Kinross Takes Writedown, Boosts Gold Production

Score it another writedown for the big boys.

In its 2008 fourth quarter, Toronto-based Kinross Gold (K-T, KGC-N) continued a recent trend among gold majors by posting a massive impairment charge against fourth-quarter earnings.

The non-cash US$994-million charge on assets related to the Bema Gold takeover in 2007 meant that Kinross recorded a fourth-quarter loss of US$968.8 million, or US$1.47 per share, a drop of more than US$1.1 billion from 2007’s fourth-quarter profit of US$173.1 million, or US29¢ per share.

The impairment charge saw Kinross post a loss for all of 2008 of US$807.2 million, or minus US$1.28 per share; whereas in full-year 2007 the gold miner netted US$334 million or US60¢ a share.

“This market has learned over time that earnings are what you want them to be and cash flow is really what it should be about. So there is more focus on the cash flow right now,” says analyst Terence Ortslan, of Montreal-based TSO & Associates. “As long as the cash flow maintains itself and enhances, I think this market accommodates earnings adjustments, which are far less important.”

Kinross’s cash flow from operations was US$222.4 million for the fourth quarter, or US34¢ per share, an increase of 240% over the same period in 2007. Cash flow for the full year was US$636.4 million, 80% higher than in 2007.

Earlier in February, senior rivals Barrick Gold (ABX-T, ABX-N) and Freeport-McMoRan Copper & Gold (FCX-N) both recorded similar writedowns. Barrick posted non-cash impairment charges of US$773 million on the Kanowna and Osborne projects in Australia, and, in Tanzania, at the company’s North Mara gold mine. Calgarybased Barrick Energy took its share of the hit, too. Freeport-Mc- MoRan’s jaw-dropping US$13.1- billion fourth-quarter charge stemmed from devalued assets picked up in the March 2007 takeover of U. S. copper giant Phelps Dodge.

One gold analyst, who agreed to speak only off the record, told The Northern Miner that pricey takeovers are hurting overall share performance among the gold majors.

“It should raise a flag for people who are sitting around scratching their heads going, ‘I don’t understand why gold stocks don’t perform as well as gold does. It must be the exchange-traded funds.’ It has nothing to do with the ETFs. It has to do with these companies wasting their shareholders’ money.”

He added: “Majors’ shares don’t perform because they don’t generate returns on their shareholders’ funds by doing things like overpaying for assets.”

Kinross’s share price has largely kept pace with the price of gold over the last few months. On Feb. 23, the London p. m. fix was US$985.75, up from a 52-week low of US$709.50 in mid-November, an increase of 39%. On Feb. 24, Kinross shares closed at US$16.89, compared to US$12.23 on Nov. 14, or an increase of 38%.

But over the previous year, gold vastly outperformed the major.

The London p. m. fix for gold on Feb. 22, 2008, was US$943, and finished at US$985.75 on Feb. 23, 2009, a gain of 4%. Kinross shares closed at US$23.12 on Feb. 22, 2008, and at US$18.33 on Feb. 23, 2009, a drop of 26%.

But not all of the news was grim. Kinross reported a 43% year-over-year rise in gold-equivalent output in the fourth quarter to 550,220 oz., up more than 165,000 oz. from the 384,600 gold-equivalent oz. in the same quarter of 2007.

Sales in the fourth quarter almost doubled to US$484 million, up from US$281 million a year earlier, while total 2008 sales hit US$1.62 billion, up from US$1.09 billion a year earlier.

Meanwhile, total gold-equivalent output soared to 1.84 million oz. in 2008 from 1.59 million oz. the year before.

Cash costs slipped to US$375 per oz. in the recent quarter, from US$419 per oz. a year earlier, but overall cash costs for the year bumped to US$421 per oz., up from US$368 per oz. in 2007.

Cash costs for 2009 are expected to rise slightly, while gold production will jump by about 600,000 oz.

In a report dated Feb. 20, analyst Tony Lesiak, with Toronto-based Genuity Capital Markets, anticipates Kinross’s costs to rise in 2009, averaging US$405 per oz., which is near the mid-point of the miner’s previously announced guidance of US$390-420 per oz.

Overall, Genuity estimates Kinross’s 2009 gold-equivalent production of 2.44 million oz., the midpoint of the company’s guidance of 2.4-2.5 million oz. Lesiak notes that Kinross maintained its production target, “despite teething issues at Paracatu, which should be resolved in second quarter of 2009.”

Paracatu, in Brazil, is expected to produce about 525,000 gold-equivalent oz. in 2009, up from 188,000 oz. in 2008. Gains are also anticipated at Kinross’s 75%-owned Kupol mine in Russia’s Far East, where production should approach 610,000 gold-equivalent oz., up from 405,000 oz. in 2007.

Long-term projects

Kinross recently bought the Lobo- Marte gold property from Teck (TCK. B-T, TCK-N) and Anglo American (AAUK-Q , AAL-L) and plans to complete a prefeasibility study on the project this year, as well as a US$3-million drill program.

“Lobo-Marte remains at the forefront of our project pipeline, with the project expected to benefit from previous mining activity at the site and our own extensive resources,” said Kinross president and CEO Tye Burt, in a release.

Lobo-Marte’s indicated resource is 97.7 million tonnes grading 1.72 grams gold per tonne, or 5.4 million contained ounces. The inferred resource is 9.25 million tonnes grading 1.56 grams gold, or 500,000 contained ounces.

In Ecuador, Kinross has restarted exploration at the 13.7-millionoz. Fruta del Norte gold deposit, which was acquired in the $1.2- billion takeover of Aurelian Resources in 2008. Exploration had been suspended until the Ecuadorian government passed a new mining law. Kinross plans to drill 8,000 metres on Fruta del Norte once the company gets the proper permits. Initial development is slated to begin in late 2010.

As of Dec. 31, 2008, Kinross has gold-equivalent reserves of 45.6 million oz., down 2% from 46.6 million oz. a year earlier.

Both Genuity and Toronto-based Dundee Capital Markets have “buy” recommendations on Kinross shares, with a 12-month target of $29.