19-year existence and one of the biggest takeovers in the history of the gold industry.

It was to have been the centrepiece of the Kinross portfolio, transforming the Toronto-based company into one of the fastest-growing gold miners in the world.

Instead, the $7.1-billion acquisition of Red Back Mining Inc. has bludgeoned Kinross’s stock and balance sheet. The company took a $2.49-billion writedown in February, angering investors and leaving the company’s chief executive officer battling to retain his credibility. Shares of the miner have lost about half their value since the August, 2010, deal, according to The Globe and Mail.

On Wednesday morning, at Kinross’s annual meeting in Toronto, president and CEO Tye Burt will get another chance to convince shareholders that the biggest bet of his career will pay off. The miner reports earnings a day earlier, on Tuesday.

The market is pretty frustrated,” says Robert Cohen, who oversees more than $1-billion in gold stocks at Dynamic Funds. “They’re still in the penalty box.”

Although Mr. Cohen, a mining-process engineer who has monitored Tasiast since 2002, believes the deposit will live up to its promise eventually, few investors share his conviction.

A class-action suit, launched by the trustees of the Musicians’ Pension Fund of Canada, alleges Kinross misled shareholders about the potential and costs of the deposit. The allegations have not been proved in court, and Kinross contends the suit is “without merit.”

Mr. Burt, who says the project is “living up to our expectations,” is frustrated by the market reception. The stock, $17.87 on Sept. 9, closed Monday at $8.26.

Two years ago, he spoke of the Tasiast project as a “home run” whose payoffs and potential would be “more exciting” than analysts could foresee. And, in fact, the company has since confirmed reserves of more than 20 million ounces of gold at Tasiast, compared with about eight million at the time of the acquisition. That would make it one of the world’s largest deposits, able to produce gold for decades.

Glen Masterman, in charge of exploration for Kinross, says the company hopes Tasiast will turn out to be in the same league as mega-deposits in Timmins, Ont., and Kalgoorlie, Western Australia. If he’s right, it could give Kinross a lead over rivals for years to come.

But there’s an enormous caveat.

This January, after geologists had analyzed 442 kilometres of rock samples from the 3,074 holes Kinross drilled last year, they learned the deposit wasn’t quite what they expected. The gold-rich core at Tasiast was surrounded by a low-grade envelope. The discovery meant the project would be delayed for months while Kinross tried to determine the most profitable way to extract and process the ore. The stock plunged on the news in mid-January, wiping out 21 per cent of Kinross’s market value in a day.

The challenges have mounted, but at the same time our knowledge of the ore body and our expectation of its expansion have improved,” Mr. Burt said in an interview in April.

Coupled with declining asset values and soaring construction costs across the industry, Kinross management believed they had no choice but to write off part of Tasiast, while also scaling back development of mines in Ecuador and Chile to focus on their flagship project.

On Feb. 15, 2012, Kinross reported detailed 2011 financial results with a $2.49-billion writedown on Tasiast and the biggest loss in the company’s history. At the same time, it reported record-high gold production, revenue, cash flow and a raised dividend.

The writedown was “the right and prudent thing to do,” Mr. Burt said, while admitting “we were bluntly disappointed with the market reaction.”

Shareholders have balked at the price of Tasiast from the beginning.

Kinross’s share price fell both times the company increased its stake in the property through the two-stage acquisition of Red Back in 2010.

Investors remained unimpressed with the record fourth-quarter. All that mattered to them was progress on Tasiast.

The reaction was a sign of “the market’s disenchantment with how management has used its capital,” says Douglas Groh, co-manager of a gold fund at New York-based Tocqueville Asset Management LP, which holds Kinross shares. “It’s one thing to make a deal, but then you have to execute.”

Mr. Burt – a finance executive who led mining deals at BMO Nesbitt Burns Inc., Deutsche Bank AG and Barrick Gold Corp. before joining Kinross as CEO in April, 2005 – says the major decisions on the Tasiast project were made in consultation with his management team and had the backing of the board of directors.

Mr. Burt says Kinross, the world’s sixth-biggest gold producer by output, faces the same challenge as every other mineral company: Grow, or risk dying. Competition is increasing, but more and more exploration dollars are yielding fewer and fewer discoveries.

As well, producers have to manage projects over decades while investors gauge returns over quarters.

If I had to pick one particular challenge for mining companies, it’s that we have to make 10- and 20-year decisions on capital allocations amidst a market that is focused on very short-term results,” Mr. Burt says.

But when it comes to Tasiast, he says, “the more we drill, the more we know.”


For Kinross, big isn’t so beautiful at least at the moment. The share holders have had a torrid time we can only hope that Tye Burt can indeed pull it round.

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