Dividends and explanations get Kinross rolling

All is it took was a bigger dividend and a bit of explaining for Kinross Gold (K-T, KGC-N) to gather some positive winds behind its back again.

The major gold producer had seen its market cap steadily erode since last September as on Sept. 8 of last year its shares closed at $18.01 and by Jan 19 they had fallen all the way down to $10.17.

Ironically it was Kinross’s higher share price at the time that it completed its acquisition of Red Back Mining that was one of the chief culprits in its recent market descent. That is because the recent sell-off was tied to the company announcing that it would have to take a multi-billion dollar write-down on the Tasiast property acquired from Red Back.

While investors interpreted that news as confirming earlier suspicions that Kinross had grossly over paid for the world-class deposit, Kinross’ chief executive, Tye Burt, shed some light on the accounting behind the write-down.

Speaking on a conference call connected to the release of the latest financial statements, Burt explained that new accounting rules force companies to use their share price as of the time an acquisition closes, not when it is announced. In the case of Kinross, it share price climbed over $2 over the time period between when it announced the acquisition of Red Back Mining and the closing date.

That higher share price at the time of closing added another $1.2 billion to the book value of the asset (determined by the price paid), which in turn was reflected in an overall goodwill figure of $5.2 billion

A write-down is a non-cash balance sheet item and is deducted from the goodwill associated with the acquisition. Goodwill appears on a company’s balance sheet as the difference between the fair value of the assets it acquired and the price that it paid for them.

Accounting rules also stipulate that goodwill must be tested for impairment once a year. That impairment test has to do with determining what the current fair value of the acquired asset is, and if it is significantly less than what it was being carried on the balance sheet at then a write-down is taken.

Burt said that the combination of lower market multiples by the end of 2011 and the use of a conservative US$1,250 per oz. gold price, combined with the high price the asset was being carried at led to the calculation of a big write down number.

The big point, however, is that the write-down had more to do with the accounting metrics used to test for impairment and less to do with any deficiencies at the project itself.  

“To give you an idea, if we used a US$1,430 per oz. gold price in the fair value calculation, no impairment would have incurred,” Burt said.

Burt acknowledged that the recent downward pressure on the stock was cause for concern for management, but said that the company is squarely focused on the long term prospects for the company, and that those long term goals will lead to enhanced cash flows, optimized cost structures, and a portfolio of world class mines that will bring higher market valuations.

In the meantime, however, there was a sweetener offered by management as an ointment to the recent poor market performance. Kinross announced a 33% increase to its semi-annual dividend, bringing up to 8¢ per share from the 6¢ level.

The market seemed to have a yen for just such a sweet taste as it sent Kinross’s shares 8% or 79¢ higher to $11.44 in Toronto on Feb. 16.