UPDATE 2-Kinross pegs Mauritania mine expansion at $2.7 bln

Mon Apr 29, 2013 2:03pm EDT

* Moving ahead with 38,000 tpd mill study at Tasiast

* Pre-feasibility shows 20-year mine life

* Output of 830,000 ounces annually in first five years

* Full feasibility to begin immediately, due Q1 2014

* Shares down 2.7 percent to C$5.41 in Toronto

By Julie Gordon

TORONTO, April 29 (Reuters) - Kinross Gold Corp on Monday estimated the cost of a scaled-back expansion of its struggling Tasiast mine in West Africa at $2.7 billion, more than some analysts had expected, sending its shares 3 percent lower.

The company said it was pushing ahead with a feasibility study for a new 38,000 tonne-per-day mill at the project, located in remote Mauritania, despite plunging gold prices and investor pressure in the mining sector to cut back on spending.

Kinross said it would make a final decision on the expansion after the study is completed in the first quarter of 2014. Still, it is already spending some $624 million on infrastructure and other aspects of the project this year.

"It's not a definitive pedal-to-the-metal, we're building this thing," said Chief Executive J. Paul Rollinson in a conference call with analysts. "It's an on-to-the-next-stage of study and we'll stop, look and listen when we complete that work."

Miners across the globe are facing shareholder revolts over costly takeovers and massive project cost overruns. They have cut spending in an effort to rein in runaway capital and operating costs.

The world's largest gold producer, Barrick Gold Corp , has stopped work on all new projects to save funds, with the notable exception of its $8.5 billion Pascua-Lama development on the border of Chile and Argentina.

Kinross, which acquired Tasiast as part of its $7.1 billion takeover of Red Back Mining in 2010, had originally planned a larger, 60,000 tonne-per-day option, but abandoned that idea when it proved too costly and risky.

Rollinson said on Monday that Kinross must consider capital and operating costs, power options and the price of gold before giving the new mill the final go-ahead. If the economics do not add up, it could continue using its existing mill.

"The priority for us is balance-sheet strength," he said. "We're not going to put the company into a situation where we're too stretched to build a project."

MORE GOLD OUNCES

The prefeasibility study, outlined on Monday, contemplated a 30,000 tonne-per-day option, which would produce around 830,000 ounces of gold annually over its first five years of production. Cash costs would average $500 an ounce over those years.

Kinross said bumping that up to a 38,000 tonne-per-day option is optimal, as it will allow the company to shut down the existing mill and wrap that production into the new facility.

Tasiast produced about 185,000 ounces at the existing 8,000 tonne-per-day mill in 2012. Total costs of sales were $1,061 an ounce in the fourth quarter and averaged $889 an ounce in 2012, making it one of Kinross's most expensive gold mines.

Barclays Capital analyst Farooq Hamed said in a note to clients on Monday that the expansion's operating and capital costs came in slightly higher than he had expected.

"We believe the market will view the cost assumptions as being high, creating more risk for the project and potentially more questioning of its viability given the scare the recent gold price volatility has added to sentiment," he said.

Gold prices plunged to a two year-low around $1,321 an ounce earlier this month, dragging down the shares of gold miners. Bullion has since recovered to around $1,465 an ounce, though it is still well below the Jan. 1 price of some $1,675 an ounce.

Kinross's shares were down 2.7 percent at C$5.41 on Monday afternoon on the Toronto Stock Exchange. The stock has lost more than 44 percent of its value so far this year.

ALREADY SPENDING

Even without a final decision on construction, Kinross dropped some $180 million on Tasiast in the first months of 2013 and has another $445 million planned this year for a water pipeline, infrastructure projects and equipment purchases.

That $445 million will come out of the planned $2.7 billion capital budget for the expansion, with much of the remaining budget earmarked for building the mill and crusher.

Kinross said that the infrastructure work being done now is required to improve operations at Tasiast regardless of the potential expansion decision.

The massive Mauritanian gold deposit was supposed to help launch the Toronto-based miner into the big leagues, but has so far failed to live up to lofty expectations.

Kinross, which operates mines in the Americas, West Africa and Russia, took a $3.21 billion impairment charge in the fourth quarter of 2012 related to Tasiast and a second West African mine acquired in the Red Back takeover.

That followed a previous $2.94 billion charge in 2011, also related to the two West African mines. Despite the writedowns Kinross has continued to push the Tasiast expansion ahead.

The pricey Red Back takeover and operational struggles at Tasiast cost long-time CEO Tye Burt his job last August. Rollinson, previously head of corporate development at Kinross, has kept Tasiast as the company's top priority.

While the company has continued to fund Tasiast, it slashed spending on some of its other projects, cutting its planned 2013 capital expenditures to $1.6 billion, down by about $325 million from 2012.

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