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We Said Spasibo, Nyet - Now We Say No Mas! For Kinross Gold

Kinross Gold (KGC) used to be an elite Canadian gold miner, active on the world stage and in the same ranks as other global gold mining behemoths such as Newmont Mining (NEM), Agnico Eagle (AEM) and Barrick Gold (GOLD). In just a few short years, a combination of operational missteps and the lack of market awareness/execution has left the company with a renewed focus on the Americas (finally) albeit with a sub optimal asset portfolio. Earlier this week, the company released their Q1/2022 financial figures which came as a disappointment to the market. For what it’s worth, revenues of amounted to $768.0M (consensus $994.8M, $986.5M in Q1/2021), operating earnings totaled $102.5M ($144.3M in Q1/2021) and EPS totaled $0.06 (consensus $0.07, $0.15 in Q1/2021). During the quarter, total gold produced amounted to an attributable 505,748 ounces, down from 558,777 ounces produced in Q1/2021.

Though all gold miners have fallen from the recent highs when spot gold topped $2,000/ounce just two years ago, the fall has been particularly hard for Kinross as the company has gone from a mcap of $12.0B just two years ago to the current $5.3B. Welcome to official relegation to tier 2 gold producer status. In fairness, Kinross lost its status in the tier 1 group (headlined by Newmont, Agnico and Barrick) when they failed to recognize and react to the market trends of largecap M&A which swept over the past four years with each tier 1 company making a transformational, largescale, currently cash-flowing acquisition. Case in point: 2018: Barrick acquired Randgold Resources in a $6.5B deal

2019: Newmont acquired Goldcorp in a $10.0B deal

2021: Agnico acquired Kirkland Lake Gold in a $10.5B deal.

During this entire time as the big boys were announcing deals and getting even bigger, the market was waiting for Kinross’ reply, hoping for a similar transformational deal from their end as well. By the end of 2021, Kinross was the last from the tier 1 camp which still didn’t announce a deal and expectations were were still high. The high expectations stemmed from years in which Kinross struggled to shed its reputation as a Russian focused gold miner. Sadly, the trigger was never pulled on any such transformational deal. The only transaction that came was the December 2021, sub-optimal acquisition of Great Bear Resources, for $1.4B. Great Bear was hardly the transformational, company making transaction the market was waiting for. Not only did Great Bear’s flagship Dixie project not yet have any current gold production, the project didn’t even have a resource estimate yet. Though Dixie could prove in time to be a very high grade open pit operation (with the potential to also transition to underground), initial production is at best expected in 2029/2030. This was Kinross’ big response in the transformational M&A tier 1 landscape since 2018 – the acquisition of 9,140 hectares of contiguous claims in northwestern Ontario, without even a maiden resource estimate. Hardly the expectations investors had for Kinross. Management’s inability to get a sizeable/transformational deal done was the biggest contributor to Kinross shares underperforming the peer tier 1 gold group and this lack of corporate execution facilitated their downgraded entry to tier 2 status.

Though Kinross has for years tried to re-brand and reposition its asset base to reflect less Russian production (and with it, less of the customary Russian owner/operator valuation discount), its recent decision to exit Russia outright was only spurred on by Russia’s invasion of Ukraine this past February and with it, the West’s imposition of strict economic sanctions. That said, last month Kinross was finally able to make well on its divestment promise with the announced sale of 100% its Russian assets (the Kupol mine and Udinsk project) to the Cyprus-registered, Highland Group of companies (owned by Russian tech and real estate developer Vladislav Sviblov) for $680M in cash. Though the asset sale was well communicated a month in advance, Kinross was certainly not negotiating from a position of strength, given how untouchable any Russian asset is these days. Though the $680M purchase price was well below the combined Kupol + Udinsk NAV, job done, Kinross was finally a Russia-free company (though with considerably less FCF to service the current $2.7B in LT debt).

What’s next for Kinross seeing as 70% of the business now emanates from the Americas ? Seeing as the company has lost 60% of its mcap over the last two years, maybe an outright takeover (at noted discounted valuations, see above) would take it out of its misery ? …unlikely.

There was speculation last week that Barrick Gold may look to acquire Kinross. This notion was categorically denied by Barrick President Mark Bristow who outright said that the Kinross asset base was “marginal”. With that much shade cast on the asset base, its hard to think of any mining company at this point coming in to make a play on Kinross. Remember, even a massively discounted prices, problematic or lower quality assets will still remain as problematic or lower quality assets. Fire issues aside at Tasiast and water/grade/Brazil issues (hopefully aside) at Paracatu, let’s take a closer look at Kinross’ future production pipeline:

Dixie Project: As previously mentioned, a lot is running on this Red Lake, Ontario located project which has yet to announce a maiden resource. Kinross is sinking $60M for a 200,000m drilling program (focusing on the LP Fault zone) this year. Some sort of Inferred initial resource is hope for by the end of this year while work on a PFS is expected to begin in 2023. Kinross has received updated assay results from 60 holes drilled in late 2021 and early 2022 in the LP Fault zone. The results continue to confirm gold mineralization, which is open along strike and at depth. As mentioned earlier, if all goes well, we can hope to see mining operations beginning in 2029 or 2030. A lot is still very unknown here. Worth the $1.4B acquisition price ? Time will tell, but nothing here and now anytime soon.

La Coipa & Lobo Marte: Though the La Coipa restart project began commissioning in February and has since poured the first doré bar this past quarter. Regardless, La Coipa will not be a cornerstone, long-lived asset as the reserve totals just under 900,000 gold ounces in the P&P category along with 1.4M gold ounces in the M&I category. With a mine life of only until 2026, the Lobo-Marte project was seen as the next development project in the pipeline. With 4.7M gold ounces and an AISC estimate of $680/ounce, the 16 year LOM project was seen as the next big project in Chile’s Atacama region. All looked good so far as was reported from the November 2021 PFS report. The problem was when the actual economic numbers were crunched. Using a base case gold price of $1,500/ounce, the project IRR was seen at an uninspiring 13%. Bumping up to a LT gold price of $1,800/ounce, the IRR nudged slightly higher to 18%. Keep in mind that the IRR numbers use a base case oil price of $70/bbl (well below the current $100+/bbl) and fails to include the capex inflation that has been seen since the report date last from November. The IRR numbers clearly will be worse than the already anemic 13% or 18%. As a project, none of this is overly interesting.

What’s left? All that’s left are exploration assets in Nevada at Round Mountain. The four target areas are specifically Phase X, Gold Hill, Kelsey Creek and North Wall. Over the course of 2022, Kinross is budgeting $16M for the construction of a drift for underground exploration drilling at Phase X and surface exploration work at Gold Hill and the Round Mountain district. That’s about it for now, the current reserves and resources are minimal. Lastly, there is the Manh Choh project in Alaska which is in the midst of Feasibility Study preparation. Initial production is expected in 2024 with an open pit operation churning out approximately 1.0M AuEq ounces over a 4.5 year LOM.

Ultimately, there's not a lot here. When it comes to the pipeline, all “marginal” assets to say the least.


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