TORONTO (Reuters) - Last week’s ouster of Tye Burt as Kinross Gold Inc’s K.TO CEO may signal that the miner is about to hit investors with more bad news about the African mine that formed the centerpiece of the Canadian company’s 2010 acquisition of Red Back Mining.
Kinross’s stock has tumbled 60 percent since the $7.1 billion takeover closed on September 17, 2010, a sure sign that Burt’s days at the helm were numbered.
Burt, who championed the Red Back deal, took the fall for setbacks Kinross has encountered in expanding the Tasiast mine in Mauritania, the acquisition’s centerpiece. The takeover, which also included the Chirano mine in Ghana, led to a $2.9 billion write-down earlier this year.
The ouster was timed come a week ahead of Kinross’ second-quarter results, due Wednesday. Analysts are bracing for everything from cost increases to delays and production cuts, not to mentioned weaker earnings.
“I think they could use the second quarter results to take the skeletons out of their closet,” said Morningstar mining analyst Joung Park. “They can use the opportunity to pin the blame on former management.”
That would mirror a tactic taken by Barrick Gold Corp (ABX.TO), which fired its CEO Aaron Regent in a surprise move in June.
Just weeks after dismissing Regent, Barrick used its second-quarter results to announce a 50 to 60 percent increase in capital costs at its largest development project, Pascua-Lama, and delayed completion of the massive South American gold mine by a year.
Already Kinross has slowed development at its Lobo-Marte project in Chile and the Fruta del Norte project in Ecuador, following the lead of other gold majors facing accelerating cost inflation.
At the same time, the company has pushed ahead with expanding Tasiast, aiming to boost output substantially from its current 200,000 ounces a year.
Kinross is studying processing options and is expected to announce on Wednesday how it will proceed. A feasibility study is planned for early 2013, with construction starting in mid-2013 and production ramping up in 2015.
But analysts aren’t ruling out further delays or higher costs.
“At Tasiast we expect Kinross to announce a delay of six to 12 months and estimate commercial production in (second quarter 2016) vs previous expectations of ‘ramping up in 2015,'” Tony Lesiak, an analyst at Macquarie Capital Markets, wrote in a note to clients last week.
Lesiak sees capital costs for the project at $5 billion compared to previous estimates of $2.7 billion to $3.2 billion.
Deutsche Bank analyst Jorge Beristain sees costs at the Mauritania mine reaching some $4 billion. As capital costs climb, and the company’s value drops, Kinross may struggle to develop the asset on its own, he said.
Two years ago Kinross was worth more than $20 billion and the Tasiast expansion was expected to cost some $2.5 billion. Now the miner has a market cap of just $8.8 billion, while analysts anticipate capital costs to be above $4 billion.
“It’s a much larger project in proportion to their current size today than it was two years ago,” said Beristain. “So I think that the logical thing at this point is to start picking up the phone and bringing in JV partners.”
Partnering up on a major gold mine development is not unusual. Barrick built the Pueblo Viejo mine in the Dominican Republic with Goldcorp Inc (G.TO) in an effort to share the risk.
Others see divestment as the best route for Kinross. The appointment of J. Paul Rollinson, a former investment banker and corporate development executive, to replace Burt suggests such a move may be in the cards.
Kinross sold its 50 percent stake in the Crixas gold mine in Brazil in May to its partner AngloGold Ashanti for $220 million. Further divestment could help fund Tasiast.
Still, for investors wary of more bad news, a premium takeover bid would represent the best-case scenario, with Barrick or Newmont Mining Corp (NEM.N) seen as potential bidders for all or parts of the company.
“Most shareholders I talk to would like to see the company sold,” said George Topping, an analyst with Stifel Nicolaus. “Put it up and let an auction process get out underway, open the gates... see what you can attract.”
Topping said a sale does not appear to be part of Kinross’ immediate plans.
Shares of the Toronto-based miner rose 1 percent to $7.82 on Tuesday afternoon on the Toronto Stock Exchange.
Reporting by Julie Gordon