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TORONTO – Kinross Gold Corp. has slashed its gold reserves by a staggering 33% as it focuses on mining high-grade ounces in a low-price environment.
The Toronto-based miner surprised investors on Wednesday by stating that its year-end reserves have dropped to 39.7 million ounces, down from 59.6 million at the end of 2012. It is a massive decline, particularly since Kinross used the same gold price in both years (US$1,200 an ounce) to calculate reserves.
Kinross said that part of the drop (6.7 million ounces) was due to the removal of its failed Fruta del Norte project in Ecuador, and part of it was simply depletion from mining. But the other key factor is its internal strategy.
The company wants to stick to mining high-margin ounces. As a result, it decided to calculate reserves using what it calls a “fully-loaded costing methodology” that factors in costs for sustaining capital, waste management and other work. The result is that millions of marginal ounces were dropped out of reserves.
The positive aspect of this strategy is that mining only higher-grade ounces means that the company’s profitability and cash flow should improve. The average grade of the reserves went up 14%.
Kinross chief executive Paul Rollinson referred to it as a “quality over quantity” strategy. It represents a startling shift for the gold industry, as companies were desperate to grow their reserves when prices were going up. At today’s lower prices, they are simply trying to maximize their earnings.
The Kinross mine that is most affected is the Paracatu operation in Brazil, where reserves fell by an astounding 6.8 million ounces. The mine life declined by roughly 12 years, though it still extends to 2030.
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