Kinross Gold KGC reported uninspiring fourth-quarter results, as well as a 2013 outlook that doesn’t promise much significant production growth or margin expansion, but does reflect more disciplined capital spending. We will likely not make significant changes to our fair value estimate of $9 per share, and believe shares are fairly valued currently. Management also made clear its decision to go with the smaller, 30,000 tons per day milling option at Tasiast in an effort to control capital spending and reduce execution risk.
We think management’s more measured approach to capital allocation and growth projects is warranted, especially as Kinross wrote down an additional $3.1 billion in impairment charges for Tasiast (as well as roughly $110 million for the Chirano mine, also acquired through Red Back) during the fourth quarter, on top of the $2.9 billion charge Kinross already took on Tasiast in early 2012. The company has now taken a cumulative $6.1 billion in impairment charges on its 2010 acquisition of Red Back Mining (which brought the Tasiast and Chirano assets into Kinross’ purview), representing the vast majority of the transaction’s original $7.1 billion price tag. While the Red Back Mining acquisition has undoubtedly been an unmitigated disaster thus far, we are optimistic that management will have a better grip on Tasiast going forward, and perhaps be able to salvage some value for shareholders from the ill-fated Red Back acquisition. Kinross’ hefty capital spending has weighed down its returns on invested capital, underpinning our nomoat rating.
We expect 2013 to bring flat gold production growth for Kinross as there are no major near-term growth projects in the firm’s pipeline besides Dvoinoye, which would commence production in the back half of 2013. Management expects to release pre-feasibility results for the Tasiast expansion project in April 2013. We are optimistic that the decision to go with the smaller, 30,000 per ton day option at Tasiast will help curb initial capital spending needs for the project, as well as lead to lower production costs by allowing the company to use higher-grade, more accessible ore to feed its mills. Under a bigger, 60,000 ton per day milling option, Kinross wouldn’t have been able to be as picky about the ore it would excavate and feed to the Tasiast mill.
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