(The following statement was released by the rating agency)
NEW YORK, June 28 (Fitch) Fitch Ratings has affirmed Kinross Gold Corporation's
(NYSE: KGC, TSX: K) Long-Term Issuer Default Rating (IDR) and senior unsecured
debt at 'BBB-'. Approximately $3.5 billion in principal amount of debt and
commitments is affected by this action. A complete list of ratings follows at
the end of this release.
The Rating Outlook is Stable
Kinross's ratings reflect its sizable reserves and strong production, average
geopolitical risk position, strong liquidity, and the expectation for gradual
deleveraging in the next three years as the company reduces total debt while
earnings increase through increased production volumes and lowered cost, in line
with Kinross' commitment to maintain a conservative capital structure. In weak
gold markets, the company has the ability to defer development and exploration
and focus on cash preservation. Offsetting factors include the company's
average- to above-average cost position, leading to an above-average sensitivity
to gold prices, heightened capex plus execution risk due to large construction
projects at a key mine site, and anticipated maturation of core assets.
The Stable Outlook reflects Fitch's expectation that in the ratings case, total
debt/EBITDA will generally be below 2.0x and free cash flow (FCF) generation
plus cash balance will be sufficient to fund recently increased capex spending
and debt reduction efforts. Should internal cash generation fall behind
expectations, we expect the company to preserve and generate liquidity via
credit-neutral actions, including cost management, capital expenditure
deferrals, non-core asset sales and potentially new equity issuances. The recent
Nevada acquisitions and the Tasiast expansion will reduce Kinross's liquidity,
increase its sensitivity to gold prices and increase execution risk in the near
term, but should increase production, lower overall cost of production at the
Tasiast site, and give the company more long-term expansion options, such as
proceeding with phase two of the Tasiast expansion, to help offset the
maturation of Russian production.
Kinross operates in Russia (29% of 2015 metals sales), the U.S. (26%), Brazil
(18%), Ghana (10%), Mauritania (8%), and Chile (8%). Gold production has grown
at a roughly a 2% annual growth rate over the past five years but is expected to
increase approximately 5%-10% in 2016. Proven and probable gold reserves pro
forma for the acquisition were approximately 35 million oz. calculated at
$1,200/oz. The company reported cost of sales for the first quarter of 2016 and
full-year 2015 of $694 and $696 per gold equivalent ounce (GEO), respectively,
with all-in sustaining cost (AISC) of $963 and $975 per GEO, respectively,
compared to $973 per ounce in 2014 and $1,082 in 2013.
KEY RATING DRIVERS
INCREASED OPERATIONAL DIVERSIFICATION
Historically, Kinross has had elevated operational concentration, with two
mining sites making up almost half of its production in 2015, and a significant
portion of its cash flows coming from its lowest-cost Russian mine, Kupol. With
the acquisition of Bald Mountain, additional interest in Round Mountain, and
production increases at Tasiast expected to start in 2018, Kinross's operational
and cash flow concentration has been slightly reduced, but will continue to
reduce as these sites ramp up production. Kinross will continue to generate a
significant portion of its cash in Russia through at 2018, but Fitch estimates
this percentage to be less than a third of total cash flow by 2017. Though not
expected, a disruption in production in its major production sites or increased
cash restrictions will still have an effect on the company's ability meet
guidance.
INCREASED NEAR-TERM SPENDING FOR LONG-TERM PRODUCTION
Capital spending in 2016 and 2017 will be higher than previous Fitch forecasts,
as the company acquired the Bald Mountain mine and the other 50% of the Round
Mountain mine from Barrick Gold Corp. (Barrick) for $588 million (including
working capital adjustments) and announced that it is proceeding with phase one
of the Tasiast mine expansion. The assets acquired from Barrick are expected to
add up to roughly 500,000 additional ounces of annual production for 2017 and
2018, while the Tasiast expansion, which is expected to be completed in 2018, is
forecast to add another approximately 200,000 ounces annually to Kinross's 2.6
million GEOs produced in 2015. In the near term, the acquisitions and the
Tasiast expansion will reduce Kinross's liquidity, increase its sensitivity to
gold prices and increase execution risk, but should lower overall cost of
production, increase production and geographical diversification in the long
term, as well as give the company more long-term expansion options, such as
proceeding with phase two of the Tasiast expansion.
This added production will help offset at least a large portion of the decline
in production from its lowest cost Russian mine sites, which currently have a
relatively short remaining mine life (estimated at 3 to 5 years), with
relatively low-cost production. Phase one of the Tasiast expansion should add
roughly 200,000 ounces and lower total cash cost to approximately $535/oz. and
an ASIC under $800/oz. at the site, while Kinross estimates Bald Mountain will
add approximately 200,000 ounces per year through the life of the mine at a cash
cost of $560-$700/oz. starting in approximately 2017, compared to the
approximately 750,000 ounces at a cash cost of just under $500/oz. produced in
Russia in 2015.
Additionally, Kinross has the opportunity to stem the production decline of the
Russian assets beyond Kupol's cessation in the next 3 to 5 years. The company
has had positive pre-feasibility study results at the neighboring Moroshka
project, which is expected to start production in 2018, and expects to continue
to explore near-mine deposits like the September Northeast target, located near
the Dvoinoye mine site, which is expected to commence mining in late 2017.
SUFFICIENT LIQUIDITY, MODERATE LEVERAGE
Liquidity at March 31, 2016 was strong, with cash on hand of roughly $750
million after the equity issuance and acquisitions, with substantially all of
the company's $1.5 billion revolver due August 2020 available. Total debt at
March 31, 2016 of roughly $2 billion-to-latest 12 months (LTM) operating EBITDA
of approximately $850 million was approximately 2.4x, and net debt-to-LTM
operating EBITDA was approximately 1.5x, not including pro forma EBITDA from the
acquired assets. Liquidity and cash generation should remain adequate to support
Kinross's capital spending, and are guided to be approximately $755 million in
2016.
Fitch expects the company to repay the $250 million notes due in 2016, with
scheduled maturities of debt as of March 31, 2016 to be an additional $500
million in 2019, and $1.3 billion thereafter.
COMMODITY PRICE EXPOSURE
Kinross's earnings are highly sensitive to gold prices; the company forecasts
that a $100/oz. decline in gold prices from the company's assumption of
$1,100/oz. could result in a $300 million impact on pre-tax earnings in 2016.
Fitch expects Kinross to be FCF positive in a scenario where realized prices
are greater than approximately $1,100, but also notes that this sensitivity to
gold prices is higher than most peers due to Kinross's higher current cost
structure and higher concentration of gold sales as a percentage of total metals
sales. For 2016, Kinross guides to production cost of sales of $675-$735/oz. and
all-in sustaining cost of $890-$990, on the higher end of peer guidance that
ranges from the $550-$700/oz. and $775-$960/oz., respectively. Fitch recognizes
the opportunity for Kinross to significantly improve its cost structure with a
successful completion of the Tasiast expansion and ramp-up of production at Bald
Mountain, as well as other initiatives.
EXPECTATIONS
Fitch expects Kinross's production to increase in 2016 from 2015, to
approximately 2.7 million to 2.9 million ounces, within the company's guidance.
Fitch expects FCF to be positive in 2016, with similar results expected in 2017,
as cash flows from additional production in 2017 are roughly offset by
heightened capex. Additional Tasiast production and continued cost reduction
efforts are expected to allow the company to generate sustained positive FCF in
the base case. Fitch expects total debt/operating EBITDA at the end of 2016 to
be approximately 1.5x-2.0x, assuming the 2016 notes are repaid, with net
debt/operating EBITDA remaining between approximately 1.0x-1.5x. Fitch expects
the company to remain well within the revolver's maximum net leverage covenant
of 3.5x.
KEY ASSUMPTIONS
--Gold Prices of $1,100 per oz.;
--Volumes within guidance range, with assumed suspension of Maricunga in the
fourth quarter;
--Costs within guidance in 2016 with realization of additional lower-cost
production leading to a longer-term production cost of sales of under
approximately $650/oz.
--Capital expenditures within guidance range;
--Senior notes due 2016 repaid;
--No material execution issues with ramp-up of ongoing expansions to approximate
annual run-rate expectations.
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
--Deterioration in gold prices and internally generated cash flow without an
equal management response in the form of lowered costs, reduced spending, assets
sales or the raising of additional equity;
--Expectations that total debt/operating EBITDA will be greater than 2.8-3.0x on
a sustained basis;
--Debt-funded shareholder-friendly activity;
--Disruption in operations of major operating sites, especially low-cost
operations in Russia;
--Expected period of sustained negative free cash flow after dividends.
Positive: Not anticipated given the company's exposure to volatile precious
metal, commodity and foreign exchange prices, but future developments that may,
individually or collectively, lead to positive rating action include:
--Material debt reduction leading to total debt/EBITDA below approximately
1.0x-1.3x;
--Expectations of sustained positive free cash flow generation over $500 million
annually.
FULL LIST OF RATING ACTIONS
Fitch affirms Kinross Gold Corporation ratings as follows:
--IDR at 'BBB-';
--$1.5 billion unsecured revolving credit facility at 'BBB-';
--Senior unsecured term loan due 2019 at 'BBB-';
--$250 million senior unsecured notes due 2016 at 'BBB-';
--$500 million senior unsecured notes due 2021 at 'BBB-';
--$500 million senior unsecured notes due 2024 at 'BBB-';
--$250 million senior unsecured notes due 2041 at 'BBB-'.
Contact:
Primary Analyst
Gregory M. Fodell
Associate Director
+1-312-368-3117
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Secondary Analyst
Monica M. Bonar
Senior Director
+1-212-908-0579
Committee Chairperson
Robert Curran
Managing Director
+1-212-908-0515
Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email:
alyssa.castelli@fitchratings.com.
Summary of Financial Statement Adjustments:
--No material adjustments have been made that have not been disclosed in public
filings of this issuer.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
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