Margins increase despite cost pressures
Projects on schedule; Buckhorn appeals dismissed
Kinross Gold Corporation (TSX: K)(NYSE: KGC) today announced its unaudited results for the three months ended March 31, 2008.
(This news release contains forward-looking information that is subject to the risk factors and assumptions set out in our Cautionary Statement on Forward-Looking Information located on page 15 of this news release. All dollar amounts in this news release are expressed in U.S. dollars, unless otherwise noted.)
2008 First Quarter Highlights
- Gold equivalent production was 331,784 gold equivalent ounces in the first quarter of 2008, compared with 389,394 ounces for the same period last year. Consistent with previously disclosed quidance, the Company remains on track to produce approximately 1.9 - 2.0 million gold equivalent ounces in 2008.
- Revenue was $330.2 million in the first quarter, a 34% increase over the same period last year, and the average realized gold price was $929 per ounce sold, compared with an average realized gold price of $650 per ounce in the first quarter of 2007.
- Cost of sales per gold equivalent ounce(1) was $455 in the first quarter, before an incremental fair value inventory charge of $6.1 million relating to the La Coipa acquisition, on sales of 356,864 gold equivalent ounces. Reported cost of sales per ounce including the inventory charge ($17 per ounce) totaled $472. This compares with a cost of sales of $328 per ounce on sales of 378,167 gold equivalent ounces in the first quarter of 2007. A further $20 of the increase over previously disclosed cost of sales per ounce guidance relates to changes in currency exchange rates, oil prices, and higher royalty payments resulting from higher gold prices. This variance is consistent with sensitivity information previously disclosed. The remaining variance relates primarily to mine operating factors and higher consumable costs.
- Based on reported cost of sales per gold equivalent ounce of $472, Kinross' margin per ounce sold was $457 in the first quarter, compared with $322 for the first quarter 2007, an increase of 42%.
- Incorporating first quarter actual results and based on the price assumptions outlined in our previous guidance for the remainder of the year, the Company expects its average 2008 cost of sales will be $385-395 per gold equivalent ounce versus the previously announced forecast of $365-375. Approximately 65% of this increase relates to first quarter actual results and the remainder to an expected increase in maintenance and repair costs at Maricunga, and pit wall repair costs at La Coipa. The Company expects that the cost of sales per ounce will be impacted positively over the course of the year as the Paracatu, Kupol and Buckhorn projects are commissioned and total production increases.
- Net earnings for the first quarter were $70.9 million, or $0.12 per share, compared with net earnings of $68.5 million, or $0.16 per share, for the same period last year. Earnings for the first quarter included a gain of $11.5 million, or $0.02 per share, related to the sale of Kubaka. The year-over-year decrease in earnings per share is largely due to a 39% increase in the average number of shares outstanding.
- Cash flow from operating activities was $76.3 million in the first quarter of 2008, compared with $90.2 million for the corresponding period in 2007. Cash and short-term investment balances were $889.5 million at March 31, 2008 compared with $561.2 million at December 31, 2007.
- Capital expenditures totaled $190.5 million in the first quarter. The Company expects 2008 capital expenditures to increase to approximately $752 million versus the previous forecast of $685 million. This increase relates to several investment initiatives including moving $35 million in capital forward from 2009 to accelerate the Fort Knox project, $12 million for Cerro Casale feasibility work, and $20 million to advance the purchase of mobile equipment at Paracatu and to purchase a fuel transport fleet at Kupol.
- The Kupol mill is now processing ore and first gold and silver production is expected during May Paracatu is on schedule to begin commissioning in July. Buckhorn is on schedule to begin commissioning in October. All permit appeals at Buckhorn have been settled and dismissed.
(1) Cost of sales per ounce is defined as cost of sales as per the financial statements divided by the number of gold equivalent ounces sold.
CEO commentary
Tye Burt, Kinross President and CEO, made the following comments in relation to the first quarter 2008 results:
"The significant growth we expect in 2008 is becoming a reality at our three projects. We have reached a major milestone at Kupol, as mining continues and milling is now underway. Initial production is expected on schedule during May Paracatu and Buckhorn remain on schedule to begin commissioning in July and October, respectively. We recently settled Buckhorn's outstanding permit and authorization appeals, reaching an agreement with a group which opposed development of the mine for many years.
"At current operations, production was slightly below our plan in the first quarter due to operational issues at Fort Knox, Round Mountain and La Coipa, which deferred some production and negatively impacted costs. These issues were short-term and were somewhat offset by solid production from Paracatu and Maricunga. We remain on track to produce 1.9 - 2.0 million gold equivalent ounces in 2008.
"We are subject to the same cost pressures as other producers, including rising costs of consumables, unfavourable currency exchange rates, and higher royalties resulting from a higher gold price. We also experienced higher than expected costs at certain key mines, but we have taken steps to manage and mitigate these costs through the remainder of the year.
"Due to a higher gold price, our margins increased in the quarter. Through the course of 2008, we expect our cost of sales per ounce to be impacted positively in each subsequent quarter as the new projects proceed through commissioning and reach full production."
Summary of financial and operating results
---------------------------------------------------------------------------- Three months ended March 31(dollars in millions, except per share and per ounce amounts) 2008 2007----------------------------------------------------------------------------Gold equivalent ounces - produced (a) 331,784 389,394Gold equivalent ounces - sold (a) 356,864 378,167
Metal sales $ 330.2 $ 245.7Cost of sales (excludes accretion and reclamation expense, depreciation, depletion and amortization) $ 168.3 $ 124.1Accretion and reclamation expense $ 4.2 $ 3.0Depreciation, depletion and amortization $ 37.8 $ 30.3Operating earnings $ 81.8 $ 59.0Net earnings $ 70.9 $ 68.5Basic earnings per share $ 0.12 $ 0.16Diluted earnings per share $ 0.11 $ 0.15Cash flow from operating activities $ 76.3 $ 90.2Average realized gold price per ounce $ 929 $ 650Cost of sales per equivalent ounce sold (b) $ 472 $ 328
(a) Gold equivalent ounces include silver ounces produced and sold converted to a gold equivalent based on the ratio of the average spot market prices for the commodities for each year. This ratio for the first quarter of 2008 was 52.57:1 compared with 48.89:1 for the first quarter of 2007.(b) Cost of sales per ounce is defined as cost of sales as per the financial statements divided by the number of gold equivalent ounces sold.----------------------------------------------------------------------------
Kinross produced 331,784 gold equivalent ounces in the first quarter of 2008, compared with 389,394 gold equivalent ounces in the first quarter of 2007. The year-over-year expected decrease in production was due to a net reduction in ounces produced as a result of the asset swap transaction with Goldcorp, and also to short-term operational issues at Fort Knox, Round Mountain, and La Coipa, described in "Operations review and update" below. The Company remains on track to produce 1.9 - 2.0 million gold equivalent ounces in 2008, in accordance with previously stated guidance.
Revenue from metal sales increased 34% in the first quarter of 2008 over the first quarter of 2007, from $245.7 million to $330.2 million, as a result of a higher realized gold price, partially offset by a decrease in ounces sold. The average realized gold price for the first quarter of 2008 was $929 per ounce, compared with $650 per ounce in the first quarter of 2007. The average spot price of gold in the first quarter of 2008 was $925 per ounce, compared with $650 per ounce in the first quarter of 2007.
Cost of sales per gold equivalent ounce was $455 in the first quarter on sales of 356,864 gold equivalent ounces, before a $6.1 million incremental charge resulting from a purchase accounting adjustment related to the asset swap with Goldcorp, whereby the value of the bullion inventory of La Coipa was increased to reflect fair value as of the acquisition date. This charge increased first quarter cost of sales per gold equivalent ounce by $17 to $472. By comparison, the cost of sales per gold equivalent ounce for the first quarter of 2007 was $328. The year-over-year increase can be attributed primarily to: higher consumable costs at most operations; the impact of strengthening currencies, most significantly the appreciation of the Chilean peso and the Brazilian real against the U.S. dollar; increased maintenance-related costs at Maricunga; reduced production at Fort Knox, Round Mountain, and La Coipa; and increased price-based royalties at Round Mountain and Fort Knox.
Approximately 55% to 60% of the Company's costs are denominated in U.S. dollars. Cost of sales per gold equivalent ounce is subject to the following key sensitivities, as previously disclosed:
----------------------------------------------------------------------------Sensitivity Approximate impact on cost of sales----------------------------------------------------------------------------10% change in foreign exchange $13 per gold equivalent ounce----------------------------------------------------------------------------$10 change in price per barrel of oil $4 per gold equivalent ounce----------------------------------------------------------------------------$100 change in gold price (royalty impact) $6 per gold equivalent ounce----------------------------------------------------------------------------
Based on reported cost of sales per ounce of $472, Kinross' margin per gold equivalent ounce sold was $457 in the first quarter of 2008 compared with $322 for the first quarter of 2007, an increase of 42% year-over-year, due to a higher realized gold price.
Net earnings for the first quarter of 2008 were $70.9 million or $0.12 per share, compared with earnings of $68.5 million or $0.16 per share for the same period last year. First quarter 2008 earnings included the sale of the Kubaka mine, which had a net benefit of $11.5 million or $0.02 per share. Earnings also included net non-hedge derivative gains of $22.4 million, $17.4 million of foreign exchange losses, and the $4.4 million (after tax effect) incremental fair value charge relating to La Coipa inventory sold in the first quarter. Year-over-year earnings per share were impacted by a 39% increase in the number of shares outstanding, primarily as a result of the Bema acquisition.
General and administrative expenses were $23.2 million in the first quarter of 2008, compared with $14.7 million in the first quarter of 2007. The increase is primarily related to higher personnel costs.
Cash flow from operating activities for the first quarter of 2008 was $76.3 million, compared with $90.2 million for the first quarter of 2007. The cash and short-term investment position was $889.5 million at March 31, 2007 compared with $561.2 million at December 31, 2007 and total long-term debt was $947.1 million at March 31, 2008 compared with $564.1 million at December 31, 2007.
Operations review and update----------------------------------------------------------------------------Three months ended March 31,
Gold equivalent ounces -------------------------------- Cost of sales/ Produced Sold Cost of sales oz(in US$ ---------------- --------------- --------------- ------------- millions ) 2008 2007 2008 2007 2008 2007 2008 2007 ---------------- --------------- --------------- -------------
Fort Knox 65,394 82,714 76,954 72,765 $ 35.3 $ 23.8 $ 459 $ 327Round Mountain 63,604 84,280 59,191 83,720 26.0 24.2 439 289
Paracatu 43,236 40,732 42,465 43,984 19.2 16.0 452 364La Coipa (a) 60,893 56,295 80,654 48,026 36.1 9.7 448 202Maricunga (b) 61,379 41,040 61,800 37,995 34.1 15.4 552 405
Crixas 20,630 23,740 19,974 27,503 5.9 6.2 295 225Julietta © 16,648 7,763 15,826 14,086 11.7 6.9 739 490
Porcupine JV - 35,800 - 33,528 - 14.1 - 421Musselwhite - 17,030 - 16,560 - 7.8 - 471
Other operations - - - - - - - -Corporate and other - - - - - - - - ---------------- --------------- --------------- -------------Total 331,784 389,394 356,864 378,167 $ 168.3 $ 124.1 $ 472 $ 328 ---------------- --------------- --------------- ------------- ---------------- --------------- --------------- -------------
(a) Production and sales for La Coipa reflect Kinross' 50% share for 2006 and from January 1, 2007 through December 21, 2007, and 100% from December 22, 2007 through December 31, 2007. Cost of sales per ounce in 2008 includes $76 related to the increase in inventory volume due to the asset swap transaction.(b) Production from the Maricunga mine is 100% for March 2007 and beyond. Prior to that Kinross owned 50% of the operation.© Production from the Julietta mine is for March 2007 and beyond.
At the Fort Knox mine in Alaska, U.S.A., gold equivalent production for the first quarter of 2008 was 65,394 ounces, a decrease of 21% compared with the first quarter of 2007. The decrease year-over-year is due primarily to mining lower grades and harder ore as a result of mine sequencing. Total sales for the quarter were 76,954 ounces, which included a late shipment of approximately 12,000 ounces at year-end that was recognized in first quarter 2008 sales rather than fourth quarter 2007 sales. Revenue for the quarter was $71.2 million, an increase of 50% over the first quarter of 2007, due to a higher gold price and an increase in ounces sold. Cost of sales per ounce was $459 for the first quarter of 2008 compared with $327 for the first quarter of 2007, primarily as a result of higher consumable costs, particularly energy costs, and an increase in revenue-based royalties due to a higher gold price.
Gold equivalent production at Round Mountain in Nevada, U.S.A. was 63,604 ounces in the first quarter of 2008, a decrease of 25% compared with the first quarter of 2007. The year-over-year decline was mostly anticipated in the mine plan, but was compounded by a 26-day shutdown of the primary crusher due to electrical issues in the first quarter. Low-grade stockpile material was substituted for regular ore production, resulting in reduced gold production. Revenue was largely unchanged year-over-year, as the reduction in ounces sold was largely offset by a higher gold price. Cost of sales per ounce was $439 for the first quarter of 2008, compared with $289 for the first quarter of 2007, primarily as a result of the reduction in ounces sold due to lower grade and mill recovery, an increase in revenue-based royalties due to a higher gold price, and higher consumable costs.
At the Paracatu mine in Brazil, gold equivalent production was 43,236 ounces in the first quarter of 2008, an increase of 6% compared with the first quarter of 2007. The increase year-over-year is primarily due to higher grade ore, a higher recovery rate, and an increase in tonnes processed. Revenue for the quarter was $39.5 million, an increase of 38% over the first quarter of 2007, due to a higher average gold price, which was offset slightly by a reduction in ounces sold. Cost of sales per ounce was $452 for the first quarter of 2008, compared with $364 for the first quarter of 2007, primarily due to higher consumable costs and the appreciation of the Brazilian real against the U.S. dollar.
Gold equivalent production at La Coipa on a 100% basis was 60,893 ounces for the first quarter of 2008, a decrease of 46% compared with first quarter 2007 production of 112,590 ounces on a 100% basis (of which Kinross had a 50% share). Gold equivalent production for the first quarter of 2008 included 1,862,223 ounces of silver. First quarter production was negatively affected by a pit wall failure in the Coipa Norte pit in January, as a result of which Coipa Norte ore was replaced by lower grade stockpiled material. This accounted for a production loss of approximately 10,000 ounces, which the operation expects substantially to recover in subsequent quarters now that mining at Coipa Norte has been re-established. Sales for the quarter of 80,654 gold equivalent ounces included a draw-down of year-end inventories of approximately 19,000 ounces. Revenue for the quarter was $73.3 million. Cost of sales per gold equivalent ounce was $448 in the first quarter of 2008, compared with $202 in the first quarter of 2007. This includes a $6.1 million incremental fair value inventory charge related to the Goldcorp swap. Without this charge, cost of sales per gold equivalent ounce would have been $372, compared with $202 in the first quarter of 2007. The year-over-year increase is due primarily to the fair value inventory charge, and increases in fuel and grinding materials and other consumables.
Gold equivalent production at Maricunga was 61,379 ounces for the first quarter of 2008, compared with 41,040 ounces in the first quarter of 2007. The year-over-year increase in production reflects the increase in Kinross' ownership from 50% per cent to 100% upon the acquisition of Bema in February 2007. On a 100% basis, production was relatively constant with an increase of 2% over the same period. Sales for the first quarter 2008 were 61,800 gold equivalent ounces, resulting in revenue of $57.6 million. Cost of sales per ounce was $552 in the first quarter of 2008, compared with $405 in the first quarter of 2007. The increase was primarily due to the impact of the appreciation of the Chilean peso against the U.S. dollar, an increase in the price of consumables, and costs associated with unplanned maintenance and repairs to the crusher motors and conveyor belt. A large portion of these maintenance costs were related to outside contractors' fees, and the operation is planning to reduce these costs in the future by hiring additional crew members to perform maintenance and repairs currently handled by external contractors.
At the Crixas joint venture mine in Brazil, gold equivalent production was 20,630 ounces in the first quarter of 2008, a decrease of 13% compared to the first quarter of 2007, as a result of a lower grade. Revenue for the quarter was $18.4 million, an increase of 4% over the first quarter of 2007, due to a higher average gold price, which was largely offset by a reduction in ounces sold. Cost of sales per ounce was $295 for the first quarter of 2008, compared with $225 for the first quarter of 2007, due primarily to higher consumable costs and the appreciation of the Brazilian real against the U.S. dollar.
The Julietta mine, in the Magadan region of Russia, was acquired as part of the Bema acquisition, and only contributed production from February 27, 2007 to March 31, 2007 in the first quarter of 2007; therefore, year-over-year results are not comparable. Gold equivalent production at Julietta was 16,648 ounces for the first quarter of 2008. Revenue during the quarter was $15.1 million and cost of sales was $739 per gold equivalent ounce.
Project updates
The forward-looking information contained in this section is subject to the risks and assumptions contained in the Cautionary Statement on Forward-Looking Information located on page 15 of this release.
Kupol project
Mining continues at Kupol and the mill is now processing ore. The first gold and silver production is expected this month.
Some 430,000 tonnes of ore were stockpiled as of March 31, which was well ahead of plan. Based on the current ramp-up schedule, the milling rate is expected to reach 1,500 tonnes per day in May, and to attain full production capacity of 3,000 tonnes per day by October.
The Kinross share of Kupol production for 2008 is expected to be approximately 365,000-390,000 gold equivalent ounces, at an expected average cost of sales per gold equivalent ounce of $235-2451 for the year. The Kupol cost of sales per gold equivalent ounce is expected to decrease to an average of approximately $210-2201 in the fourth quarter of 2008. Capital expenditures for 2008 are expected to increase by approximately $10 million as a result of the decision to buy the Kupol fuel transport fleet, as opposed to subcontracting for these services as previously planned. We intend to provide a final capital amount for the project once commissioning is complete.
Paracatu expansion
Construction on the Paracatu expansion project was 89% complete as of March 31, 2008, with $476 million of capital spent or committed. The project remains on schedule to begin commissioning in July 2008. The crushing, conveying, and stockpiling facilities are near completion, and testing of these facilities is expected to begin in May All mining equipment is now on site, the electric shovel is being erected, and training for mobile equipment operators is in progress.
The project is expected to increase gold production at Paracatu from approximately 175,000 ounces in 2007 to approximately 305,000-335,000 ounces in 2008 at an expected average cost of sales per ounce of $390-400(1) for 2008. The Paracatu cost of sales per ounce is expected to decrease to an average of approximately $345-355(1) in the fourth quarter of 2008. Capital expenditures at Paracatu are expected to increase by approximately $10 million as a result of accelerating the purchase of mobile equipment from 2009 to 2008. We intend to provide a total capital amount for the project once commissioning is complete, which we expect may be in the range of 5% to 8% in excess of the project budget, depending on final costs and foreign exchange rates.
Kettle River - Buckhorn project
Construction on the Buckhorn mine project is proceeding on schedule and on budget and was approximately 90% complete as of March 31, 2008, with $68 million of capital committed or spent. The mine is expected to commence gold production in October 2008. The water treatment plant is operating and mine development from the upper and main portals is progressing.
Crown Resources Corporation, a subsidiary of Kinross, recently completed a settlement with the project opponents who were appealing certain State and Federal permits and authorizations required to operate the mine, pursuant to which all appeals were dismissed.
The settlement terms primarily focus on environmental monitoring and mitigation measures, and on the funding of additional wetland, habitat and fisheries restoration and improvement projects in the Okanogan Highlands.
Expected production for 2008 is approximately 25,000-30,000 ounces, at an expected average cost of sales per ounce of $290-300(1). The cost of sales per ounce is expected to be impacted positively once the project is operating at full capacity by the end of 2008.
(1) Based on price assumptions outlined in "2008 Outlook" below.
Fort Knox Project
Kinross has accelerated the schedule of the Fort Knox project in order to bring additional ounces expected from the project into production sooner. Based on the revised schedule, production from the project is now expected to begin in mid-2009 instead of at the end of 2009, as reported in our Q4 2007 and year-end news release. The accelerated schedule will result in the Company advancing approximately $35 million of capital expenditures from 2009 to 2008.
