Gold mine economics still in question

TORON TO • After two and a half years of work at its troubled Tasiast project, Kinross Gold Corp. still has a lot to prove.

On Monday, Kinross released a long-awaited prefeasibility study on the proposed expansion of Mauritania-based Tasiast. The company called the results “encouraging” and elected to move ahead with a full feasibility study. But analysts and investors were far from thrilled.

Put simply, the study results did not confirm that the project would generate a strong return on investment. Instead, they confirmed a lot of work still needs to be done.

The initial cost to get Tasiast up and running would be US$2.7-billion, according to the study. While the proposed mine would produce roughly 830,000 ounces of gold a year at low costs, the estimated net present value is only US$1.1billion at a gold price of US$1,500 an ounce, while the internal rate of return (IRR) is a meagre 11%.

That is a low IRR for such a large and high-risk project, especially given that the assumed gold price is higher than the current one. At lower gold prices, analysts estimated that the numbers get significantly weaker.

“A US$2.7-billion investment to generate US$1.1billion in West Africa is unattractive,” Stifel Nicolaus analyst George Topping wrote in a note. He believes that pressing on with a “weak” project in a rough market is not a wise move, and is “detrimental to market confidence in the company.”

On a conference call, chief executive Paul Rollinson stated repeatedly that this is only a pre-feasibility study and there are opportunities to improve the economics of the project. One possibility is to use natural gas instead of heavy oil as an energy source, as Mauritania has vast quantities of offshore gas that have not been tapped. “At some point, this gas will come to shore,” he said.

But he also maintained a cautious outlook on Tasiast, stating that Toronto-based Kinross would not do anything to threaten its balance sheet.

“The priority for us is balance sheet strength,” he promised.

Kinross will not make a construction decision on the Tasiast expansion until the feasibility study is finished next year, so there is plenty of time to find ways to improve returns.

Kinross picked up Tasiast in 2010 when it acquired Red Back Mining Inc. for US$7.1billion. Remarkably, that is higher than Kinross’s current market value. Tasiast was supposed to become one of the company’s crown jewels, but instead became a headache as capital costs soared and it was mostly written down. The problems at Tasiast were a key factor behind the firing of former CEO Tye Burt last year.

Kinross initially hoped to process 60,000 tonnes of ore per day at Tasiast, but later downsized those plans because of cost pressures. The pre-feasibility study concluded that the best option is to process 38,000 tonnes per day.

Greg Barnes, an analyst at TD Securities, wrote that the project economics at Tasiast should improve after US$600million is spent to upgrade infrastructure this year. However, he noted that many question marks remain and investors will remain cautious until they see firmer numbers. As the senior mining companies try to shed non-core assets, smaller competitors have a rare chance to snap them up. And is taking advantage.

The Vancouver-based miner has struck a deal to buy the Pinto Valley copper mine in Arizona from BHP Billiton Ltd. for US$650-million. It is the kind of opportunity Capstone chief executive Darren Pylot has been awaiting for a long time.

“The majors don’ t sell assets very often,” he said in an interview. “I’ve been CEO of Capstone for over 10 years, and I’ve seen more assets for sale in this six-month period than I had in the [prior] 10-year period.”

After a decade of rapid growth, large global miners such as BHP are now keen to get rid of non-core operations in order to optimize their port- ageable size and is located in Arizona, which fits Capstone’s focus on low-risk jurisdictions. The mine produces as much as 160 million pounds of copper a year, immediately boosting the company’s production by more than 160%. The deal includes a related railroad operation.

“It has an immediate mean-