August 9, 2012 / 12:06 AM / in 5 years

UPDATE 1-Kinross profit falls on lower output, higher costs

* EPS $0.10 v $0.22 in Q2 2011

* Revenue up 5 percent to $1 billion

* Miner eyes smaller, expandable mill for Tasiast mine

* Lobo-Marte development under review to contain costs

By Julie Gordon

TORONTO, Aug 8 (Reuters) - Canada’s Kinross Gold Corp said on Wednesday its second-quarter profit fell 53 percent as lower production and higher costs outweighed a slight increase in precious metal prices.

The gold miner lowered its gold production outlook by 4 to 7 percent and forecast slightly higher production costs for 2012 on the sale of its 50 percent stake in the Crixas mine in Brazil and operational hiccups at its Tasiast mine in Mauritania.

Kinross also said it would move ahead with a prefeasibility study for a 30,000 tonne a day expandable mill at Tasiast, a lower cost and lower risk option than a previously outlined 60,000 tonne a day expansion.

“Notwithstanding lower production in the initial years of operation, a staged approach to the Tasiast expansion could reduce initial capital costs and project execution risk, while delivering a rate of return comparable to constructing a larger initial mill,” the company said in a statement.

Kinross will continue to evaluate the 60,000 tonne a day option for Tasiast and said heap leach testing is expected to be completed in the fourth quarter.

The West African mine was the centerpiece of Kinross’ $7.1 billion takeover of Red Back Mining in 2010 and then-CEO Tye Burt championed Tasiast as a company-making asset.

The gold mine, however, has not lived up to expectations and Kinross booked a $2.94 billion writedown related to the Red Back takeover earlier this year. Burt was fired from the top job at Kinross last week.

Kinross’ new CEO, former corporate development executive J. Paul Rollinson, has launched a cost-reduction strategy in an effort to improve capital efficiency and boost margins.

Cost inflation is a major issue in the mining industry with high labor, fuel and consumable costs leading to ballooning price tags on projects around the world.

To that point, Kinross said it is considering smaller options for its Lobo-Marte development in Chile as it looks to reduce capital spending and constrain risk.

A feasibility study on the gold mine, which is expected to produce some 350,000 ounces a year, is due in 2013. The project is expected to be permitted by the end of 2012.

With Kinross eyeing a smaller footprint at both Tasiast and Lobo-Marte, Morningstar analyst Joung Park worried that efforts to reduce capital spending could end up working against the company.

“The problem with decreasing the size of the project is for a lot of these open-pit large-scale operations, there’s a lot of economies of scale involved,” he said. “So if you’re not careful - if you make it too small - you can have an adverse effect on the unit costs.”

LOWER OUTPUT

Kinross said production at Tasiast would be lower than planned in the second half of 2012, leading the miner to reduce its 2012 output outlook from West Africa by 14 to 18 percent.

Including the loss of ounces from the sale of its 50 percent stake in the Crixas mine, Kinross now expects to produce 2.5 million-2.6 million gold equivalent ounces in 2012, compared with a previous plan of 2.6 million-2.8 million ounces.

The miner produced 632,772 gold equivalent ounces in the quarter ended June 30, down slightly from the year earlier period. Production costs per ounce rose 27 percent to $725 on lower grade ore and higher labor and energy costs.

The average realized gold price rose to $1,568 an ounce compared with $1,448 an ounce in the year-ago quarter.

Kinross said net earnings from continuing operations fell to $115.8 million, or 10 cents per share, in the second quarter. That compared with $244.3 million, or 22 cents per share, in the year-earlier period.

Adjusted to remove one-time items, earnings were $156 million, or 14 cents a share, compared with $222.6 million, or 20 cents a share, in the year-ago quarter.

Analysts, on average, had expected earnings of 17 cents a share, according to Thomson Reuters I/B/E/S.

Revenue rose nearly 5 percent to $1 billion.

Shares of Kinross, which owns projects in the Americas, West Africa and Russia, closed at C$7.77 on Wednesday on the Toronto Stock Exchange. The stock has fallen more than 34 percent so far this year.

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