Tasiast purchase weighs down Kinross

Kinross Gold (K-T, KGC-N) will have to take the bad with the good.

The company has announced impressive gold-equivalent sales of 724,000 oz. on production of 687,000 oz., at relatively low cash costs of US$686 per oz. for the fourth quarter.

These are all good numbers to base a gold-mining business on, especially when considering that they beat analyst estimates — like the one by BMO’s David Haughton — by a good margin. BMO’s forecast for the quarter’s production was 598,000 oz., at cash costs of US$739 per oz.

But despite the sound operating numbers, Kinross’ earnings were hit hard by a big-time impairment charge — another writedown in the value of its Tasiast gold project in Mauritania.

This time the impairment to the asset on the balance sheet is to the tune of US$3.2 billion, and that sent a shock wave through earnings, with a reported net loss of $3 billion, or $2.62 per share for the three months ended Dec. 31. This compares to a net loss of $2.8 billion, or $2.45 per share in the year-earlier period.

Kinross paid $7.1 billion for Red Back Mining and its two key assets — Tasiast and the Chirano gold mine in Ghana — just two years ago. The company had already taken a $2.5-billion charge on the assets last year, and some quick math shows it has written down 80% of the price it paid for the acquisition.

Such writedowns are by their nature non-cash charges, done in accordance with accounting principals that state that a company must do fair market-value assessments of its assets on a regular basis. If that valuation results in a number less than the asset on its books, a writedown to the new valuation ensues.

Kinross says this writedown was connected to a reduction in the valuation multiple for Tasiast and industry-wide increases in capital and operating costs.

The company plans to have a carbon-in-leach mill finished at the site by April, but it envisions a 30,000-tonne-per-day mill rather than the 60,000-tonne-per-day mill that it previously considered. This means that the future mine will be half the size of what the company thought it was buying.

The expensive acquisition already cost former CEO Tye Burt his job in mid-2012, after much clamouring from investors who were rattled by the stock’s moribund performance.

When the quarterly results are adjusted to exclude non-cash charges like the writedown, net earnings ring in at $276.5 million, or 24¢ per share.

Revenue for the quarter came in at $1.2 billion, compared with $919.8 million year-over-year.

Kinross also said it is cutting capital expenditures for 2013 to $1.6 billion for the year — down $325 million from last year.

The company expects gold production to be flat this year, and issued a guidance of 2.4 million to 2.6 million, at cash costs of $740 to $790 per oz. Last year’s total production came in at 2.6 million oz. gold equivalent, which was slightly higher than the 2.5 million oz. gold equivalent it produced in 2011.

Despite a lack of growth in production and the continued issues at Tasiast, BMO still has Kinross rated as “outperform.”

“The shares provide reasonable value, but continued uncertainty may prevent a meaningful share-price rally in the near-term,” Haughton writes in his research note. “The release of the Tasiast prefeasibility study in late April 2013 may provide a meaningful catalyst.”

In Toronto on Feb. 14, Kinross shares were up 5%, or 42¢ to $8.31, on 12 million shares traded.