EXHIBIT
99.2
Management’s
Discussion and Analysis
for
the year ended December 31, 2006
This
management’s discussion and analysis (“MD&A”) relates to the financial
condition and results of operations of Kinross Gold Corporation together with
its wholly owned subsidiaries as of March 23,
2007,
and is intended to supplement and complement Kinross Gold Corporation’s audited
consolidated financial statements for the year ended December 31, 2006 and
the
notes thereto. Readers are cautioned that the MD&A contains forward-looking
statements and that actual events may vary from management’s expectations.
Readers are encouraged to consult Kinross Gold Corporation’s audited
consolidated financial statements and corresponding notes to the financial
statements which are available on the Company’s website www.kinross.com
and on
www.sedar.com.
The
consolidated financial statements and MD&A are presented in U.S. dollars and
have been prepared in accordance with Canadian generally accepted accounting
principles (“CDN GAAP”). This discussion addresses matters we consider important
for an understanding of our financial condition and results of operations as
of
and for the year ended December 31, 2006, as well as our outlook.
This
section contains forward-looking statements and should be read in conjunction
with the risk factors described in “Risk Analysis”. In certain instances,
references are made to relevant notes in the consolidated financial statements
for additional information.
Where
we
say “we”, “us”, “our”, the “Company” or “Kinross”, we mean Kinross Gold
Corporation or Kinross Gold Corporation and it subsidiaries, as it may apply.
Where we refer to the “industry”, we mean the gold mining industry.
Kinross
Gold Corporation is engaged in gold mining and related activities, including
exploration and acquisition of gold-bearing properties, extraction, processing
and reclamation. Kinross’ gold production and exploration activities are carried
out principally in the United States, Canada, Brazil, Chile and Russia. Gold
is
produced in the form of doré, which is shipped to refineries for final
processing. Kinross also produces and sells a limited quantity of
silver.
The
profitability and operating cash flow of Kinross is affected by various factors,
including the amount of gold and silver produced, the market prices of gold
and
silver, operating costs, interest rates, regulatory and environmental
compliance,
the level of exploration and capital expenditures, general and administrative
costs, and other discretionary costs. Kinross is also exposed to fluctuations
in
foreign currency exchange rates and varying levels of taxation that can impact
profitability and cash flow. The Company seeks to manage the risks associated
with its business operations, however, many of the factors affecting these
risks
are beyond the Company’s control.
Each
of
the Company’s significant operating mines are considered separate segments.
These
are
the segments that are reviewed and measured by the Chief Executive Officer
as
they are financially and operationally significant operations of Kinross. Other
operations include those properties that no longer have significant production
or are development stage properties. Properties that are shut down and are
in
care and maintenance or are in reclamation phase, and non-mining operations
and
other operations are included in corporate and other.
|
Ownership percentage
|
||||||||||||||||
|
2006
|
|
|
2005
|
|
|
2004
|
||||||||||
|
Operating
Segments
|
Operator
|
Location
|
||||||||||||||
|
Fort
Knox
|
Kinross
|
U.S.A.
|
100
|
%
|
100
|
%
|
100
|
%
|
||||||||
|
Round
Mountain
|
Kinross
|
U.S.A.
|
|
50
|
%
|
50
|
%
|
50
|
%
|
|||||||
|
La
Coipa
|
Goldcorp
|
Chile
|
50
|
%
|
50
|
%
|
50
|
%
|
||||||||
|
Crixás
|
AngloGold
Ashanti
|
Brazil
|
50
|
%
|
50
|
%
|
50
|
%
|
||||||||
|
Paracatu
(a)
|
Kinross
|
Brazil
|
100
|
%
|
100
|
%
|
49
|
%
|
||||||||
|
Musselwhite
|
Goldcorp
|
Canada
|
32
|
%
|
32
|
%
|
32
|
%
|
||||||||
|
Porcupine
Joint Venture
|
Goldcorp
|
Canada
|
49
|
%
|
49
|
%
|
49
|
%
|
||||||||
|
Refugio
|
Kinross
|
Chile
|
50
|
%
|
50
|
%
|
50
|
%
|
||||||||
|
Kettle
River
|
Kinross
|
U.S.A.
|
100
|
%
|
100
|
%
|
100
|
%
|
||||||||
|
Other
operations (b)
|
Kinross
|
Various
|
Various
|
Various
|
Various
|
|||||||||||
|
Corporate
and other
|
Various
|
Various
|
Various
|
Various
|
||||||||||||
|
(a)
|
Acquisition
of the remaining 51% interest in Paracatu was completed
on December 31, 2004. Consequently, operating results for the year
ending
December 31, 2004 only include the Company’s 49% proportionate share of
Paracatu.
|
|||||
|
(b)
|
Other
operations include Gurupi and
Kubaka.
|
|||||
|
|
Years
ended December 31,
|
|
|
Change
|
||||||||||||
|
(dollars
in millions, except per share amounts)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
06
vs 05
|
|
|
05
vs 04
|
|
|
Gold
equivalent ounces
(a)
-
produced
|
1,476,329
|
1,608,805
|
1,653,784
|
(8
|
%)
|
(3
|
%)
|
|||||||||
|
Gold
equivalent ounces (a) - sold
|
1,510,836
|
1,627,675
|
1,654,617
|
(7
|
%)
|
(2
|
%)
|
|||||||||
|
Gold
ounces - sold
|
1,416,797
|
1,575,267
|
1,585,109
|
(10
|
%)
|
(1
|
%)
|
|||||||||
|
Metal
sales
|
$
|
905.6
|
$
|
725.5
|
$
|
666.8
|
25
|
%
|
9
|
%
|
||||||
|
Cost
of sales (excludes accretion and reclamation
expense,
depreciation, depletion and amortization
|
$
|
481.7
|
$
|
448.1
|
$
|
402.4
|
7
|
%
|
11
|
%
|
||||||
|
Accretion
and reclamation expenses
|
$
|
33.5
|
$
|
56.0
|
$
|
21.4
|
(40
|
%)
|
162
|
%
|
||||||
|
Depreciation,
depletion and amortization
|
$
|
108.3
|
$
|
167.7
|
$
|
170.1
|
(35
|
%)
|
(1
|
%)
|
||||||
|
Impairment
|
$
|
10.5
|
$
|
184.7
|
$
|
59.9
|
(94
|
%)
|
208
|
%
|
||||||
|
Operating
earnings (loss)
|
$
|
201.5
|
$
|
(211.2
|
)
|
$
|
(67.9
|
)
|
195
|
%
|
(211
|
%)
|
||||
|
Net
earnings (loss)
|
$
|
165.8
|
$
|
(216.0
|
)
|
$
|
(63.1
|
)
|
177
|
%
|
(242
|
%)
|
||||
|
Basic
and diluted earnings (loss) per share
|
$
|
0.47
|
$
|
(0.63
|
)
|
$
|
(0.18
|
)
|
175
|
%
|
(250
|
%)
|
||||
|
Cash
flow from operating activities
|
$
|
292.0
|
$
|
133.7
|
$
|
161.2
|
118
|
%
|
(17
|
%)
|
||||||
|
Average
realized gold price ($/ounce)
|
$
|
598
|
$
|
445
|
$
|
404
|
34
|
%
|
10
|
%
|
||||||
|
Cost
of sales per ounce sold
|
$
|
319
|
$
|
275
|
$
|
243
|
16
|
%
|
13
|
%
|
||||||
|
|
(a)
|
Gold
equivalent ounces include silver ounces produced and sold converted
to
gold based on the ratio of the average spot market prices for the
commodities for each year. The ratios were 2006-52.28:1, 2005-60.79:1
and
2004-61.46:1.
|
|||||
Kinross
recorded earnings of $165.8 million, or $0.47 per share, for the twelve
months ended December 31, 2006, compared with a loss of $216.0 million, or
$0.63
per share, in 2005 and a loss of $63.1 million, or $0.18 per share, in 2004.
Financial results for 2006 reflect higher prices for gold and silver, with
the
average realized gold price in 2006 of $598 per ounce, 34% higher than that
which was realized in 2005. Although quantities of gold equivalent ounces sold
were down to 1,510,836 ounces from 2005 and 2004 levels of 1,627,675 ounces
and
1,654,617 ounces, respectively, operating earnings rose to $201.5 million.
This
compares to losses of $211.2 million and $67.9 million in 2005 and 2004,
respectively.
Cost
of
sales increased 7% even though the quantity of gold equivalent ounces sold
was
down 7% from 2005 level. Kinross, along with the rest of the industry, continues
to experience increases in the costs for power, fuel, labour and consumables.
Costs at the Company’s mines located outside the United States were also higher
due to the effects of the weakening U.S. dollar. General and administrative
expenses increased to $52.1 million, from $45.3 million in 2005 and $36.4
million in 2004. Increases in stock-based compensation, higher costs associated
with new hires and the effects of a strong Canadian dollar compared to the
U.S.
dollar all contributed to these cost increases. Accretion and reclamation
expense decreased to $33.5 million in 2006, from $56.0 million in 2005, which
was an increase from $21.4 million in 2004. The reclamation expense in 2006
was
significantly impacted by a charge of $21.2 million for changes in estimates
for
reclamation, largely on properties no longer in production. This is in
comparison to 2005 when expenses of $46.0 million
were recorded in respect of similar issues.
When
compared to 2005 results, 2006 earnings improved as a result of impairment
charges taken in 2005. and a higher realized gold price. Impairment charges
of
$10.5 million in 2006 resulted from a write-down of long-term investments.
Lower
cost bases resulting from the 2005 impairment charges resulted in lower
depreciation, depletion and amortization charges in 2006. 2005 results were
negatively impacted by total impairment charges of $184.7 million, which
included a charge relating to the Fort Knox mine of $141.8 million. The 2005
Fort Knox impairment resulted from a strategic review of the operation in which
reserves at the True North and Gil deposits were reclassified to resources,
the
Company decided to withdraw from the Ryan Lode project and changes were made
to
the design of the mine pit.
The
same
impairment testing methodology was used in 2006, 2005 and 2004, using nominal
prices and cost assumptions which included the impact of inflation and currency
exchange rates. Gold price assumptions were based on gold price forecasts
provided by an independent research firm as well as other external market
data.
During
2006, cash flows from operations more than doubled to $292.0 million from $133.7
million in 2005. Higher gold prices were the primary driver behind the increase
in cash flows in 2006 when gold prices reached a high, exceeding $725 per ounce.
Cash flow increases were partially offset by increases in operating costs,
primarily for energy, fuel, labour and consumables. The 17% decrease in
operating cash flow from $161.2 million in 2004 to $133.7 million in 2005 was
the result of higher operating costs and changes in working capital
requirements, partially offset by higher gold prices.
Kinross
has continued to pursue a strategy of growing core assets and shedding non-core
assets. In 2006, this strategy resulted in the acquisition of Crown Resources
Corporation, owner of the Kettle River - Buckhorn Property in Washington State,
United States, near the Company’s Kettle River mill. This follows the
acquisition in 2004 of the remaining 51% of the Paracatu mine in Brazil, where
Kinross held a 49% ownership interest.
Non-core
assets that were disposed of in 2006 included the New Britannia Mine, Blanket
Mine, Aquarius and George/Goose Lake properties. The Company also entered into
an agreement to sell Lupin, which was finalized in 2007.
Cash
used
on additions to property, plant and equipment was $202.9 million in 2006, $142.4
million in 2005 and $169.5 million in 2004, reflecting expansion of operations
at Paracatu, Round Mountain, Fort Knox, Refugio, Porcupine Joint Venture and
Kettle River. Expenditures on property, plant and equipment were financed
largely with cash provided by operating activities and existing cash balances.
Cash and cash equivalents increased to $154.1 million at December 31, 2006,
up
from $97.6 million at December 31, 2005 and $47.9 million at December 31, 2004.
During 2006, long-term debt decreased to $89.9 million at December 31, 2006
from
the December 31, 2005 balance of $159.3 million.
Kinross’
Proven and Probable Reserves increased to 27.9 million ounces of gold, compared
with 24.7 million at the end of 2005. This 13% increase is net of 1.6 million
contained gold ounces depleted through mining. The reserve additions of 4.8
million ounces were the result of successful exploration efforts at Refugio,
engineering design changes at Paracatu and Fort Knox, and the addition of the
Buckhorn Property at Kettle River. A higher gold price assumption also had
a
positive impact on the reserve calculations. Reserves at December 31, 2006,
were
estimated based on a gold price of $475 per ounce, versus $400 per ounce at
December 31, 2005.1
Source:
Reuters
The
price
of gold is the largest single factor in determining profitability and cash
flow
from operations, therefore, the financial performance of the Company has been,
and is expected to continue to be, closely linked to the price of gold.
Historically, the price of gold has been subject to volatile price movements
over short periods of time and is affected by numerous macroeconomic and
industry factors that are beyond the Company’s control. Major influences on the
gold price include currency exchange rate fluctuations and the relative strength
of the U.S. dollar, the supply of and demand for gold and macroeconomic factors
such as the level of interest rates and inflation expectations. During 2006,
the
price of gold hit a high of approximately $725 per ounce. The average realized
price for the year was $598 per ounce, a 34% increase over the 2005 average
price of $445 per ounce. The major influences on the gold price during 2006
were
increased investment demand, further producer de-hedging, a weaker U.S. dollar,
a decrease in Central Bank selling activity, and lower supply from gold
mines.
| 1 |
For
details concerning mineral reserve and mineral resource estimates
refer to
the Mineral Reserves and Mineral Resources tables and notes in
the
Company’s Annual Information
Form.
|
Source:
GFMS 2006 Gold Survey
Global
gold mine production in 2006 decreased 2.2% from 2005 production which is also
lower than production in the 2000 through 2003 period. Mine supply is not
predicted to increase in the near future. Central banks net sales of gold
declined by almost 50% compared to the previous year, marking a change in
sentiment at official institutions concerning gold. Recycled gold helped to
fill
the supply gap and increased roughly 20% from 2005 levels.
Source:
GFMS 2006 Gold Survey
With
the
rising price of gold, fabrication and jewelry demand decreased by 11%.
Investment demand was strong with over 300 tonnes purchased during the year.
A
new Exchange Trade Fund (“ETF”), was introduced in 2004, which enables investors
to purchase 1/10th
of an
ounce of gold and trades on the New York Stock Exchange. From initial demand
of
about 100 tonnes of gold in early 2005, the ETF now has over 450 tonnes of
gold
investment demand. Gold ETF’s are marketed in the United States, Australia,
United Kingdom, and South Africa. The U.S. streetTRACKS
ETF is by far the most popular vehicle. Other sources of investment demand
for
gold include futures exchanges such as COMEX in the U.S. and TOCOM in Japan.
Producer de-hedging also contributed to demand as gold hedging programs
continued their decline.
Source:
Mitsui and Co., USA
The
Company generally has a “no gold hedge” policy. However, the Company may acquire
gold and /or silver hedge or derivative product obligations as a result of
an
acquisition. A hedge program can protect the Company against future declines
in
price and can prevent the Company from benefiting from future price increases.
As
a
result of the acquisition of Bema, the Company acquired a portfolio of hedge
contracts for gold and silver related to the Kupol pre-existing project
financing. Otherwise, Kinross is not actively engaged in hedging its exposure
to
prices for gold or silver.
Kinross
realized slightly lower than the average market prices for gold from 2002
through 2006, as ounces necessary to satisfy gold hedge contracts at prices
that
were lower than average market prices were delivered into and recognized in
revenue as the existing hedge contracts were closed out.
| (2) |
The
use of the words “hedge”
or
“hedging” throughtout the MD&A refers to an economic hedge, which is
not necessarily a hedge from a financial statement perspective as
defined
in Accounting Guideline 13, “Hedging
Relationships”.
|
Source:
London Bullion Marketing Association London PM Fix
Inflationary
Cost Pressures
The
Company’s profitability has been negatively impacted by rising development and
operating costs with respect to labour, energy and consumables in general.
Since
mining is generally an energy intensive activity, especially in open pit
mining,
energy prices can have a significant impact on operations. The cost of fuel
as a
percentage of operating costs varies amongst the Company’s mines; however, all
operations experienced higher fuel costs during 2006, largely attributable
to a
continuing rise in crude oil prices. Higher oil prices have translated into
higher costs for petroleum based expenditures as well, including diesel fuel,
lubricants, explosives, tires and transportation. Electricity prices have
also
increased in recent years as a result of increased demand and higher natural
gas
prices.
Source:
Reuters
In
order
to mitigate the impact of higher consumable prices, the Company continues
to
focus on continuous improvement by extending the life of capital assets and
promoting a more efficient use of materials and supplies in
general.
Exploration,
development and operating activities have grown substantially in the mining
and
resource industries due to the continued strengthening of the gold price
and
other commodity prices. This has led to higher labour costs due to increased
competition for qualified personnel.
Currency
Fluctuations
Source:
Reuters
Changes
in foreign exchange rates have an impact on the Company’s operating costs and
capital expenditures, affecting profitability and cash flow. For the
Company’s
non-U.S. operations, which are located in Canada, Brazil, Chile and Russia,
a
portion of their operating costs and capital expenditures are denominated
in the
local currency. Since 2003, the currencies of the countries in which
Kinross
operates have strengthened against the U.S. dollar, as highlighted in
the graph
above. As those foreign currencies have risen, local costs incurred in
those
countries, when measured in U.S. dollars, have increased. As illustrated
in the
graph above, the Canadian dollar has appreciated by 34%, the Brazilian
real by
61%, the Chilean peso by 34% and the Russian ruble by 21% since the beginning
of
2003, as measured against the U.S. dollar. During 2006, the Canadian
dollar,
Brazilian real, Chilean peso and Russian ruble appreciated 6%, 11%, 5%
and 4%
respectively, against the U.S. dollar. Approximately 43% of the Company’s
expected production in 2007 is forecast to come from operations outside
the U.S.
and will continue to be exposed to foreign exchange rate movements. In
order to
manage this risk, the Company periodically uses currency hedges for certain
foreign currency exposures.
3. 2007
Outlook
The
following outlook relates to Kinross only. Production and cost outlook
will be
updated to include Bema at a subsequent date.
Kinross
expects to produce approximately 1.5 million gold equivalent ounces
in 2007,
substantially unchanged from 2006 levels. Decreases in production due
to the
cessation of mining activities at Kubaka and lower production at Round
Mountain
and Paracatu are offset by expected increases at Kettle River, La Coipa,
Refugio, Porcupine Joint Venture and Musselwhite. Cost of sales are
expected to
be in the range of $320 to $330 per ounce sold, increasing over 2006
levels due
to rising electricity, fuel and other commodity costs. The U.S. dollar
continued
to weaken against the Canadian dollar, Brazilian real and Chilean peso
during
2006. As a result, 2007 operating results and capital expenditures
in non-U.S.
countries where the Company operates are expected to be negatively
impacted.
In
2007,
general and administrative expenses are expected to be approximately
$48
million, a decline from 2006 levels. Reclamation expenditures in 2007
are
expected to increase to approximately $29 million.
Exploration
and business development expense is forecasted to be $44 million in
2007, an
increase of $5 million over 2006 levels, as efforts continue to extend
the mine
life at the Company’s core operations and look for new opportunities. Capital
expenditures are expected to be approximately $450 million in 2007,
for the
expansion project at Paracatu, development of the Kettle River - Buckhorn
Property, underground development at Musselwhite and expansion at La
Coipa and
Round Mountain.
Based
on
the average gold price to date in 2007, it is expected that the Company’s
existing cash balances, cash flow from operations and existing credit
facilities
will be sufficient to fund the exploration, capital and reclamation
programs
planned for 2007.
4. Strategy
Kinross
continues to deliver according to the four point strategic plan laid
out in
2005, aimed at maximizing net asset value and cash flow per share.
The four
points are growth from core assets; best people; building blocks for
the future;
and drive growth opportunities. In pursuing this plan, the Company
has replaced
Proven and Probable Reserves depleted through mining operations, such
that as at
December 31, 2006, the Company has gold reserves of 27.9 million ounces,
an
increase from 24.7 million ounces at December 31, 2005. This has been
achieved
through exploration efforts at existing properties and acquisition
of new
properties. With the management team in place, adherence to, and recognition
of,
high standards of environmental, health and safety, and a competitive
human
resources program, the Company created a work environment designed
to attract
and retain the best people. The Company continues to improve its technology
and
business systems, improve cost control and reporting systems and expand
internal
and external communications efforts. With increased cash flows and
credit
facilities, the Company has built a foundation on which to continue
to deliver
against the plan. Kinross’ business development approach has seen the Company
shed non-core assets and acquire properties strategic to its continued
success.
The
Company is positioned to continue to execute on its strategic plan.
Newly
acquired assets will be integrated into Kinross operations and the
Company will
continue to dispose of non-core assets. Exploration and development
of Kinross’
properties will continue throughout 2007 to add reserves and exploit
the
potential contained therein. Development projects continue in Brazil,
Chile,
Russia and the United States to ensure that potential from existing
properties
is maximized and long term growth is maintained.
With
the
management team now in place and systems continuing to be developed
and
improved, Kinross will build on this base to optimize shareholder value
and
ensure a high degree of corporate governance.
5. Developments
Acquisition
of
Bema Gold Corporation
On
February 27, 2007, the Company finalized the acquisition of Bema after
agreeing
to waive the conditions related to classification of the land upon
which the
Kupol project in Russia is located and long term leases relating to
this
property as set out in the Purchase Agreement. Through the acquisition,
Kinross
now owns the remaining 50% interest in CMM, the company that owns the
Refugio
mine in Chile, that Kinross did not already own, a 75% interest in
the Kupol
mine project and a 90% interest in the Julietta mine, both of which
are located
in Eastern Russia. The properties will be included with Kinross’ consolidated
results commencing on the Acquisition Date. Also, included in the acquisition
is
a 49% interest in the Cerro Casale Deposit, an exploration property
in Chile and
an approximately 30% interest in Pamodzi Gold Limited, a public South
African
company that owns the Petrex mine.
Acquisition
of Crown Resources Corporation
The
Company completed the acquisition of Crown Resources Corporation (“Crown”) on
August 31, 2006, and with it acquired the Buckhorn Property in Washington
State,
U.S.A, which is near the Kettle River mill. Consideration consisted
of 14.6
million common shares, plus the Company’s previous ownership interests in Crown,
consisting of 511,640 shares acquired in January 2004 and a $10.0 million
convertible debenture issued in May 2005, plus accrued interest, and
transaction
costs for a total of $219.6 million. The purchase price has been allocated
as
follows:
|
Current
assets
|
$
|
0.1
|
||
|
Property,
plant and equipment (net)
|
219.8
|
|||
|
Other
long-term assets
|
0.1
|
|||
|
Current
liabilities
|
(0.3
|
)
|
||
|
Reclamation
and remediation obligations
|
(0.1
|
)
|
||
|
$
|
219.6
|
During
2006, the Company continued the process of disposing of non-core assets.
The
most significant transactions were:
New
Britannia
Mine
On
December 22, 2006, Kinross sold its 50% interest in the New Britannia
mine in
Canada to Pegasus Mines Limited (“Pegasus”) in exchange for a 19.9% interest in
each of Pegasus’ joint venture partners, Garson Resources Ltd. (“Garson”) and
Piper Capital Inc. (“Piper”). Fair value of consideration received was estimated
to be CDN $5.1 million and a gain of $8.9 million was recorded on the
sale. As
part of the transaction, Pegasus replaced Kinross’ environmental letter of
credit of CDN $1.9 million with the Government of Manitoba and issued
a CDN $3.9
million letter of credit to the Company in the event that the Government
imposes
any closure liability or obligation in respect of the New Britannia
property
onto Kinross. This letter of credit will be increased each anniversary
date by
an amount equal to the Consumer Price Index for the preceding 12 months.
If the
mine goes into production, the letter of credit will be returned to
Pegasus by
Kinross. In addition, the Company has retained a right to purchase
60% of the
joint venture assets provided a feasibility study that identifies a
deposit of
at least 3.0 million ounces of gold reserves is completed by
Pegasus.
Aquarius
Property
In
May
2006, the Company realized a gain of $0.1 million on the sale of the
Aquarius
property to St Andrew Goldfields (“St Andrew”) in exchange for 100.0 million
common shares and 25.0 million common share purchase warrants of St
Andrew. In
2005, the property had been written down to approximate sale value.
Bolder Opportunity Limited Partnership
The
Company recognized a gain of $1.6 million on the sale of its interest
in Bolder
Opportunity Limited Partnership on May 24, 2006.
Katanga
The
Company received 5,751,500 shares of Katanga Mining Limited (“Katanga”) in
exchange for its 11.67% interest in Kinross Forrest Ltd. on June 27,
2006. On
September 8, 2006, Kinross sold the 5,751,500 shares in Katanga through
a
private placement for proceeds of $31.4 million resulting in a gain
of $31.3
million.
Lupin
Mine
Kinross
and Wolfden Resources Inc. (“Wolfden”) signed a definitive agreement on June 19,
2006, whereby Kinross would sell the Lupin mine in the Territory of
Nunavut to
Wolfden in exchange for Wolfden assuming certain of the mine’s liabilities. The
agreement was finalized subsequent to year end. Under the terms of
this
agreement, Wolfden owns the mine and the related property. Kinross
retired the
letters of credit and promissory notes related to reclamation at Lupin.
The
Company delivered a CDN $3.0 million standby letter of credit to Wolfden
and
agreed to reimburse Wolfden for CDN $1.7 million of fuel costs in 2007.
If the
Lupin mill is demolished by Wolfden without restarting the mill, the
Kinross
letter of credit will be drawn on to help fund the demolition costs.
Kinross
agreed to pay up to CDN $1.0 million for reclamation and closing of
the tailings
facility if the mill is restarted, and up to CDN $4.0 million if the
mill is not
restarted, provided the work is performed before the end of 2008. The
agreement
also provides that if the price of gold exceeds $500 per ounce, Kinross
is to be
paid a 1% royalty on future production.
Blanket
Mine
On
July
5, 2006, the Company concluded its sale of the Blanket mine to Caledonia
Mining
Corporation (“Caledonia”) and recorded a gain on sale of $2.9
million.
George/Goose
Lake Property
The
Company recorded a gain of $1.6 million on the sale of its interest
in the
George/Goose Lake property to Dundee Precious Metals Inc. on July 25,
2006.
Credit
Facility
On
August
18, 2006, the Company entered into a credit facility consisting of
an amended
and restated, three year revolving credit facility in the amount of
$300.0
million, which replaced the previous $295.0 million revolving facility
and
extended the term to August 2008 and a five and a half year, $200.0
million term
loan. The revolving credit facility will support the Company’s liquidity and
letters of credit requirements. The facility was secured by the assets
of the
Fort Knox mine as well as by the shares of various wholly owned subsidiaries.
As
at December 31, 2006, the Company had drawn $187.5 million of this
facility in
the form of a $60.0 million LIBOR loan and letters of credit totaling
$127.5
million. The five and a half year $200.0 million term loan supports
the Paracatu
expansion project in Brazil. As of December 31, 2006, the Company was
in
compliance with the credit facility’s various covenants.
A
shareholders’ rights plan (the “Plan”) was ratified by the shareholders of the
Company at the Company’s 2006 annual and special shareholder’s meeting. The Plan
was adopted to ensure that the Board of Directors and shareholders
of the
Company have sufficient time to properly evaluate a take-over bid or
pursue
other alternatives. The Plan is described in greater detail in Note
12 to the
accompanying financial statements.
Change
in Chief Financial Officer
In
March
2006, the Company announced the retirement of Lars-Eric Johansson and
the
appointment of Thomas M. Boehlert as Executive Vice President and Chief
Financial Officer. Mr. Boehlert joined Kinross following his most recent
position as Executive Vice President and Chief Financial Officer of
Houston’s
Texas Genco and has spent over 20 years in corporate finance, accounting
and
banking.
Appointment
of Chief Legal Officer
In
April
2006, the Company announced the appointment of Geoffrey P. Gold as
Senior Vice
President and Chief Legal Officer of Kinross. Mr. Gold joined Kinross
following
his most recent position as Vice President, Assistant Secretary and
Associate
General Counsel of Placer Dome Inc., and has over 12 years of legal
experience
in the mining industry.
Change
in Chief Operating Officer
In
May
2006, the Company announced the resignation of Scott Caldwell and the
appointment of Timothy C. Baker as Executive Vice President and Chief
Operating
Officer of Kinross. Mr. Baker joined Kinross following his most recent
position
as Executive General Manager of Place Dome Chile and has over 19 years
of
operations experience in the mining industry.
6. Consolidated
Results
of Operations
Financial
and Operating Highlights
|
Years
ended December 31,
|
Change
|
|||||||||||||||
|
(in
millions, except ounces and per share amounts)
|
2006
|
2005
|
2004
|
’06
vs ’05
|
’05
vs ’04
|
|||||||||||
|
Gold
equivalent ounces - sold (a)
|
1,510,836
|
1,627,675
|
1,654,617
|
(7
|
%)
|
(2
|
%)
|
|||||||||
|
Gold
ounces - sold
|
1,416,797
|
1,575,267
|
1,585,109
|
(10
|
%)
|
(1
|
%)
|
|||||||||
|
Silver
ounces - sold
|
4,864,084
|
3,185,776
|
4,271,980
|
53
|
%
|
(25
|
%)
|
|||||||||
|
Average
realized gold price ($/ounce)
|
$
|
598
|
$
|
445
|
$
|
404
|
34
|
%
|
10
|
%
|
||||||
|
Gold
sales - revenue
|
$
|
855.6
|
$
|
702.7
|
$
|
649.8
|
22
|
%
|
8
|
%
|
||||||
|
Loss
on metal derivative contracts (b)
|
(8.2
|
)
|
(2.4
|
)
|
(9.3
|
)
|
(242
|
%)
|
74
|
%
|
||||||
|
Silver
sales revenue
|
58.2
|
25.2
|
26.3
|
131
|
%
|
(4
|
%)
|
|||||||||
|
Total
revenue
|
$
|
905.6
|
$
|
725.5
|
$
|
666.8
|
25
|
%
|
9
|
%
|
||||||
|
Operating
earnings (loss)
|
$
|
201.5
|
$
|
(211.2
|
)
|
$
|
(67.9
|
)
|
195
|
%
|
(211
|
%)
|
||||
|
Net
earnings (loss)
|
$
|
165.8
|
$
|
(216.0
|
)
|
$
|
(63.1
|
)
|
177
|
%
|
(242
|
%)
|
||||
|
Basic
and diluted loss per share
|
$
|
0.47
|
$
|
(0.63
|
)
|
$
|
(0.18
|
)
|
175
|
%
|
(250
|
%)
|
||||
|
(a)
|
All
produced and sold ounces refer to Kinross’ proportionate share. Gold
equivalent ounces include silver ounces produced and sold
converted to
gold based on the ratio of average spot market prices for
the commodities
for each year. The ratios were 2006 - 52.28:1, 2005 - 60.79:1
and 2004 -
61.46:1.
|
|
(b)
|
Gains
or losses on purchased gold or silver options, spot deferred
contracts or
fixed forward contracts as a hedge against falling gold
prices are
recorded as revenue from metal
sales.
|
2006
vs. 2005
|
·
|
Gold
equivalent ounces sold in 2006 were down to 1,510,836 ounces
compared to
1,627,675 ounces in 2005. This is primarily the result of
reduced output
from Kubaka and Kettle River as these operations reduced
their mining
activites in 2006. These decreases were partially offset
by increased
sales of gold equivalent ounces at to Refugio which came
into production
in late 2005 and increased gold equivalent production at
La
Coipa.
|
|
·
|
Revenue
increased to $905.6 million from $725.5 million due to a
realized gold
price that was 34% higher than 2005, even though sales quantities
were
down 10%. The Company realized an average gold price of $598
per ounce in
2006 compared to $445 per ounce in
2005.
|
|
·
|
Operating
earnings went from a loss of $211.2 million in 2005 and a
loss of $67.9
million in 2004 to earnings of $201.5 million in 2006. This
performance
was driven by higher metal prices and a reduced impairment
charge of $10.5
million in 2006, compared to a charge of $184.7 million in
2005.
|
|
·
|
Net
gains on the disposals of assets and investments of $47.4
million in 2006
also contributed to improved operating earnings. Net gains
of $6.0 million
and $1.7 million were recorded in 2005 and 2004, respectively.
Net
earnings of $165.8 million, or $0.47 per share, were also
impacted by a
tax provision of $25.9 million, as compared to a recovery
of taxes of
$12.9 million in 2005, when a loss of $216.0 million, or
$0.63 per share,
was reported.
|
|
·
|
General
and administrative costs increased to $52.1 million up from
$45.3 million
as a result of stock-based compensation expenses, a stronger
Canadian
dollar and costs associated with new
hires.
|
2005
vs. 2004
|
·
|
In
2005, gold equivalent ounces sold decreased 2%, compared
with 2004.
Production and ounces sold decreased at Fort Knox, Round
Mountain, Lupin,
New Britannia and La Coipa. This was partially offset by
increases at
Kubaka, Musselwhite and attributable production at Paracatu
due to the
purchase of the remaining 51% at the end of
2004.
|
|
·
|
Revenue
from metal sales increased by 9% year-over-year; from $666.8
million in
2004 to $725.5 million in 2005. The increase was primarily
due to a 10%
increase in the realized gold price. During 2005, the Company
realized an
average price of $445 per ounce on the sale of its gold,
against an
average spot gold price for the year of $444 per ounce. During
2004, the
Company realized an average gold price of $404 per ounce,
versus an
average spot gold price of $409 per ounce.
|
|
·
|
The
net loss increased from $63.1 million, or $0.18 per share,
to $216.0
million, or $0.63 per share, between 2004 and 2005. During
2005,
impairment charges totaling $184.7 million, were recorded
against
property, plant and equipment of $171.9 million, goodwill
of $8.7 million,
and investments of $4.1 million. This included impairment
charges of
$141.8 million on Fort Knox, $36.8 million on the Aquarius
property, $3.4
million on Crixás and $2.0 million on Musselwhite. Excluding these
impairment charges, results for 2005 would have been a net
loss
attributable to common shares of $32.1 million, compared
to a net loss
attributable to common shares of $5.6 million in 2004. The
impairment
charges are discussed further under “Impairment of Goodwill, Property,
Plant and Equipment, and Investments”. General and administrative expense
increased to $45.3 million, from $36.4 million in 2004. The
increase was
largely due to costs related to the regulatory review of
the Company’s
accounting for goodwill and subsequent restatement, as well
as increased
severance costs. In addition, accretion and reclamation expense
related to
the Company’s reclamation and remediation obligations increased to $33.5
million in 2006, from $56.0 million in 2005 and $21.4 million
in 2004.
Included in accretion and reclamation expense for 2006 and
2005 is $21.2
million and $46.0 million,
respectively, related to increased cost estimates at mines
no longer in
production.
|
|
Years
ended December 31,
|
2006
vs 2005
|
|
2005
vs 2004
|
|||||||||||||||||||
|
(in
millions)
|
2006
|
2005
|
|
2004
|
|
Change
$
|
|
Change
%
|
|
Change
$
|
|
Change
%
|
||||||||||
|
Operating
Segments
|
||||||||||||||||||||||
|
Fort
Knox
|
$
|
77.2
|
$
|
(124.1
|
)
|
$
|
16.6
|
$
|
201.3
|
nm
|
$
|
(140.7
|
)
|
nm
|
||||||||
|
Round
Mountain
|
93.7
|
26.6
|
25.8
|
67.1
|
252
|
%
|
0.8
|
3
|
%
|
|||||||||||||
|
La
Coipa
|
25.1
|
(2.4
|
)
|
0.9
|
27.5
|
nm
|
(3.3
|
)
|
nm
|
|||||||||||||
|
Crixás
|
26.2
|
11.3
|
12.8
|
14.9
|
132
|
%
|
(1.5
|
)
|
12
|
%
|
||||||||||||
|
Paracatu
(b)
|
26.0
|
5.4
|
2.9
|
20.6
|
381
|
%
|
2.5
|
86
|
%
|
|||||||||||||
|
Musselwhite
|
(1.2
|
)
|
(7.7
|
)
|
(3.8
|
)
|
6.5
|
84
|
%
|
(3.9
|
)
|
103
|
%
|
|||||||||
|
Porcupine
Joint Venture
|
18.6
|
(0.9
|
)
|
5.7
|
19.5
|
nm
|
(6.6
|
)
|
nm
|
|||||||||||||
|
Refugio
|
22.1
|
1.7
|
0.1
|
20.4
|
1200
|
%
|
1.6
|
1600
|
%
|
|||||||||||||
|
Kettle
River
|
(4.3
|
)
|
(4.7
|
)
|
0.9
|
0.4
|
9
|
%
|
(5.6
|
)
|
nm
|
|||||||||||
|
Other
operations (c)
|
(19.8
|
)
|
3.8
|
(37.9
|
)
|
(23.6
|
)
|
nm
|
41.7
|
nm
|
||||||||||||
|
Corporate
& other
|
(62.1
|
)
|
(120.2
|
)
|
(91.9
|
)
|
58.1
|
48
|
%
|
(28.3
|
)
|
31
|
%
|
|||||||||
|
Total
|
$
|
201.5
|
$
|
(211.2
|
)
|
$
|
(67.9
|
)
|
$
|
412.7
|
nm
|
$
|
(143.3
|
)
|
211
|
%
|
||||||
|
(a)
|
“nm”
refers to
not meaningful.
|
|
(b)
|
The
acquisition of Paracatu was completed on December 31, 2004. Therefore,
the
Company’s 49% proportionate share of Paracatu’s
operating
results have been included for the year ended December 31,
2004.
|
|
(c)
|
Other
operations include Kubuka and
Gurupi.
|
|
Years
ended December 31,
|
2006
vs 2005
|
|
2005
vs 2004
|
|||||||||||||||||||
|
(in
millions, except ounces)
|
2006
|
2005
|
2004
|
Change
|
|
Change
%
|
|
Change
|
|
Change
%
|
||||||||||||
|
Operating
Statistics
|
||||||||||||||||||||||
|
Tonnes
ore mined (000’s)
|
14,514
|
12,683
|
10,927
|
1,831
|
14
|
%
|
1,756
|
16
|
%
|
|||||||||||||
|
Tonnes
processed (000’s)
|
13,462
|
13,050
|
13,239
|
412
|
3
|
%
|
(189
|
)
|
(1
|
%)
|
||||||||||||
|
Grade
(grams/tonne)
|
0.90
|
0.90
|
0.94
|
—
|
0
|
%
|
(0.04
|
)
|
(4
|
%)
|
||||||||||||
|
Recovery
(%)
|
85.7
|
%
|
86.9
|
%
|
84.2
|
%
|
(1.2
|
%)
|
(1
|
%)
|
2.7
|
%
|
3
|
%
|
||||||||
|
Gold
equivalent ounces
|
||||||||||||||||||||||
|
Produced
|
333,383
|
329,320
|
338,334
|
4,063
|
1
|
%
|
(9,014
|
)
|
(3
|
%)
|
||||||||||||
|
Sold
|
342,455
|
320,771
|
351,738
|
21,684
|
7
|
%
|
(30,967
|
)
|
(9
|
%)
|
||||||||||||
|
Financial
Data (in US$ millions)
|
||||||||||||||||||||||
|
Metal
sales
|
$
|
208.3
|
$
|
143.1
|
$
|
143.9
|
$
|
65.2
|
46
|
%
|
$
|
(0.8
|
)
|
(1
|
%)
|
|||||||
|
Cost
of sales (a)
|
102.9
|
88.1
|
89.2
|
14.8
|
17
|
%
|
(1.1
|
)
|
(1
|
%)
|
||||||||||||
|
Accretion
and reclamation expense
|
1.3
|
1.1
|
1.3
|
0.2
|
18
|
%
|
(0.2
|
)
|
(15
|
%)
|
||||||||||||
|
Depreciation,
depletion and amortization
|
25.0
|
34.8
|
35.9
|
(9.8
|
)
|
(28
|
%)
|
(1.1
|
)
|
(3
|
%)
|
|||||||||||
|
79.1
|
19.1
|
17.5
|
60.0
|
314
|
%
|
1.6
|
9
|
%
|
||||||||||||||
|
Exploration
|
1.4
|
0.6
|
0.6
|
0.8
|
133
|
%
|
—
|
0
|
%
|
|||||||||||||
|
Impairment
charge
|
—
|
141.8
|
—
|
(141.8
|
)
|
(100
|
%)
|
141.8
|
nm
|
|||||||||||||
|
Other
|
0.5
|
0.8
|
0.3
|
(0.3
|
)
|
(38
|
%)
|
0.5
|
167
|
%
|
||||||||||||
|
Segment
earnings (loss)
|
$
|
77.2
|
$
|
(124.1
|
)
|
$
|
16.6
|
$
|
201.3
|
nm
|
$
|
(140.7
|
)
|
nm
|
||||||||
| (a) |
Cost
of sales excludes accretion and reclamation expense, depreciation,
depletion and
amortization.
|
The
Company has been operating the Fort Knox Mine, located near Fairbanks, Alaska,
since it was acquired in 1998. The operation consists of the Fort Knox open
pit
and the True North open pit which is located approximately 15 kilometres
northwest of the Fort Knox pit.
2006
vs. 2005
The
quantity of ore processed at Fort Knox has remained relatively constant from
2004 through 2006, with stockpiles utilized in 2006 to maintain throughput
of
the mill. The decrease in the recovery rate from 86.9% in 2005, to 85.7% in
2006, resulted from processing ore from Phase V, which is a lower recovery
ore
than the Phase IV ore processed in 2005. Gold equivalent ounces increased 7%
from 2005 levels, and combined with a higher gold price resulted in sales
revenues increasing 46% to $208.3 million from $143.1 million in
2005.
Cost
of
sales increases of 17% reflect the fact that more tonnage was mined to extract
the same quantity of metal in 2005 and there were higher costs, particularly
for
electricity, fuel and consumable costs. Depreciation, depletion and amortization
expense was $25.0 million, down 28% from $34.8 million reflecting the impact
of
the write down of property, plant and equipment taken in 2005. This decrease
was
partly offset by increases to the cost base with over $40.0 million in capital
expenditures in 2005 and 2006. Exploration spending has increased to $1.4
million as efforts continue to extend the life of the mine. The Company is
evaluating a new heap leach project at Fort Knox in order to more economically
recover lower grade ore. Expectations are that gold equivalent production in
2007 will be approximately the same as 2006 levels.
2005
vs. 2004
Production
of gold equivalent ounces in 2005 remained about the same as 2004 levels. The
lower grade in 2005 was the result of suspending production at the True North
deposit in 2004, which was a higher grade ore. Lower mill throughput in 2005
resulted due to processing harder Fort Knox pit ore compared with the blended
ore from the True North and Fort Knox pits for much of the prior year. Despite
selling 9% fewer gold equivalent ounces in 2005, revenues remained largely
unchanged, due to a higher realized gold price. The decrease in cost of sales
reflects lower gold ounces sold. The cost of sales, on a per ounce basis,
increased as a result of higher energy costs, partially offset by improved
cost
efficiencies as a result of the continuous improvement program. During 2005,
a
strategic review was conducted on the Fort Knox operation. The review was done
in light of rising electricity and fuel costs, the metallurgical performance
at
True North and slope stability issues at the southwest wall of the pit. As
a
result of the review, the True North and Gil deposits were reclassified from
reserves to resources, the Company decided to withdraw from the Ryan Lode
project, which had been included in reserves, and design changes were made
to
the Fort Knox pit. As a result, the Company recorded a $141.8 million impairment
charge against the mine. The impairment is discussed further under “Impairment
of Goodwill, Property, Plant and Equipment, and Investments”. Depreciation
expense remained relatively constant despite a 9% decrease in ounces being
sold
due to increased capital expenditures that have added to the assets subject
to
depreciation.
|
Years
ended December 31,
|
2006
vs 2005
|
|
2005
vs 2004
|
|||||||||||||||||||
|
(in
millions, except ounces)
|
2006
|
2005
|
2004
|
Change
|
Change
%
|
Change
|
Change
%
|
|||||||||||||||
|
Operating
Statistics
|
||||||||||||||||||||||
|
Tonnes
ore mined (000’s) (a)
|
21,488
|
29,002
|
35,820
|
(7,514
|
)
|
(26
|
%)
|
(6,818
|
)
|
(19
|
%)
|
|||||||||||
|
Tonnes
processed (000’s) (a)
|
43,436
|
61,696
|
67,065
|
(18,260
|
)
|
(30
|
%)
|
(5,369
|
)
|
(8
|
%)
|
|||||||||||
|
Grade
(grams/tonne)
|
0.65
|
0.64
|
0.55
|
0.01
|
2
|
%
|
0.09
|
16
|
%
|
|||||||||||||
|
Gold
equivalent ounces
|
||||||||||||||||||||||
|
Produced
|
335,115
|
373,947
|
387,785
|
(38,832
|
)
|
(10
|
%)
|
(13,838
|
)
|
(4
|
%)
|
|||||||||||
|
Sold
|
349,497
|
367,581
|
375,421
|
(18,084
|
)
|
(5
|
%)
|
(7,840
|
)
|
(2
|
%)
|
|||||||||||
|
Financial
Data (in US$ millions)
|
||||||||||||||||||||||
|
Metal
sales
|
$
|
211.7
|
$
|
164.0
|
$
|
154.1
|
$
|
47.7
|
29
|
%
|
$
|
9.9
|
6
|
%
|
||||||||
|
Cost
of sales (c)
|
99.4
|
93.7
|
82.3
|
5.7
|
6
|
%
|
11.4
|
14
|
%
|
|||||||||||||
|
Accretion
and reclamation expense
|
1.7
|
1.8
|
1.9
|
(0.1
|
)
|
(6
|
%)
|
(0.1
|
)
|
(5
|
%)
|
|||||||||||
|
Depreciation,
depletion and amortization
|
11.9
|
39.5
|
43.3
|
(27.6
|
)
|
(70
|
%)
|
(3.8
|
)
|
(9
|
%)
|
|||||||||||
|
98.7
|
29.0
|
26.6
|
69.7
|
240
|
%
|
2.4
|
9
|
%
|
||||||||||||||
|
Exploration
|
5.0
|
2.4
|
0.8
|
2.6
|
108
|
%
|
1.6
|
200
|
%
|
|||||||||||||
|
Segment
earnings (loss)
|
$
|
93.7
|
$
|
26.6
|
$
|
25.8
|
$
|
67.1
|
252
|
%
|
$
|
0.8
|
3
|
%
|
||||||||
|
(a)
|
Tonnes
of ore mined/processed represent 100% of mine
production.
|
|
(b)
|
Due
to the nature of heap leach operations, recovery rates cannot be
accurately measured.
|
|
(c)
|
Cost
of sales excludes acretion and reclamation expense, depreciation,
depletion and
amortization.
|
The
Company acquired its ownership interest in the Round Mountain open pit mine,
located in Nye County, Nevada, in the acquisition of Echo Bay Mines Ltd. (“Echo
Bay”) on January 31, 2003.
2006
vs. 2005
Tonnes
of
ore mined and processed have declined at Round Mountain as the existing pit
is
depleted. The pit is currently undergoing an expansion which is expected to
contribute to improved grades and recovery rates. The decrease in tonnes
processed is reflected in the 10% decrease in gold equivalent ounces produced
of
335,115 ounces, from 373,947 ounces in 2005. Gold equivalent ounces were down
5%
to 349,497 ounces, but with a higher gold price, saw revenues climb to $211.7
million, a 29% increase from 2005. Higher costs for energy, primarily in the
form of diesel fuel and consumables resulted in a 6% increase in cost of sales
over 2005, despite the lower quantities of ore processed. The decrease in
depreciation expense by 70% is related to the increase in the reserves in 2005
which form the basis for depreciation, depletion and amortization changes.
Exploration expenditures of $5.0 million are part of the continuing efforts
to
extend the life of the mine. Production in 2007 is expected to continue to
trend
lower than previous years.
2005
vs. 2004
Fewer
tonnes of ore were delivered to the dedicated pads at a lower grade resulting
in
a production level that was 4% lower in 2005 than in the prior year. Tonnes
processed were lower during the year due to pit phasing and pit slope failures.
Revenues were up by 6% as a result of higher realized gold prices, despite
fewer
ounces being sold. Cost of sales increased by 14% due to increased commodity
related costs, higher costs on replacement parts, increased contractor costs
on
equipment maintenance and higher royalties and taxes due to a stronger gold
price. Depreciation expense was 10% lower year-over-year due to fewer ounces
being sold and the addition of reserve ounces.
|
Years
ended December 31,
|
2006
vs 2005
|
2005
vs 2004
|
||||||||||||||||||||
|
(in
millions, except ounces)
|
2006
|
2005
|
2004
|
Change
|
|
Change
%
|
|
Change
|
|
Change
%
|
||||||||||||
|
Operating
Statistics
|
||||||||||||||||||||||
|
Tonnes
ore mined (000’s) (a)
|
2,751
|
3,450
|
3,769
|
(699
|
)
|
(20
|
%)
|
(319
|
)
|
(8
|
%)
|
|||||||||||
|
Tonnes
processed (000’s) (a)
|
5,126
|
6,496
|
6,562
|
(1,370
|
)
|
(21
|
%)
|
(66
|
)
|
(1
|
%)
|
|||||||||||
|
Grade
(grams/tonne)
|
||||||||||||||||||||||
|
Gold
|
0.95
|
1.01
|
1.10
|
(0.06
|
)
|
(6
|
%)
|
(0.09
|
)
|
(8
|
%)
|
|||||||||||
|
Silver
|
94.31
|
45.07
|
60.83
|
49.24
|
109
|
%
|
(15.76
|
)
|
(26
|
%)
|
||||||||||||
|
Recovery
(%)
|
||||||||||||||||||||||
|
Gold
|
79.4
|
%
|
80.5
|
%
|
81.2
|
%
|
(1.1
|
%)
|
(1
|
%)
|
(0.7
|
%)
|
(1
|
%)
|
||||||||
|
Silver
|
64.4
|
%
|
54.0
|
%
|
57.5
|
%
|
10.4
|
%
|
19
|
%
|
(3.5
|
%)
|
(6
|
%)
|
||||||||
|
Gold
equivalent ounces
|
||||||||||||||||||||||
|
Produced
|
155,180
|
125,991
|
150,887
|
29,189
|
23
|
%
|
(24,896
|
)
|
(16
|
%)
|
||||||||||||
|
Sold
|
154,192
|
131,051
|
149,785
|
23,141
|
18
|
%
|
(18,734
|
)
|
(13
|
%)
|
||||||||||||
|
Silver
ounces produced (000’s)
|
4,346
|
2,547
|
3,693
|
1,799
|
71
|
%
|
(1,146
|
)
|
(31
|
%)
|
||||||||||||
|
Financial
Data (in US$ millions)
|
||||||||||||||||||||||
|
Metal
sales
|
$
|
94.0
|
$
|
60.3
|
$
|
59.0
|
$
|
33.7
|
56
|
%
|
$
|
1.3
|
2
|
%
|
||||||||
|
Cost
of sales (b)
|
47.6
|
45.4
|
39.7
|
2.2
|
5
|
%
|
5.7
|
14
|
%
|
|||||||||||||
|
Accretion
and reclamation expense
|
0.9
|
0.4
|
0.4
|
0.5
|
125
|
%
|
—
|
0
|
%
|
|||||||||||||
|
Depreciation,
depletion and amortization
|
16.9
|
15.8
|
16.8
|
1.1
|
7
|
%
|
(1.0
|
)
|
(6
|
%)
|
||||||||||||
|
28.6
|
(1.3
|
)
|
2.1
|
29.9
|
nm
|
(3.4
|
)
|
nm
|
||||||||||||||
|
Exploration
|
2.0
|
1.1
|
0.5
|
0.9
|
82
|
%
|
0.6
|
120
|
%
|
|||||||||||||
|
Other
|
1.5
|
—
|
0.7
|
1.5
|
nm
|
(0.7
|
)
|
nm
|
||||||||||||||
|
Segment
earnings (loss)
|
$
|
25.1
|
$
|
(2.4
|
)
|
$
|
0.9
|
$
|
27.5
|
nm
|
$
|
(3.3
|
)
|
nm
|
||||||||
|
(a)
|
Tonnes
of ore mined/processed represent 100% of mine
production.
|
|
(b)
|
Cost
of sales excludes accretion and reclamation expense, depreciation,
depletion and
amortization.
|
The
Company acquired its ownership interest in the La Coipa open pit mine in the
acquisition of TVX Gold Inc. (“TVX”) on January 31, 2003. In the second quarter
of 2006, Goldcorp Inc. (“Goldcorp”) acquired the 50% interest in the mine from
Barrick Gold Corporation (“Barrick”), which in turn had acquired the mine on its
purchase of Placer Dome.
2006
vs. 2005
Gold
equivalent production increased 23% from 2005 levels as ore from the Puren
deposit came into production at a higher overall grade. With gold equivalent
ounces sold increasing 18% to 154,192 ounces and a higher realized gold price,
metal sales revenues rose to $94.0 million, up 56% from 2005 revenue of $60.3
million.
Due
to
higher labour costs, the negative impact of currency exchange rates and high
processing costs for Puren ore, total cost of sales was up 5% to $47.6 million.
Accretion and reclamation expense increased to $0.9 million reflecting the
increased reclamation liability resulting from the mining activity at the Puren
pit and the Coipa Norte pit. Gold equivalent production in 2007 is expected
to
be higher than 2006 since Puren came into production in July 2006.
2005
vs. 2004
Tonnes
mined and milled, along with grade and recoveries were lower than 2004 due
to
changes in the mine plan caused by pit slope failures during the year. As a
result, production was down 16% to 125,991 gold equivalent ounces from 150,887
equivalent ounces in 2004. Geotechnical studies were conducted in order to
assess the situation and appropriate corrective actions were taken. While gold
equivalent ounces sold were 13% lower in 2005, due to lower production, a higher
realized gold price resulted in a 2% increase in revenue. Cost of sales was
14%
higher year-over-year despite fewer ounces being sold. The increase was due
to
higher stripping costs, increased cost for power, fuel and other consumables,
and the strengthening of the Chilean peso, against the U.S. dollar of
approximately 9% year-over-year. Depreciation expense was 6% lower, largely
due
to fewer ounces being sold. There was no significant change during the year
to
the average ratio for conversion of silver into equivalent gold ounces.
|
Years
ended December 31,
|
2006
vs 2005
|
2005
vs 2004
|
||||||||||||||||||||
|
(in
millions, except ounces)
|
2006
|
2005
|
2004
|
Change
|
|
Change
%
|
Change
|
Change
%
|
||||||||||||||
|
Operating
Statistics
|
||||||||||||||||||||||
|
Tonnes
ore mined (000’s) (a)
|
790
|
755
|
746
|
35
|
5
|
%
|
9
|
1
|
%
|
|||||||||||||
|
Tonnes
processed (000’s) (a)
|
790
|
755
|
746
|
35
|
5
|
%
|
9
|
1
|
%
|
|||||||||||||
|
Grade
(grams/tonne)
|
7.98
|
8.32
|
8.18
|
(0.34
|
)
|
(4
|
%)
|
0.14
|
2
|
%
|
||||||||||||
|
Recovery
|
95.3
|
%
|
95.2
|
%
|
95.4
|
%
|
0.1
|
%
|
0
|
%
|
(0.2
|
%)
|
0
|
%
|
||||||||
|
Gold
equivalent ounces
|
||||||||||||||||||||||
|
Produced
|
97,009
|
96,212
|
93,540
|
797
|
1
|
%
|
2,672
|
3
|
%
|
|||||||||||||
|
Sold
|
94,986
|
93,309
|
93,265
|
1,677
|
2
|
%
|
44
|
0
|
%
|
|||||||||||||
|
Financial
Data (in US$ millions)
|
||||||||||||||||||||||
|
Metal
sales
|
$
|
57.0
|
$
|
41.5
|
$
|
38.2
|
$
|
15.5
|
37
|
%
|
$
|
3.3
|
9
|
%
|
||||||||
|
Cost
of sales (b)
|
17.7
|
14.1
|
12.2
|
3.6
|
26
|
%
|
1.9
|
16
|
%
|
|||||||||||||
|
Accretion
and reclamation expense
|
0.2
|
0.1
|
0.1
|
0.1
|
100
|
%
|
—
|
0
|
%
|
|||||||||||||
|
Depreciation,
depletion and amortizatio
|
11.2
|
12.3
|
12.8
|
(1.1
|
)
|
(9
|
%)
|
(0.5
|
)
|
(4
|
%)
|
|||||||||||
|
27.9
|
15.0
|
13.1
|
12.9
|
86
|
%
|
1.9
|
15
|
%
|
||||||||||||||
|
Exploration
|
1.5
|
0.3
|
0.3
|
1.2
|
400
|
%
|
—
|
0
|
%
|
|||||||||||||
|
Impairment
charge
|
—
|
3.4
|
—
|
(3.4
|
)
|
nm
|
3.4
|
nm
|
||||||||||||||
|
Other
|
0.2
|
—
|
—
|
0.2
|
nm
|
—
|
nm
|
|||||||||||||||
|
Segment
earnings
|
$
|
26.2
|
$
|
11.3
|
$
|
12.8
|
$
|
14.9
|
132
|
%
|
$
|
(1.5
|
)
|
(12
|
%)
|
|||||||
|
(a)
|
Tonnes
of ore mined/processed represent 100% of mine
production.
|
|
(b)
|
Cost
of sales excludes accretion and reclamation expense, depreciation,
depletion and
amortization.
|
The
Company acquired its ownership interest in the Crixás underground mine, located
in the State of Goias, Brazil, in the acquisition of TVX on January 31,
2003.
2006
vs. 2005
Tonnes
of
ore processed, grades and recovery rates have remained relatively consistent
over the last two years with gold equivalent production and sales ounces of
97,009 ounces and 94,986 ounces, respectively. Higher gold prices are reflected
in a 37% increase in revenue to $57.0 million while cost of sales has increased
26% to $17.7 million, the result of higher consumable costs and an 11%
appreciation of the Brazilian real against the U.S. dollar. Depreciation,
depletion and amortization have remained relatively constant year-over-year.
There were no impairment charges in 2006, compared to $3.4 million write-down
of
a tax-related receivable in 2005.
Production
of gold equivalent ounces in 2007 is expected to be below 2006 levels due to
lower grade of ore.
2005
vs. 2004
Gold
production was 3% higher in 2005, compared with 2004, due to higher grade and
increased mill throughput. Revenue increased by 9% as a result of a higher
realized gold price. Costs of sales increased year-over-year by 16% due to
the
appreciation of the Brazilian real against the U.S. dollar, and higher energy,
service and consumable costs. The average exchange rate of the Brazilian real
against the U.S. dollar increased, year-over-year, by approximately 20%.
|
Years
ended December 31,
|
|
2006
vs 2005
|
|
2005
vs 2004
|
||||||||||||||||||
|
(in
millions, except ounces)
|
2006
|
|
|
2005
|
|
|
2004
(b)
|
|
|
Change
|
|
|
Change
%
|
|
|
Change
|
|
|
Change
%
|
|
||
|
Operating
Statistics
|
||||||||||||||||||||||
|
Tonnes
ore mined (000’s)
(a)
|
17,637
|
17,157
|
17,281
|
480
|
3
|
%
|
(124
|
)
|
(1
|
%)
|
||||||||||||
|
Tonnes
processed (000’s)
(a)
|
18,137
|
16,945
|
17,342
|
1,192
|
7
|
%
|
(397
|
)
|
(2
|
%)
|
||||||||||||
|
Grade
(grams/tonne)
|
0.38
|
0.42
|
0.44
|
(0.04
|
)
|
(10
|
%)
|
(0.02
|
)
|
(5
|
%)
|
|||||||||||
|
Recovery
(%)
|
76.8
|
%
|
78.2
|
%
|
76.8
|
%
|
(1.4
|
%)
|
(2
|
%)
|
1.4
|
%
|
2
|
%
|
||||||||
|
Gold
equivalent ounces
|
||||||||||||||||||||||
|
Produced
|
174,254
|
180,522
|
92,356
|
(6,268
|
)
|
(3
|
%)
|
88,166
|
95
|
%
|
||||||||||||
|
Sold
|
173,821
|
177,806
|
93,279
|
(3,985
|
)
|
(2
|
%)
|
84,527
|
91
|
%
|
||||||||||||
|
Financial
data (in
US$ millions)
|
||||||||||||||||||||||
|
Metal
sales
|
$
|
104.1
|
$
|
79.0
|
$
|
38.2
|
$
|
25.1
|
32
|
%
|
$
|
40.8
|
107
|
%
|
||||||||
|
Cost
of sales
(c)
|
57.7
|
50.0
|
20.6
|
7.7
|
15
|
%
|
29.4
|
143
|
%
|
|||||||||||||
|
Accretion
and reclamation expense
|
0.9
|
0.7
|
0.5
|
0.2
|
29
|
%
|
0.2
|
40
|
%
|
|||||||||||||
|
Depreciation,
depletion and amortization
|
12.5
|
17.0
|
9.5
|
(4.5
|
)
|
(26
|
%)
|
7.5
|
79
|
%
|
||||||||||||
|
33.0
|
11.3
|
7.6
|
21.7
|
192
|
%
|
3.7
|
49
|
%
|
||||||||||||||
|
Exploration
|
1.5
|
5.2
|
—
|
(3.7
|
)
|
(71
|
%)
|
5.2
|
nm
|
|||||||||||||
|
Impairment
charge
|
—
|
—
|
2.1
|
—
|
nm
|
(2.1
|
)
|
nm
|
||||||||||||||
|
Other
|
5.5
|
0.7
|
2.6
|
4.8
|
686
|
%
|
(1.9
|
)
|
(73
|
%)
|
||||||||||||
|
Segment
earnings
|
$
|
26.0
|
$
|
5.4
|
$
|
2.9
|
$
|
20.6
|
381
|
%
|
$
|
2.5
|
86
|
%
|
||||||||
|
(a)
|
Tonnes
of ore mined/processed represents 100% of mine
production.
|
|||||||
|
(b)
|
The
results for 2004 reflect the Company’s 49% ownership. The Company acquired
the remaining 51% on December 31, 2004.
|
|||||||
|
(c)
|
Cost
of sales excludes accretion and reclamation expense, depreciation,
depletion and
amortization.
|
|||||||
The
Company acquired a 49% ownership interest in the Paracatu open pit mine, located
in the State of Minas Gerais, Brazil, in the acquisition of TVX on January
31,
2003. On December 31, 2004, the Company completed the purchase of the remaining
51% of Paracatu from Rio Tinto Plc.
2006
vs. 2005
Harder
ore at lower grades resulted in a 3% decrease in gold equivalent production
to
174,254 ounces, from 180,522 ounces in 2005. Higher gold prices resulted in
a
32% increase in revenue even though gold equivalent sales were down by 2%.
The
appreciation of the Brazilian real, higher production taxes related to the
price
of gold and higher costs for labour and consumables pushed cost of sales 15%
higher than 2005 to $57.7 million. With the Paracatu expansion project underway,
exploration efforts have been reduced resulting in a decrease in expenses to
$1.5 million from $5.2 million in 2005. Other expenses increased to provide
for
tax contingencies. Gold production is expected to be lower in 2007 as fewer
tonnes at a lower grade and recovery are anticipated.
2005
vs. 2004
Gold
equivalent production attributable to Kinross’ account increased by 95% between
2004 and 2005. The increase was due to the increase in Kinross’ ownership of
Paracatu from 49% in 2004 to 100% in 2005. On a 100% basis, gold equivalent
production decreased by 4% year-over-year. The decrease was due to lower grade
ore and the processing of fewer tonnes, partially offset by a higher recovery
rate. Revenue increased by 107%, or approximately 1% on a 100% basis. Revenue,
on a 100% basis, increased despite fewer ounces being sold as a result of a
higher realized gold price. Cost of sales during 2005 increased by 19% against
2004, on a 100% basis. The increase was due to increased energy and consumable
costs, and an appreciation of the Brazilian real against the U.S. dollar,
year-over-year, of approximately 20%. Depreciation decreased in 2005 by 12%
against 2004, on a 100% basis, due to increases in the mine’s
reserves.
|
Years
ended December 31,
|
2006
vs 2005
|
2005
vs 2004
|
||||||||||||||||||||
|
(in
millions, except ounces)
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
Change
%
|
|
|
Change
|
|
|
Change
%
|
|
||
|
Operating
Statistics
|
||||||||||||||||||||||
|
Tonnes
ore mined (000’s)
(a)
|
1,301
|
1,390
|
2,340
|
(89
|
)
|
(6
|
%)
|
(950
|
)
|
(41
|
%)
|
|||||||||||
|
Tonnes
processed (000’s)
(a)
|
1,301
|
1,477
|
1,459
|
(176
|
)
|
(12
|
%)
|
18
|
1
|
%
|
||||||||||||
|
Grade
(grams/tonne)
|
5.51
|
5.46
|
5.30
|
0.05
|
1
|
%
|
0.16
|
3
|
%
|
|||||||||||||
|
Recovery
(%)
|
95.4
|
%
|
95.0
|
%
|
95.8
|
%
|
0.4
|
%
|
0
|
%
|
(0.8
|
%)
|
(1
|
%)
|
||||||||
|
Gold
equivalent ounces
|
||||||||||||||||||||||
|
Produced
|
69,834
|
79,916
|
76,640
|
(10,082
|
)
|
(13
|
%)
|
3,276
|
4
|
%
|
||||||||||||
|
Sold
|
71,405
|
79,919
|
78,430
|
(8,514
|
)
|
(11
|
%)
|
1,489
|
2
|
%
|
||||||||||||
|
Financial
Data (in
US$ millions)
|
||||||||||||||||||||||
|
Metal
sales
|
$
|
43.0
|
$
|
34.9
|
$
|
32.1
|
$
|
8.1
|
23
|
%
|
$
|
2.8
|
9
|
%
|
||||||||
|
Cost
of sales (b)
|
31.9
|
26.4
|
21.1
|
5.5
|
21
|
%
|
5.3
|
25
|
%
|
|||||||||||||
|
Accretion
and reclamation expense
|
0.2
|
0.1
|
0.1
|
0.1
|
100
|
%
|
—
|
0
|
%
|
|||||||||||||
|
Depreciation,
depletion and amortization
|
10.4
|
12.5
|
12.5
|
(2.1
|
)
|
(17
|
%)
|
—
|
0
|
%
|
||||||||||||
|
0.5
|
(4.1
|
)
|
(1.6
|
)
|
4.6
|
nm
|
(2.5
|
)
|
(156
|
%)
|
||||||||||||
|
Exploration
|
1.7
|
1.6
|
2.0
|
0.1
|
6
|
%
|
(0.4
|
)
|
(20
|
%)
|
||||||||||||
|
Impairment
charge
|
—
|
2.0
|
—
|
(2.0
|
)
|
nm
|
|
2.0
|
nm
|
|||||||||||||
|
Other
|
—
|
—
|
0.2
|
—
|
nm
|
(0.2
|
)
|
nm
|
||||||||||||||
|
Segment
loss
|
$
|
(1.2
|
)
|
$
|
(7.7
|
)
|
$
|
(3.8
|
)
|
$
|
6.5
|
84
|
%
|
$
|
(3.9
|
)
|
(103
|
%)
|
||||
|
(a)
|
Tonnes
of ore mined/processed represent 100% of mine
production.
|
||||||||
|
(b)
|
Cost
of sales excludes accretion and reclamation expense, depreciation,
depletion and
amortization.
|
||||||||
The
Company acquired its 31.9% ownership interest in the Musselwhite underground
mine, located in northwestern Ontario, Canada, in the acquisition of TVX on
January 31, 2003. In the second quarter of 2006, Goldcorp acquired the 68.1%
interest in the mine from Barrick, which had previously acquired the mine on
its
purchase of Placer Dome.
2006
vs. 2005
Production
at Musselwhite was down 13% to 69,384 gold equivalent ounces due to reduced
availability of labour and equipment. Revenue increased 23%, a result of higher
realized gold prices to $43.0 million from $34.9 million in 2005, even though
gold equivalent ounces sold were down 11% from the prior year.
Depreciation
expense is lower due to an increase in reserves in 2005. Increased throughput
at
slightly lower recovery rates is expected to increase 2007 production over
2006
levels.
2005
vs. 2004
Gold
equivalent production increased 4% in 2005 due to a 3% increase in grade
year-over-year and an increase in tonnes processed. The increased grade was
the
result of increased tonnage from underground sources which replaced low grade
stockpile feed. Revenue from metal sales increased by 9% due to a higher
realized gold price and a 2% increase in the number of ounces sold. Cost of
sales increased 25% due to the increased tonnage from higher-cost underground
ore, increased underground development costs and higher energy and commodity
costs. Cost of sales was also negatively impacted by a 7% appreciation of the
Canadian dollar against the U.S. dollar year-over-year.
|
|
Years
ended December 31,
|
|
2006
vs 2005
|
|
2005
vs 2004
|
|||||||||||||||||
|
(in
millions, except ounces)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
Change
%
|
|
|
Change
|
|
|
Change
%
|
|
|
Operating
Statistics
|
||||||||||||||||||||||
|
Tonnes
ore mined (000’s)
(a)
|
20,348
|
5,443
|
13,752
|
14,905
|
274
|
%
|
(8,309
|
)
|
(60
|
%)
|
||||||||||||
|
Tonnes
processed (000’s)
(a)
|
4,218
|
4,266
|
3,995
|
(48
|
)
|
(1
|
%)
|
271
|
7
|
%
|
||||||||||||
|
Grade
(grams/tonne)
|
2.55
|
2.95
|
3.35
|
(0.40
|
)
|
(14
|
%)
|
(0.40
|
)
|
(12
|
%)
|
|||||||||||
|
Recovery
(%)
|
92.5
|
%
|
92.6
|
%
|
91.8
|
%
|
(0.1
|
%)
|
(0
|
%)
|
0.8
|
%
|
1
|
%
|
||||||||
|
Gold
equivalent ounces
|
||||||||||||||||||||||
|
Produced
|
156,735
|
183,976
|
193,799
|
(27,241
|
)
|
(15
|
%)
|
(9,823
|
)
|
(5
|
%)
|
|||||||||||
|
Sold
|
161,196
|
179,585
|
191,296
|
(18,389
|
)
|
(10
|
%)
|
(11,711
|
)
|
(6
|
%)
|
|||||||||||
|
Financial
data (in
US$ millions)
|
||||||||||||||||||||||
|
Metal
sales
|
$
|
97.5
|
$
|
80.8
|
$
|
78.8
|
$
|
16.7
|
21
|
%
|
$
|
2.0
|
3
|
%
|
||||||||
|
Cost
of sales
(b)
|
59.9
|
50.7
|
44.4
|
9.2
|
18
|
%
|
6.3
|
14
|
%
|
|||||||||||||
|
Accretion
and reclamation expense
|
2.0
|
11.8
|
2.3
|
(9.8
|
)
|
(83
|
%)
|
9.5
|
413
|
%
|
||||||||||||
|
Depreciation,
depletion and amortization
|
11.8
|
14.8
|
22.7
|
(3.0
|
)
|
(20
|
%)
|
(7.9
|
)
|
(35
|
%)
|
|||||||||||
|
23.8
|
3.5
|
9.4
|
20.5
|
580
|
%
|
(5.9
|
)
|
(63
|
%)
|
|||||||||||||
|
Exploration
|
4.9
|
3.5
|
3.2
|
1.4
|
40
|
%
|
0.3
|
9
|
%
|
|||||||||||||
|
Other
|
0.3
|
0.9
|
0.5
|
(0.6
|
)
|
(67
|
%)
|
0.4
|
80
|
%
|
||||||||||||
|
Segment
earnings (loss)
|
$
|
18.6
|
$
|
(0.9
|
)
|
$
|
5.7
|
$
|
19.5
|
nm
|
$
|
(6.6
|
)
|
nm
|
||||||||
|
(a)
|
Tonnes
of ore mined/processed represents 100% of mine
production.
|
|||||||
|
(b)
|
Cost
of sales excludes accretion and reclamation expense, depreciation,
depletion and amortizaton.
|
|||||||
On
July
1, 2002, the Company formed the Porcupine Joint Venture with a wholly owned
subsidiary of Placer Dome Inc. (“Placer Dome”). The formation of the joint
venture combined the two companies’ gold mining operations in the Porcupine
district of Timmins, Ontario. In the second quarter of 2006, Goldcorp acquired
the 51% interest in the joint venture from Barrick Gold Corporation which in
turn had acquired their interest on its purchase of Placer Dome.
2006
vs. 2005
Gold
equivalent production was down 15% as the mine transitioned activities from
the
Dome pit to the lower grade Pamour pit as planned. Lower production levels
at
lower grades, resulted in a 10% decline in gold equivalent ounces sold to
161,196 ounces from 179,585 ounces. Despite the decrease, revenue increased
21%
due to higher gold prices. Cost of sales were negatively impacted by the 6%
appreciation of the Canadian dollar to the U.S. dollar, plus higher energy
and
consumable costs. Accretion and reclamation expenses were down to $2.0 million
from $11.8 million in 2005 due to an additional charge taken in 2005.
Exploration costs of $4.9 million were up slightly from 2005 as efforts continue
to expand reserves and resources. Production in 2007 is expected to increase
from 2006 levels due to increases in tonnes and grade.
2005
vs. 2004
Production
was positively impacted by higher recoveries and increased mill throughput
in
2005; however, this was offset by lower grade, resulting in gold production
that
in 2005 was 5% lower than 2004. Mill throughput was higher as a result of a
mill
expansion undertaken to ensure the harder ores originating from the Pamour
pit
could be processed through the Dome mill. Feed grade was lower due to localized
highwall instability in the Dome pit, no production from the Dome underground
mine and the commencement of mining at the Pamour pit which has a lower average
grade than the Dome pit. Revenue increased by 3% despite a 6% drop in ounces
sold as a result of higher realized gold prices. Cost of sales was also up
despite selling fewer ounces due to higher energy and commodity costs, and
a 7%
increase in value of the Canadian dollar against the U.S. dollar year-over-year.
Increases during the year in the Company’s portion of the estimated reclamation
and remediation liability relating to areas of the joint venture no longer
in
production were expensed in the current year and have been included as part
of
accretion and reclamation expense. Depreciation expense decreased by 35% due
to
a 6% drop in ounces sold and a larger reserve base in 2005.
|
|
Years
ended December 31,
|
|
|
2006
vs 2005
|
|||||||||
|
(in
millions, except ounces)
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
%
|
|
||
|
Operating
Statistics
|
|||||||||||||
|
Tonnes
ore mined (000’s)
(a)
|
14,832
|
5,800
|
9,032
|
156
|
%
|
||||||||
|
Tonnes
processed (000’s)
(a)
|
14,721
|
5,800
|
8,921
|
154
|
%
|
||||||||
|
Grade
(grams/tonne)
|
0.70
|
0.83
|
(0.13
|
)
|
(16
|
%)
|
|||||||
|
Gold
equivalent ounces
|
|||||||||||||
|
Produced
|
116,868
|
30,580
|
86,288
|
282
|
%
|
||||||||
|
Sold
|
115,198
|
30,575
|
84,623
|
277
|
%
|
||||||||
|
Financial
Data (in
US$ millions)
|
|||||||||||||
|
Metal
sales
|
$
|
69.7
|
$
|
14.6
|
$
|
55.1
|
377
|
%
|
|||||
|
Cost
of sales
(b)
|
39.3
|
9.6
|
29.7
|
309
|
%
|
||||||||
|
Accretion
and reclamation expense
|
(1.0
|
)
|
0.2
|
(1.2
|
)
|
nm
|
|||||||
|
Depreciation,
depletion and amortization
|
7.0
|
0.2
|
6.8
|
3400
|
%
|
||||||||
|
24.4
|
4.6
|
19.8
|
430
|
%
|
|||||||||
|
Exploration
|
1.8
|
—
|
1.8
|
nm
|
|||||||||
|
Impairment
charge
|
0.5
|
—
|
0.5
|
nm
|
|||||||||
|
Other
|
—
|
2.9
|
(2.9
|
)
|
(100
|
%)
|
|||||||
|
Segment
earnings
|
$
|
22.1
|
$
|
1.7
|
$
|
20.4
|
1200
|
%
|
|||||
|
(a)
|
Tonnes of
ore mined/processed represent 100% of mine
production.
|
|||||
|
(b)
|
Cost
of sales excludes accretion and reclamation, depreciation, depletion
and
amortization.
|
|||||
Kinross
acquired its 50% interest in the Refugio open pit mine, located 120 kilometres
northeast of Copiapo, Chile in 1998. In 2001, due to low gold prices and
operational difficulties, mining activities were suspended and the operation
was
placed on care and maintenance. In late 2002, a multi-phase exploration program
commenced and in 2003 it was determined that the mine would be recommissioned.
The Refugio mine went into production in the second half of 2005 and achieved
its targeted production rate in November 2005. As a result, comparative amounts
from 2005 are not meaningful. With the acquisition of the remaining 50% interest
in Refugio from Bema early in 2007 Kinross will report 100% of the site’s
production and sales commencing on the date of acquisition.
2006
vs 2005
The
Refugio mine produced 116,898 gold equivalent ounces in 2006 as a full year
of
production was achieved, compared to 30,580 gold equivalent ounces in the last
few weeks of 2005. Metal sales revenue was $69.7 million on 115,198 gold
equivalent ounces, up from $14.6 million in 2005. Cost of sales reflects this
increased production and higher costs for energy and consumables. Depreciation,
depletion and amortization increased due to the mine coming into full
production. Total 2007 mine production is expected to be approximately the
same
as in 2006.
In
2005,
the mine processed 5.8 million tonnes of ore with an average grade of 0.83
gpt,
to produce 30,580 ounces of gold to Kinross’ account.
In
November 2005, the Kettle River mill was temporarily shut down as all mining
activities had been completed. The Buckhorn property was acquired with the
purchase of Crown in August 2006 and efforts are now underway to get the
Buckhorn mine operational. On September 27, 2006, Washington State regulatory
agencies issued permits allowing construction of the Buckhorn mine to commence.
On October 17, 2006, the Okanagan Highlands Alliance (“OHA”) filed an
administrative appeal of the water rights and stormwater permits issued by
the
Washington State Department of Ecology and the reclamation permit issued by
the
Washington State Department of Natural Resources. The appeal asserts that the
permits were improperly issued and that the Supplemental Environmental Impact
Statement (“EIS”) prepared by the State supporting the permits is inadequate. It
is expected that the balance of the permits for the project will be issued
mid-year 2007 and appeals of some or all of those expected to be filed sometime
thereafter.
On
January 17, 2007, the Okanagan/Wenatchee National Forest Supervisor issued
a
Record of Decision (“ROD”) and Final
EIS in respect of the Company’s request for authorization of road access, power
and utility lines, treated water pipelines and infiltration gallery, fences
and
monitoring wells to serve the Buckhorn mine. On March 22, 2007, the OHA filed
a
written administrative appeal of the ROD, the Final EIS and associated special
use permits and/or authorizations (including any approval of any mining plan
of
operations) for the “Buckhorn
Access
Project”, with the
USDA Forest Service Regional Forester (the “Federal Appeal”). While
it
would be premature to predict the outcome of the appeal at this stage of the
proceedings, the Company believes it has substantial defenses to the appeal,
including any motion for a stay of operations.
Kinross
has held an interest in the Kubaka mine, located in the Magadan Oblast in far
eastern Russia since 1998, and on February 28, 2003 increased its ownership
interest to 98.1%.
All
mining activity at Kubaka was completed by June 2005, and the remaining
stockpiles had been processed by the third quarter of 2006. During 2006,
materials and supplies inventory was written down by $7.6 million. Kubaka is
reported with Other operations for segment reporting purposes.
Gold
equivalent production in 2005 increased by 13% over 2004 levels to 140,195
ounces. The increase was due to a 10% increase in mill throughput and 7%
increase in grades. The change in mill throughput was largely the result of
an
8-week scheduled shutdown in 2004. Revenue from metal sales increased by 27%
due
to more ounces being sold and a higher realized gold price. Costs of sales
increased due to more tonnes processed and an increase in the number of ounces
sold. Depreciation, depletion and amortization was up by 39% as the remaining
unamortized development costs and property, plant and equipment was fully
depreciated over the production during the year, following the decision to
close
the mine.
|
|
Years
ended December 31,
|
|
|
2006
vs 2005
|
|
|
2005
vs 2004
|
|||||||||||||||
|
(in
millions)
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Change
$
|
|
|
Change
%
|
|
|
Change
$
|
|
|
Change
%
|
|
||
|
Exploration
and business development
|
$
|
39.4
|
$
|
26.6
|
$
|
20.4
|
$
|
12.8
|
48%
|
|
$
|
6.2
|
30
|
%
|
||||||||
2006 Exploration and business development expenses increased 48% from 2005 to $39.4 million. Of this, $13.5 million was spent on Kinross-owned properties and an additional $10.1 million at non-operated joint venture properties. This contributed to increases in reserves and resources at Refugio, Fort Knox, Paracatu, the Porcupine Joint Venture, La Coipa and Crixás.
Exploration
and business development expenditures in 2007 are expected to rise to $44.0
million to ensure that there is a pipeline of projects to replace and build
on
the reserves and resources.
2005 Exploration
expenditures in 2005 focused primarily on mine exploration. The two highest
priorities were the resource expansion project at Paracatu and the pit expansion
at Round Mountain. During 2005, the Company spent $5.2 million at Paracatu,
while $2.4 million was spent at Round Mountain. Exploration expenditures at
the
other Company operated mines included $2.3 million at Kubaka, $0.6 million
at
Fort Knox and $0.4 million at Kettle River. The Company’s share of exploration
expenditures at non-operated joint venture properties included $3.5 million
at
Porcupine, $1.6 million at Musselwhite, $1.1 million at La Coipa and $0.3
million at Crixás.
2004 The
focus
of the Company’s exploration program was to replace and increase reserves at
existing mines and increase reserves at its development projects. Exploration
expenditures at mines the Company operates totaled $14.4 million. This included
$2.2 million at Kettle River, $0.6 million at Fort Knox, $0.8 million at Round
Mountain and $0.4 million at Kubaka. The Company’s share of exploration
expenditures at joint venture properties operated by others included $3.2
million at Porcupine, $2.0 million at Musselwhite, $0.5 million at La Coipa
and
$0.3 million at Crixás.
General
and Administrative
|
Years
ended December 31,
|
2006
vs 2005
|
2005
vs 2004
|
||||||||||||||||||||
|
(in
millions)
|
2006
|
2005
|
2004
|
Change
$
|
Change
%
|
Change
$
|
Change
%
|
|||||||||||||||
|
General
and administrative
|
$
|
52.1
|
$
|
45.3
|
$
|
36.4
|
$
|
6.8
|
15
|
%
|
$
|
8.9
|
24
|
%
|
||||||||
General
and administrative costs include expenses related to the overall management
of
the business which are not part of direct mine operating costs. This includes
the costs incurred at corporate offices located in Toronto, Reno and Brasilia.
General
and administrative costs have increased to $52.1 million in 2006 from $45.3
million in 2005. The increase was primarily due to stock-based compensation
expense and higher personnel costs.
A
large
portion of the Company’s general and administrative expense is incurred in
Canadian dollars, therefore the weakening U.S. dollar has negatively impacted
general and administrative expense. The average exchange rate of the U.S. dollar
compared to the Canadian dollar decreased by 7% between 2004 and 2005 and a
further 6% between 2005 and 2006.
Increases
in general and administrative costs from 2004 to 2005 were the result of several
factors, including increases in severance and related personnel costs, legal
and
insurance costs and costs incurred relating to the regulatory review of the
Company’s accounting for goodwill. Overall, costs related to regulatory
requirements have increased each year.
Impairment
of Goodwill,
Property, Plant and Equipment and Investments
Goodwill
The
Company evaluates its carrying value of Goodwill at least once each year. The
test for impairment of goodwill is discussed further in the “The Carrying Value
of Goodwill” in the Critical Accounting Policies and Estimates section below. In
2006, no impairment of goodwill was recorded. During 2005, goodwill impairment
totaled $8.7 million which related to the Musselwhite mine and the Aquarius
property. The goodwill impairment of $2.0 million relating to Musselwhite was
the result of a reduction in the future value ascribed to the property by
management and the goodwill impairment charge of $6.7 million at Aquarius
followed management’s decision to dispose of the property. Goodwill impairment
charges of $12.4 million were recorded in 2004. A breakdown of the impairment
charges to goodwill is as follows:
|
Years
ended December 31,
|
||||||||||
|
(in
millions)
|
2006
|
2005
|
2004
|
|||||||
|
Goodwill
Impairment Charges
|
||||||||||
|
Musselwhite
|
$
|
—
|
$
|
2.0
|
$
|
—
|
||||
|
Gurupi
property - exploration project
|
—
|
—
|
12.4
|
|||||||
|
Aquarius
|
—
|
6.7
|
—
|
|||||||
|
Total
|
$
|
—
|
$
|
8.7
|
$
|
12.4
|
||||
Property,
Plant and Equipment and investments
The
impairment test of long lived assets is a test of recoverability. The test
of
the carrying value of property, plant and equipment is discussed further in
the
“The Carrying Value of Operating Mines, Mineral Rights, Development Properties
and Other” in the Critical Accounting Policies and Estimates section below. In
conducting the impairment analysis for 2006, the Company utilized the same
methodology as 2005 and 2004, using nominal prices and cost assumptions,
reflecting inflation and currency impacts. The gold price assumptions were
based
on a forecast from an independent external research firm, as well as other
external market data.
During
the last quarter of 2006, the Company determined that the decline in the market
value of its holdings of St Andrew Goldfield shares and warrants and Caledonia
Mining Corporation shares were other-than-temporary. As a result, long-term
investments were impaired by $10.5 million.
The
following is a breakdown of the impairments recorded against the Company’s
property, plant and equipment and investments for the three years ended December
31, 2006:
|
Years
ended December 31,
|
||||||||||
|
(in
millions)
|
2006
|
2005
|
2004
|
|||||||
|
Property,
plant and equipment Impairment Charges
|
||||||||||
|
Fort
Knox
|
$
|
—
|
$
|
141.8
|
$
|
—
|
||||
|
Paracatu
|
—
|
—
|
2.1
|
|||||||
|
Kubaka
|
—
|
—
|
25.1
|
|||||||
|
Gurupi
property - exploration project
|
—
|
—
|
5.0
|
|||||||
|
Lupin
|
—
|
—
|
7.9
|
|||||||
|
New
Britannia
|
—
|
—
|
1.3
|
|||||||
|
Aquarius
- exploration project
|
—
|
30.1
|
—
|
|||||||
|
Norseman
property - exploration project
|
—
|
—
|
3.5
|
|||||||
|
Reclamation
projects
|
—
|
—
|
1.2
|
|||||||
|
|
$ |
—
|
$
|
171.9
|
$
|
46.1
|
||||
|
Investment
Impairment Charges
|
||||||||||
|
Crixás’
taxes
receivable
|
$
|
—
|
$
|
3.4
|
$
|
—
|
||||
|
Marketable
securities and long-term investments
|
10.5
|
0.7
|
1.4
|
|||||||
|
$
|
10.5
|
$
|
4.1
|
$
|
1.4
|
|||||
|
$
|
10.5
|
$
|
176.0
|
$
|
47.5
|
|||||
In
the
fourth quarter of 2005, an impairment charge of $141.8 million was recorded
at
Fort Knox as a result of a strategic review conducted on the Fort Knox
operation. The True North and Gil deposits were reclassified from reserves
to
resources, the Company decided to withdraw from the Ryan Lode project, which
previously had been included in reserves, and design changes were made to the
Fort Knox pit.
An
impairment charge of $3.4 million was recorded in the fourth quarter of 2005,
following the determination that a tax receivable was unrecoverable by the
Crixás mine. Following the Company’s decision to dispose of the Aquarius
exploration property in the third quarter of 2005, an impairment charge of
$30.1
million was recorded against property, plant and equipment plus a $6.7 million
charge against goodwill.
In
2004,
impairment losses of $46.1 million were recorded against the carrying value
of
long-lived assets at various operations, along with an impairment loss of $1.4
million recorded against investments for a total of $47.5 million. An impairment
loss of $25.1 million was recorded at the Company’s Kubaka operation following
the decision not to proceed with the development of the Tsokol vein located
near
the Kubaka mill. At Lupin, a charge of $7.9 million was recorded, as the mine
was scheduled for reclamation in 2005. An impairment charge of $5.0 million
was
recorded at Gurupi on its long-lived assets, in addition to the impairment
loss
against goodwill. An impairment loss of $3.5 million was recorded against the
carrying value of the Norseman property in Australia, as the decision was made
by the Company to dispose of the property. Impairment losses were also recorded
at Paracatu ($2.1 million), New Britannia ($1.3 million) and the Delamar
reclamation property ($1.2 million).
Gain
on Disposal of Assets
Kinross
continues to dispose of non-core assets that were identified in the strategic
review carried out in 2005. In 2006, total gains on disposal of assets and
investments were $47.4 million. These gains were the result of the disposition
of New Britannia mine ($8.9 million), the Blanket mine ($2.9 million) and
George/Goose Lake property ($1.6 million) and other properties ($1.1 million).
Gains of $31.3 million and $1.6 million were recorded on the disposal of
investments in Katanga and Bolder, respectively.
The
Company disposed of certain non-core assets in 2005, realizing a net gain
totaling $6.0 million. $4.7 million related to the sale of a portion of its
interest in Kinross Forrest Ltd. The investment in Kinross Forrest Ltd. is
discussed further under “Related Party Transactions”. Kinross also sold its
position in Cumberland Resources Ltd. and various other equity holdings. The
Company realized a net gain on the disposals of assets of $1.7 million in 2004.
The gains were largely on the sale of investments in junior mining
companies.
Other
Expense - Net
Other
expense was $9.3 million in 2006, compared with $17.0 million in 2005 and $6.2
million in 2004. Interest income increased to $5.3 million as a result of higher
average cash balances throughout the year. A foreign exchange loss of $9.5
million was recorded in 2006, compared with a loss of $14.0 million in 2005
and
$13.3 million in 2004. The loss on foreign exchange was largely the result
of
the impact of strengthening foreign currencies on net monetary liabilities
in
the Company’s non-U.S. operations. Interest expense remained relatively constant
from 2005, due to lower debt levels and an increase in capitalized interest,
offset by higher interest rates in 2006. During 2006, the Company capitalized
interest totaling $3.7 million relating to capital expenditures at Fort Knox,
Round Mountain and Paracatu. During 2005, the Company capitalized interest
totaling $1.8 million relating to capital expenditures at Fort Knox, the
Porcupine Joint Venture, Refugio and Round Mountain. Interest and other income
is expected to be lower in 2007 due to lower cash balances. Interest expense
is
expected to increase as a result of higher debt levels with the addition of
Bema
in 2007 and rising interest rates.
Kinross
maintains a no-hedging policy on gold sales. However, the Company does, from
time to time, generate premiums through the sale of gold call options. Non-hedge
derivative gains and losses relate to the mark-to-market movement on these
gold
call options. During the year ended December 31, 2006, the Company closed out
the remaining call options resulting in a pre-tax loss of $8.2 million. There
were no written call options outstanding as at December 31, 2006. During 2005,
the liability on call options sold increased by $3.2 million. At December 31,
2005, the Company had 255,000 ounces of sold call options outstanding at an
average strike price of $522 per ounce, which had an unrealized loss of $6.2
million. Gains or losses on mark-to-market adjustments are reflected in the
period incurred.
|
2006
vs 2005
|
2005
vs 2004
|
|||||||||||||||||||||
|
(in
millions)
|
2006
|
2005
|
2004
|
Change
$
|
Change
%
|
Change
$
|
Change
%
|
|||||||||||||||
|
Interest
and other income
|
$
|
7.1
|
$
|
7.0
|
$
|
9.1
|
0.1
|
1
|
%
|
(2.1
|
)
|
(23
|
%)
|
|||||||||
|
Interest
expense
|
(6.9
|
)
|
(6.8
|
)
|
(5.1
|
)
|
(0.1
|
)
|
(1
|
%)
|
(1.7
|
)
|
(33
|
%)
|
||||||||
|
Foreign
exchange losses
|
(9.5
|
)
|
(14.0
|
)
|
(13.3
|
)
|
4.5
|
32
|
%
|
(0.7
|
)
|
(5
|
%)
|
|||||||||
|
Non-hedge
derivative gains (losses)
|
—
|
(3.2
|
)
|
3.1
|
3.2
|
—
|
(6.3
|
)
|
nm
|
|||||||||||||
|
Other
expense - net
|
$
|
(9.3
|
)
|
$
|
(17.0
|
)
|
$
|
(6.2
|
)
|
7.7
|
45
|
%
|
(10.8
|
)
|
(174
|
%)
|
||||||
Income
and
Mining Tax Expense
Kinross
is subject to tax in various jurisdictions including Canada, the United States,
Brazil, Chile and Russia. The Company recorded a provision of $25.9 million
on
earnings before taxes and other items of $192.2 million in 2006 and recoveries
of $12.9 million and $11.5 million for income and mining taxes in 2005 and
2004
on losses before tax and other items of $228.2 million and $74.1 million,
respectively. Kinross’ combined federal and provincial statutory tax rate was
34% for 2006, 34% for 2005 and 39% for 2004. There are a number of factors
that
can significantly impact the Company’s effective tax rate including the
geographic distribution of income, varying rates in different jurisdictions,
the
non-recognition of tax assets, mining allowance, foreign currency exchange
rate
movements, changes in tax laws and the impact of specific transactions and
assessments. A reconciliation of the Company’s statutory rate to the actual
provision is provided in Note 15 to the consolidated financial
statements.
Due
to
the number of factors that can potentially impact the effective tax rate and
the
sensitivity of the tax provision to these factors, as discussed above, it is
expected that the Company’s effective tax rate will continue to fluctuate in
future periods.
Related
Party
Transactions
During
2004, the Company entered into a shareholders’ agreement providing for the
incorporation of Kinross Forrest Ltd. (“KF Ltd.”). KF Ltd. is incorporated under
the laws of the Territory of the British Virgin Islands and is a party to a
joint venture with La Générale des Carrières et des Mines, a Congolese
state-owned mining enterprise. The joint venture was formed for the purpose
of
exploiting the Kamoto Copper Mine located in the Democratic Republic of Congo.
Upon incorporation, the Company held 35% of the shares of KF Ltd., 25% of the
shares were held by a company controlled by Mr. Arthur Ditto, a former director
and officer of the Company, and 40% were held by an unrelated third party.
Mr.
Ditto paid the Company his share of the expenses incurred in the amount of
$0.3
million.
During
2005, the Company agreed to sell 23.33% of the shares of KF Ltd. to Balloch
Resources Ltd. (“Balloch”) for consideration of $4.7 million. Based on an
original cost of less than $0.1 million, the Company recorded a gain on sale
of
$4.7 million. In addition, the Company and Balloch signed an agreement giving
Balloch an option to purchase Kinross’ remaining 11.67% interest in KF Ltd. Mr.
Ditto owned a 17.1% interest in the outstanding common shares of Balloch and,
following its purchase of the interest in KF Ltd., was appointed the president
and Chief Executive Officer of Balloch. Mr. Robert M. Buchan, a former officer
and director of the Company, is the non-executive Chairman of Balloch. On
November 30, 2005, Balloch changed its name to Katanga Mining Ltd. (“Katanga”).
On June 27, 2006, the Company received 5,751,000 shares of Katanga in exchange
for its 11.67% interest in KF Ltd. On September 8, 2006, Kinross sold the
5,751,000 shares in Katanga for proceeds of $31.4 million, recording a gain
of
$31.3 million.
The
following table summarizes Kinross’ cash flow activity and does not include
Bema:
|
Years
ended December 31,
|
2006
vs 2005
|
2005
vs 2004
|
||||||||||||||||||||
|
(in
millions)
|
|
2006
|
|
2005
|
|
2004
|
|
Change
$
|
|
Change
%
|
|
Change
$
|
|
Change
%
|
|
|||||||
|
Cash
flow:
|
||||||||||||||||||||||
|
Provided
from operating activities
|
$
|
292.0
|
$
|
133.7
|
$
|
161.2
|
$
|
158.3
|
118
|
%
|
$
|
(27.5
|
)
|
(17
|
%)
|
|||||||
|
Used
in investing activities
|
(173.0
|
)
|
(121.1
|
)
|
(442.3
|
)
|
(51.9
|
)
|
(43
|
%)
|
321.2
|
73
|
%
|
|||||||||
|
Provided
by (used in) financing acitvities
|
(64.2
|
)
|
35.7
|
82.6
|
(99.9
|
)
|
(280
|
%)
|
(46.9
|
)
|
(57
|
%)
|
||||||||||
|
Effect
of exchange rate changes on cash
|
1.7
|
1.4
|
0.6
|
0.3
|
21
|
%
|
0.8
|
133
|
%
|
|||||||||||||
|
Increase
(decrease) in cash and cash equivalents
|
$
|
56.5
|
$
|
49.7
|
$
|
(197.9
|
)
|
$
|
6.8
|
14
|
%
|
$
|
247.6
|
125
|
%
|
|||||||
|
Cash
and cash equivalents:
|
||||||||||||||||||||||
|
Beginning
of year
|
$
|
97.6
|
$
|
47.9
|
$
|
245.8
|
$
|
49.7
|
104
|
%
|
$
|
(197.9
|
)
|
(81
|
%)
|
|||||||
|
End
of year
|
$
|
154.1
|
$
|
97.6
|
$
|
47.9
|
$
|
56.5
|
58
|
%
|
$
|
49.7
|
104
|
%
|
||||||||
Operating
Activities
Primarily
as a result of higher gold and silver prices, cash flow provided from operating
activities increased 118% to $292.0 million from $133.7 million in 2005. This
has been partially offset by higher cost of sales, although the actual quantity
of gold equivalent ounces was lower than 2005 sales quantities.
Cash
flow
provided from operating activities in 2005 decreased to $133.7 million from
$161.2 million in 2004. The decrease was largely the result of fewer ounces
sold
combined with increased operating costs, partially offset by higher realized
gold prices.
Investing
Activities
In
2006,
net cash used in investing activities was $173.0 million, an increase of $51.9
million from the $121.1 million spent in 2005. Additions to property, plant
and
equipment in 2006 were $202.9 million compared to $142.4 million in 2005. Cash
used in investing activities in 2004 was $442.3 million, primarily related
to
the $255.6 million used in the acquisition of the remaining 51% interest in
the
Paracatu mine and additions to property, plant and equipment of $169.5 million.
The following schedule provides a breakdown by segment of the capital
expenditures:
|
Years
ended December 31,
|
2006
vs 2005
|
2005
vs 2004
|
||||||||||||||||||||
|
(in
millions)
|
2006
|
2005
|
|
2004
|
Change
$
|
|
Change
%
|
|
Change
$
|
|
Change
%
|
|||||||||||
|
Operating
Segments
|
||||||||||||||||||||||
|
Fort
Knox
|
$
|
49.9
|
$
|
44.6
|
$
|
58.7
|
$
|
5.3
|
12
|
%
|
$
|
(14.1
|
)
|
(24
|
%)
|
|||||||
|
Round
Mountain
|
28.3
|
5.9
|
8.8
|
22.4
|
380
|
%
|
(2.9
|
)
|
(33
|
%)
|
||||||||||||
|
La
Coipa
|
7.8
|
4.9
|
1.0
|
2.9
|
59
|
%
|
3.9
|
390
|
%
|
|||||||||||||
|
Crixás
|
7.8
|
6.2
|
3.6
|
1.6
|
26
|
%
|
2.6
|
72
|
%
|
|||||||||||||
|
Paracatu
|
61.8
|
21.3
|
5.8
|
40.5
|
190
|
%
|
15.5
|
267
|
%
|
|||||||||||||
|
Musselwhite
|
4.7
|
5.7
|
3.9
|
(1.0
|
)
|
(18
|
%)
|
1.8
|
46
|
%
|
||||||||||||
|
Porcupine
Joint Venture
|
19.5
|
24.7
|
24.5
|
(5.2
|
)
|
(21
|
%)
|
0.2
|
1
|
%
|
||||||||||||
|
Refugio
|
4.7
|
26.2
|
43.4
|
(21.5
|
)
|
(82
|
%)
|
(17.2
|
)
|
(40
|
%)
|
|||||||||||
|
Kettle
River
|
16.7
|
1.7
|
1.6
|
15.0
|
882
|
%
|
0.1
|
6
|
%
|
|||||||||||||
|
Other
operations
|
—
|
0.2
|
17.0
|
(0.2
|
)
|
(100
|
%)
|
(16.8
|
)
|
(99
|
%)
|
|||||||||||
|
Corporate
& other
|
1.7
|
1.0
|
1.2
|
0.7
|
70
|
%
|
(0.2
|
)
|
(17
|
%)
|
||||||||||||
|
Total
|
$
|
202.9
|
$
|
142.4
|
$
|
169.5
|
$
|
60.5
|
42
|
%
|
$
|
(27.1
|
)
|
(16
|
%)
|
|||||||
Expenditures
on capital in 2006 included costs to continue Phase VI of the expansion at
Fort
Knox, the pit expansion and costs related to a new dedicated leach pad at Round
Mountain, development of the Paracatu mine and infrastructure costs at Kettle
River with the acquisition of Buckhorn.
Capital
expenditures during 2005 included costs related to accessing Phase V and Phase
VI ore zones at Fort Knox, development of the Pamour pit at the Porcupine Joint
Venture, mine and mill expansion costs at Paracatu, and continuing
recommissioning costs at Refugio.
During
2004, the major focus of the Company’s program included expenditures at Fort
Knox on the tailings dam, equipment and mine development, recommissioning of
Refugio and development of the Pamour pit at the Porcupine Joint
Venture.
During
2006, cash proceeds of $33.7 million were received from the disposal of
long-term investments and other assets, compared with proceeds of $19.8 million
in 2005 and $14.6 million in 2004. Cash of $13.9 million was used to acquire
long-term investments and other assets compared to $16.9 million in 2005 and
$26.4 million in 2004. At December 31, 2006, Kinross held long-term investments
in resource companies with a book value of $25.8 million and a market value
of
$45.7 million and at December 31, 2005, held long-term investments in resource
companies with a book value of $21.2 million and a market value of $27.7
million.
Net
cash
used in financing activities during 2006 was $64.2 million compared with cash
provided of $35.7 million in 2005 and $82.6 million in 2004. Debt of $104.6
million was repaid in 2006 and $35.3 million was received on proceeds from
the
issuance of debt. Included was repayment of $80.0 million on the revolving
credit facility. During 2005, cash from financing activities was primarily
from
a net increase to the LIBOR loan of $35.0 million under the corporate credit
facility and $5.5 million was drawn down on a $6.0 million credit facility
for
the Refugio mine in 2005.
In
December 2004, $105.0 million was drawn down on the corporate credit facility,
which helped fund the purchase of the remaining 51% interest in Paracatu. During
the first quarter of 2004, the Company repaid the Industrial Revenue Bonds
of
$25.0 million owing to the Alaska Industrial Development and Export Authority.
The repurchase of common shares resulting from a share consolidation followed
by
an immediate deconsolidation required the use of $11.8 million. The Company
decided to undertake this action to eliminate the large number of shareholders
who held less than 100 shares.
No
dividends were declared or paid to the holders of the convertible preferred
shares of Kinam Gold Inc., a subsidiary of the Company, in 2006, 2005, or 2004.
As
of
March 19, 2007, there were 583,784,242 million common shares of the Company
issued and outstanding. In addition, at the same date, the Company had
10,748,502 million share purchase options outstanding under its share option
plan, 1,249,834 million restricted share rights under its restricted share
plan
and 25.0 million common share purchase warrants outstanding which are
convertible to 8.3 million common shares.
Kinross
had cash and cash equivalents of $154.1 million at December 31, 2006, an
increase of $56.5 million from December 31, 2005. The Company’s net debt
position, consisting of (long-term debt and preferred shares, less cash and
cash
equivalents) was $75.8 million at December 31, 2005 and was in a net cash
position of $49.3 million at the end of 2006. The shift to a net cash position
is due to the cash flow provided from operating activities of $292.0 million,
less net cash used in financing including net debt repayments of $69.3 million,
and investing activities which includes additions to property, plant and
equipment of $202.9 million. Non-cash working capital comprised of current
assets less cash and cash equivalents and restricted cash decreased by $5.4
million from $143.0 million at December 31, 2005 to $137.6 million at the end
of
2006.
Property,
plant and equipment had a net increase of $266.3 million which was primarily
due
to the acquisition of Crown and expansions at Round Mountain, Fort Knox and
Paracatu. Depreciation, depletion and amortization expense was $108.3
million.
The
reclamation and remediation obligation is estimated to be $168.4 million at
December 31, 2006, compared to $175.9 million at the end of 2005. Reclamation
expenditures totaled $22.8 million in 2006. The net decrease of $7.5 million
is
the result of a reduction in the liability through reclamation activities and
the disposition of certain properties where Kinross was relieved of the
obligation. These were offset by higher cost assumptions used in determining
the
estimated liabilities along with the ongoing development and expansion at
various operations. At producing mines, increases to estimated reclamation
and
remediation costs are recorded as an adjustment to the corresponding asset
carrying amount. At closed mines, changes to estimates are charged directly
to
earnings. Accretion and reclamation expense of $33.5 million in 2006 included
$23.5 million related to increased cost estimates at mines no longer in
production.
At
December 31, 2006, the Company had in place a three-year revolving credit
facility of $300 million and a five and a half year $200 million term loan.
During August 2006, the Company amended and restated the previous $295.0 million
revolving facility with a $300.0 million revolving credit facility that supports
the Company’s liquidity and letters of credit requirements. In addition, the
term was extended to August 2008. The Company had drawn $187.5 million of this
facility, at December 31, 2006 in the form of a $60.0 million LIBOR loan and
letters of credit totaling $127.5 million. The new credit facility includes
a
five and a half year $200.0 million term loan that supports the Paracatu
expansion project in Brazil. The following table outlines the credit facility
utilization as at December 31:
|
As
at December 31,
|
|||||||
|
(in
millions)
|
2006
|
2005
|
|||||
|
Credit
facility limit
|
$
|
300.0
|
$
|
295.0
|
|||
|
Term
loan
|
195.0
|
—
|
|||||
|
LIBOR
loan
|
(60.0
|
)
|
(140.0
|
)
|
|||
|
Letters
of credit
|
(127.5
|
)
|
(117.6
|
)
|
|||
|
Credit
facility availability as at December 31
|
$
|
307.5
|
$
|
37.4
|
|||
Obligations
under the facilities are secured by the assets of the Fort Knox mine as well
as
by a pledge of shares in various wholly owned subsidiaries. Pricing is dependent
upon the ratio of the Company’s net debt to operating cash flow. Assuming the
Company maintains a leverage ratio less than 1.25, interest charges would be
as
follows:
|
Type
of Credit
|
Interest
rates in
credit
facility
|
|||
|
Dollar
based LIBOR loan
|
LIBOR
plus 1.00
|
%
|
||
|
Letters
of credit
|
1.00
|
%
|
||
|
Standby
fee applicable to unused availability
|
0.25
|
%
|
||
Significant
financial covenants contained in the credit facility include a minimum tangible
net worth of $700.0 million (2005 - $727.9 million), an interest coverage ratio
of 4.5:1, net debt to operating cash flow of no more than 3.0:1 and minimum
Proven and Probable Reserves of 6.0 million gold equivalent ounces. The Company
was in compliance with all covenants as at December 31, 2006.
Total
long-term debt of $89.9 million at December 31, 2006, consists of $60.0 million
borrowed under the corporate credit facility, $5.0 million on the Paracatu
term
loan, $15.0 million outstanding on the Paracatu short-term loan and capital
leases of $9.9 million.
The Paracatu short-term loan bears an interest rate of 5.67% and is repayable
in
30 days. Capital lease payments of $2.9
million
and the
repayment of the $15.0 million Paracatu short-term loan are expected to be
made
in 2007.
The
following amounts do not include the effects of the acquisition of Bema. The
three major uses of cash in 2007 as compared with 2006, outside of operating
activities and general and administrative costs, are expected to be:
|
As
at December 31,
|
|||||||
|
(in
millions)
|
2007
|
2006
|
|||||
|
Site
restoration
|
$
|
29.0
|
$
|
22.8
|
|||
|
Exploration
and business development
|
44.0
|
39.4
|
|||||
|
Property,
plant and equipment additions
|
450.0
|
202.9
|
|||||
|
$
|
523.0
|
$
|
265.1
|
||||
The
exploration costs are discussed further in the “Exploration and Business
Development Expense” section under “Consolidated Financial
Results”.
Certain
letters of credit are expected to be released as various closure properties
proceed with final reclamation. However, the exact timing of these releases
is
uncertain. It is also difficult to predict the specific timing of reductions
or
further increases in LIBOR based borrowings. In addition, Kinross anticipates
the need for additional bonding requirements.
Kinross
had cash and cash equivalents of $154.1 million and $307.5 million available
on
its credit facilities at December 31, 2006. With the average gold price in
the
first two months of 2007 at $647 per ounce, it is expected that the Company’s
existing cash balances, cash flow from operations and existing credit facilities
will be sufficient to fund the exploration, capital and reclamation programs
budgeted for 2007.
Major
expenditures in Kinross’ capital program of approximately $450 million forecast
for 2007, excluding Bema, include:
|
·
|
$279
million at Paracatu, of which $260 million relates to the expansion
project.
|
|
·
|
$40
million at the Fort Knox mine, for development of Phase IV and potential
Phase VII expansion and for a heap leach pad project.
|
|
·
|
$58
million at Kettle River, of which $54 million relates to developing
the
Kettle River - Buckhorn Property
project.
|
|
·
|
$37
million at Round Mountain, for stripping in the expansion and additional
mobile equipment.
|
|
·
|
$20
million at the Porcupine Joint Venture on underground development
and mill
tailing lift.
|
|
·
|
$12
million at La Coipa, which includes capital development and water
treatment facilities.
|
All
amounts represent Kinross’ proportionate share of planned
expenditures.
Reclamation
expenditures in 2007 are forecast to be $29 million, which includes expenditures
of approximately $13 million at Delamar and $7 million at Kubaka. Reclamation
is
also scheduled at many of the operating mines as well as reclamation and
monitoring continuing at the Company’s Haile and Mineral Hill
sites.
The
following amounts do not include the effects of the acquisition of
Bema.
Table
of
Contractual Obligations:
|
(in
millions)
|
Total
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
and beyond
|
|||||||||
|
Long-term
debt obligations
|
$
|
91.1
|
$
|
19.5
|
4.8
|
63.0
|
1.1
|
2.7
|
|||||||||||
|
Capital
lease obligations
|
10.9
|
3.4
|
3.3
|
4.1
|
0.1
|
– | |||||||||||||
|
Operating
lease obligations
|
6.9
|
2.5
|
1.7
|
1.5
|
1.2
|
– | |||||||||||||
|
Purchase
obligations
|
193.7
|
123.6
|
38.1
|
11.6
|
6.1
|
14.3
|
|||||||||||||
|
Reclamation
and remediation obligations
|
168.4
|
28.8
|
19.8
|
12.8
|
20.2
|
86.8
|
|||||||||||||
|
Total
|
$
|
471.0
|
$
|
177.8
|
$
|
67.7
|
$
|
93.0
|
$
|
28.7
|
$
|
103.8
|
|||||||
Kinross
may manage its exposure to fluctuations in commodity prices and foreign exchange
rates by entering into derivative financial instrument contracts in accordance
with the formal risk management policies approved by its Board of Directors.
Kinross’ exposure with respect to foreign exchange is addressed under the
section entitled “Risk Analysis - Foreign Currency Exchange Risk” and, with
respect to commodities, in the section entitled “Risk Analysis - Commodity Price
Risks.”
|
2006
|
2005
|
||||||||||||||||||||||||
|
(in
millions)
|
Q4
|
Q3
|
Q2
|
Q1
|
Q4
|
Q3
|
Q2
|
Q1
|
|||||||||||||||||
|
Metal
sales
|
$
|
231.4
|
$
|
223.6
|
$
|
252.3
|
$
|
198.3
|
$
|
190.0
|
$
|
181.1
|
$
|
174.6
|
$
|
179.8
|
|||||||||
|
Net
earnings (loss) attributable to common shares
|
$
|
41.0
|
$
|
50.3
|
$
|
65.6
|
$
|
8.9
|
$
|
(154.3
|
)
|
$
|
(44.4
|
)
|
$
|
(16.4
|
)
|
$
|
(0.9
|
)
|
|||||
|
Basic
and diluted earnings (loss) per share
|
$
|
0.11
|
$
|
0.14
|
$
|
0.19
|
$
|
0.03
|
$
|
(0.45
|
)
|
$
|
(0.13
|
)
|
$
|
(0.05
|
)
|
$
|
—
|
||||||
|
Cash
flow provided from operating activities
|
$
|
91.2
|
$
|
85.8
|
$
|
94.9
|
$
|
20.1
|
$
|
23.8
|
$
|
52.5
|
$
|
30.6
|
$
|
26.8
|
|||||||||
During
the fourth quarter of 2006, revenue rose to $231.4 million on sales of 375,684
gold equivalent ounces, up from $190.0 million on sales of 389,037 gold
equivalent ounces in the same period in 2005. The average price was $614
compared to $485 in the fourth quarter of 2005. Cost of sales in the quarter
rose to $119.2 million from $110.9 million due to rising fuel, power labour
and
other production costs. The strengthening Canadian dollar, Chilean peso and
Brazilian real against the United States dollar also increased costs at the
Company’s non-U.S. mines.
Accretion
and reclamation expense was $1.8 million in the fourth quarter of 2006 as
compared to $47.0 million in the same period in 2005 as a result of adjustments
to the cost estimates for mines no longer in production recorded in December
2005 whereas the 2006 adjustments were made in the third quarter. Other items
affecting net earnings in the fourth quarter were gains recorded on the sale
of
New Britannia of $8.9 million and an impairment charge against the investments
in St Andrew Goldfields Ltd. and Caledonia Mining Corporation totaling $10.5
million.
Pursuant
to regulations adopted by the U.S. Securities and Exchange Commission (SEC),
under the Sarbanes-Oxley Act of 2002 and those of the Canadian Securities
Administrators, Kinross’ management evaluates the effectiveness of the design
and operation of the Company’s disclosure controls and procedures (disclosure
controls). This evaluation is done under the supervision of, and with the
participation of, the President and Chief Executive Officer and the Chief
Financial Officer.
As
of the
end of the period covered by this MD&A and accompanying audited financial
statements, Kinross’ management evaluated the effectiveness of its disclosure
controls. Based on that evaluation, the President and Chief Executive Officer
and the Chief Financial Officer have concluded that Kinross’ disclosure controls
and procedures were effective.
Kinross’
accounting
policies are described in Note 2 to the consolidated financial statements.
The
preparation of the Company’s consolidated financial statements, in conformity
with GAAP, requires management to make estimates and assumptions that affect
amounts reported in the consolidated financial statements and accompanying
notes. The following is a list of the accounting policies that the Company
believes are critical, due to the degree of uncertainty regarding the estimates
or assumptions involved and the magnitude of the asset, liability, revenue
or
expense being reported:
|
·
|
Purchase price allocation; |
|
·
|
Goodwill
and Goodwill Impairment;
|
|
·
|
Property,
plant and equipment
and Impairment of Property, plant and
equipment;
|
|
·
|
Long-term
investments;
|
|
·
|
Inventories;
|
|
·
|
Reclamation
and remediation obligations; and
|
|
·
|
Income
and mining taxes
|
Management
has discussed the development and selection of the above critical accounting
policies with the Audit Committee of the Board of Directors, and the Audit
Committee has reviewed the disclosure relating to such policies in the
MD&A.
Business
acquisitions are accounted
for by
the purchase method of accounting whereby, the purchase price is allocated
to
the assets acquired and the liabilities assumed based on fair value at the
time
of the acquisition. The excess purchase price over the fair value of
identifiable assets and liabilities acquired is goodwill. The determination
of
fair value often requires management to make assumptions and estimates about
future events. The assumptions and estimates with respect to determining the
fair value of property, plant and equipment acquired generally require a high
degree of judgment, and include estimates of mineral reserves acquired, future
gold prices and discount rates. Changes in any of the assumptions or estimates
used in determining the fair value of acquired assets and liabilities could
impact the amounts assigned to assets, liabilities and goodwill in the purchase
price allocation.
The
amount by which the purchase price of a business acquisition exceeds the fair
value of identifiable assets and liabilities acquired, is goodwill. Goodwill
is
allocated to the reporting units acquired based on management’s estimates of the
fair value of each reporting unit as compared to the fair value of the assets
and liabilities of the reporting unit. Estimates of fair value may be impacted
by gold and silver prices, currency exchange rates, discount rates, level of
capital expenditures, interest rates, operating costs and other factors that
may
be different from those used in determining fair value.
For
reporting units that have recorded goodwill, the estimated fair value of each
unit is compared to its carrying value at least once each year, or when
circumstances indicate that the value may have become impaired. If the carrying
value exceeds the estimated or implied fair value of goodwill, which is equal
to
management’s estimate of potential value contained within the reporting unit,
any excess of the carrying amount of goodwill over the estimated or implied
goodwill is deducted from the carrying value of goodwill and charged to current
period earnings.
While
the
Company believes that the approach used to calculate estimated fair value for
each reporting unit is appropriate, the Company also recognizes that the timing
and future value of additions to proven and probable mineral reserves, as well
as the gold price and other assumptions discussed previously, may change
significantly from current expectations. For example, a reduction in the
forecasted gold price used to test impairment of 10% would have the impact
of
reducing the value of the goodwill by an additional $125.0 million, keeping
other variables constant.
Kinross
reviews and evaluates the carrying value of its operating mines and development
properties for impairment whenever events or circumstances indicate that the
carrying amounts of these assets might not be recoverable. When the carrying
amount exceeds the undiscounted cash flow, an impairment loss is measured and
recorded. Future cash flows are based on estimated recoverable production as
determined from Proven and Probable Reserves and Measured, Indicated and
Inferred resources. Assumptions underlying the cash flow estimates include,
but
are not limited to, forecasted prices for gold and silver, production levels,
and operating, capital and reclamation costs. The fair values of
exploration-stage properties are estimated based primarily on recent
transactions of similar properties adjusted for any infrastructure that may
already be in place. Assumptions underlying future cash flow estimates are
subject to risks and uncertainties. Therefore, it is possible that changes
in
estimates with respect to the Company’s mine plans could occur which may affect
the expected recoverability of Kinross’ investments in the carrying value of the
assets. The components of the asset impairment charges are discussed in
“Impairment of Goodwill, Property, Plant and Equipment and Investments” under
the “Consolidated Financial Results” section.
Long-term
investments over which the Company holds less than a 20% interest and does
not
exercise significant influence are accounted for at cost. Those investments
where the Company holds greater than 20% but less than a 50% interest, and
has
the ability to exercise significant influence are accounted for as an equity
investment. The Company reviews the carrying value of its interests in long
term
investments each reporting period. When there is a decline in the carrying
value
that is expected to be an other-than-temporary decline, the investment is
written down to net realizable value with a charge to impairment
expenses.
Plant
and
other facilities, used directly in mining activities, are amortized using the
units-of-production (“UOP”) method over the estimated life of the ore body based
on recoverable ounces to be mined from estimated proven and probable mineral
reserves. Mobile and other equipment is depreciated, net of residual value,
on a
straight-line basis, over the useful life of the equipment but does not exceed
the related estimated life of the mine based on proven and probable reserves.
Costs
to
develop new properties, where it has been determined that a mineral property
can
be economically developed as a result of establishing proven and probable
mineral reserves are capitalized. All such costs are amortized using the UOP
method based on recoverable ounces to be mined from proven and probable mineral
reserves.
Major
costs incurred after the commencement of production that represent betterment
to
the property are capitalized and amortized using the UOP method based on
recoverable ounces to be mined from estimated proven and probable mineral
reserves from the reserves exposed as a result of these activities.
The
calculation of the UOP rate, and therefore the annual depreciation, depletion,
and amortization expense, could be materially affected by changes in the
underlying estimates. Changes in estimates can be the result of actual future
production differing from current forecasts of future production, expansion
of
proven and probable mineral reserves through exploration activities, differences
between estimated and actual costs of mining and differences in gold price
used
in the estimation of proven and probable mineral reserves.
Significant
judgment is involved in the determination of useful life and residual values
for
the computation of depreciation, depletion, and amortization and no assurance
can be given that actual useful lives and residual values will not differ
significantly from current assumptions.
Inventories
Expenditures
incurred, and depreciation, depletion and amortization of assets used in mining
and processing activities are deferred and accumulated as the cost of ore in
stockpiles, ore on leach pads, in-process and finished metal inventories. These
deferred amounts are carried at the lower of average cost or net realizable
value (“NRV”). NRV is the difference between the estimated future gold price
based on prevailing and long-term prices, less estimated costs to complete
production into a saleable form. Write-downs of ore in stockpiles, ore on leach
pads, in-process and finished metal inventories resulting from NRV impairments
are reported as a component of current period costs. The primary factors that
influence the need to record write-downs include prevailing and long-term gold
prices and prevailing costs for production inputs such as labour, fuel and
energy, materials and supplies, as well as realized ore grades and actual
production levels.
Stockpiles
are comprised of ore that has been extracted from the mine and is available
for
further processing. Stockpiles are valued based on mining costs incurred up
to
the point of stockpiling the ore, including applicable depreciation, depletion
and amortization relating to mining operations. Costs are added to stockpiles
based on the current mining cost per tonne and removed at the average cost
per
tonne.
Ore
on
leach pads is ore that is placed on pads where it is permeated with a chemical
solution that dissolves the gold contained in the ore. Costs are attributed
to
the leach pads based on current mining costs, including applicable depreciation,
depletion and amortization relating to mining operations incurred up to the
point of placing the ore on the pad. Costs are removed from the leach pad based
on the average cost per recoverable ounce of gold on the leach pad as the gold
is recovered. Estimates of recoverable gold on the leach pads are calculated
from the quantities of ore placed on the pads, the grade of ore placed on the
leach pads and an estimated percentage of recovery. Timing and ultimate recovery
of gold contained on leach pads can vary significantly. The quantities of
recoverable gold placed on the leach pads are reconciled to the quantities
of
gold actually recovered (metallurgical balancing), by comparing the grades
of
ore placed on the leach pads to actual ounces recovered. The nature of the
leaching process inherently limits the ability to precisely monitor inventory
levels. As a result, the metallurgical balancing process is constantly monitored
and the engineering estimates are refined based on actual results over time.
The
ultimate recovery of gold from a pad will not be known until the leaching
process is completed.
In-process
inventories are materials that are currently in the process of being converted
to a saleable product. Conversion processes vary depending on the nature of
the
ore and the specific mining operation, but include mill in-circuit, leach
in-circuit, flotation and column cells, and carbon in-pulp inventories.
In-process material is measured based on assays of the material fed to the
processing plants and the projected recoveries of the respective plants.
In-process inventories are valued at the average cost of the material fed to
the
processing plant which is attributable to the source material coming from the
mines, stockpiles or leach pads plus the in-process conversion costs, including
applicable depreciation relating to the process facilities, incurred to that
point in the process.
Finished
metal inventory is gold and silver doré and bullion in saleable form and is
valued at the lower of the previous three month average production cost and
net
realizable value. Average production cost represents the average cost of the
respective in-process inventories incurred prior to the refining process plus
applicable refining costs and associated royalties.
The
allocation of costs to ore in stockpiles, ore on leach pads and in-process
inventories and the determination of NRV involves the use of estimates. There
is
a high degree of judgment in estimating future costs, future production levels,
proven and probable mineral reserve estimates, gold and silver prices, and
the
ultimate estimated recovery for ore on leach pads. There can be no assurance
that actual results will not differ significantly from estimates used in the
determination of the carrying value of inventories.
Mining
and exploration activities are subject to various laws and regulations governing
the protection of the environment. In general, these laws and regulations are
continually changing and the Company has made, and intends to make in the
future, expenditures to comply with such laws and regulations. The Company
records the estimated present value of reclamation liabilities in the period
in
which they are incurred. A corresponding increase to the carrying amount of
the
related asset is recorded and depreciated over the life of the asset. The
liability will be increased each period to reflect the interest element or
accretion reflected in its initial measurement at fair value, and will also
be
adjusted for changes in the estimate of the amount, timing and cost of the
work
to be carried out.
Future
remediation costs for inactive mines are accrued based on management’s best
estimate at the end of each period of the undiscounted cash costs expected
to be
incurred at each site. Changes in estimates are reflected in earnings in the
period an estimate is revised.
Accounting
for reclamation and remediation obligations requires management to make
estimates of the future costs the Company will incur to complete the reclamation
and remediation work required to comply with existing laws and regulations
at
each mining operation. Actual costs incurred may differ from those amounts
estimated. Also, future changes to environmental laws and regulations could
increase the extent of reclamation and remediation work required to be performed
by the Company. Increases in future costs could materially impact the amounts
charged to operations for reclamation and remediation. At December 31, 2006,
the
undiscounted future cost of reclamation and remediation obligations before
inflation was estimated to be $263.8 million. The present value of estimated
future cash outflows for reclamation and remediation obligations was $168.4
million and $175.9 million at December 31, 2006 and 2005,
respectively.
The
Corporation recognizes the future tax benefit related to deferred income
and
resource tax assets and sets up a valuation allowance against any portion
that
it believes will, more likely than not, fail to be realized (see Note
15
to the
consolidated financial statements). Assessing the recoverability of future
income tax assets requires management to make significant estimates of future
taxable income. Estimates of future taxable income are subject to changes
as
discussed under the section “Carrying Value of Operating Mines, Mineral Rights,
Development Properties and Other Assets”. To the extent that future cash flows
and taxable income differ significantly from estimates, the ability of the
Company to realize the net deferred tax assets recorded at the balance sheet
date could be impacted. In addition, future changes in tax laws could limit
the
ability of the Corporation to obtain tax deductions in future periods from
deferred income and resource tax assets.
Please
refer to Note 3
to the
December 31, 2006 consolidated financial statements.
The
operations of Kinross are high-risk due to the nature of mining, exploration,
and development activities. Certain risk factors listed below are related to the
mining industry in general while others are specific to Kinross. Included
in the
risk factors below are details on how Kinross seeks to mitigate these risks
wherever possible. For additional discussion of risk factors please refer
to the
Company’s Annual Information Form which is available on the Company’s
website www.kinross.com and
on www.sedar.com or
is
available upon request from the Company.
The
profitability of any gold mining operation in which Kinross has an interest
will
be significantly affected by changes in the market price of gold. Gold prices
fluctuate on a daily basis and are affected by numerous factors beyond Kinross’
control. The supply and demand for gold, the level of interest rates, the
rate
of inflation, investment decisions by large holders of gold, including
governmental reserves, and stability of exchange rates can all cause significant
fluctuations in gold prices. Such external economic factors are in turn
influenced by changes in international investment patterns and monetary systems
and political developments. The price of gold has fluctuated widely and future
serious price declines could cause continued commercial production to be
impractical. Depending on the price of gold, cash flow from mining operations
may not be sufficient to cover costs of production and capital expenditures.
If,
as a result of a decline in gold prices, revenues from metal sales were to
fall
below operating costs, production may be discontinued.
The
exploration and development of mineral deposits involves significant financial
and other risks over an extended period of time which may not be eliminated
even
with careful evaluation, experience and knowledge. While discovery of a
gold-bearing structures may result in substantial rewards, few properties
explored are ultimately developed into producing mines. Major expenditures
are
required to establish reserves by drilling and to construct mining and
processing facilities at a site. It is impossible to ensure that the current
or
proposed exploration programs on properties in which Kinross has an interest
will result in profitable commercial mining operations.
The
operations of Kinross are subject to the hazards and risks normally incident
to
exploration, development and production of gold and silver, any of which
could
result in damage to life or property, environmental damage and possible legal
liability for such damage. The activities of Kinross may be subject to prolonged
disruptions due to weather conditions depending on the location of operations
in
which it has interests. Hazards, such as unusual or unexpected formations,
rock
bursts, pressures, cave-ins, flooding or other conditions, may be encountered
in
the drilling and removal of material. While Kinross may obtain insurance
against
certain risks, potential claims could exceed policy limits or could be excluded
from coverage. There are also risks against which Kinross cannot or may elect
not to insure. The potential costs which could be associated with any
liabilities not covered by insurance or in excess of insurance coverage or
compliance with applicable laws and regulations may cause substantial delays
and
require significant capital outlays, adversely affecting the future earnings
and
competitive position of Kinross and, potentially, its financial
viability.
Whether
a
gold deposit will be commercially viable depends on a number of factors,
some of
which include the particular attributes of the deposit, such as its size
and
grade, costs and efficiency of the recovery methods that can be employed,
proximity to infrastructure, financing costs and governmental regulations,
including regulations relating to prices, taxes, royalties, infrastructure,
land
use, importing and exporting of gold and environmental protection. The effect
of
these factors cannot be accurately predicted, but the combination of these
factors may result in Kinross not receiving an adequate return on its invested
capital.
Kinross
mitigates the likelihood and potential severity of these mining risks it
encounters in its day-to-day operations through the application of high
operating standards. In addition, Kinross reviews its insurance coverage
at
least annually to ensure the most complete and cost-effective coverage is
obtained.
Kinross’
mining and
processing operations and exploration activities in Canada, the United States,
Russia, Brazil and Chile are subject to various laws and regulations governing
the protection of the environment, exploration, development, production,
exports, taxes, labour standards, occupational health, waste disposal, toxic
substances, mine safety, and other matters. New laws and regulations, amendments
to existing laws and regulations, or more stringent implementation of existing
laws and regulations could have a material adverse impact on Kinross through
increased costs, a reduction in levels of production and/or a delay or
prevention of the development of new mining properties. Compliance with these
laws and regulations requires significant expenditures and increases Kinross’
mine development and operating costs.
Permits
from various governmental authorities are necessary in order to engage in
mining
operations in all jurisdictions in which Kinross operates. Such permits relate
to many aspects of mining operations, including maintenance of air, water
and
soil quality standards. In most jurisdictions, the requisite permits cannot
be
obtained prior to completion of an environmental impact statement and, in
some
cases, public consultation. Further, Kinross may be required to submit for
government approval a reclamation plan, to post financial assurance for the
reclamation costs of the mine site, and to pay for the reclamation of the
mine
site upon the completion of mining activities. Kinross mitigates this risk
by
performing certain reclamation activities concurrent with production.
Mining,
like many other extractive natural resource industries, is subject to potential
risks and liabilities concerning the environmental effects associated with
mineral exploration and production. Environmental liability may result from
mining activities conducted by others prior to Kinross’ ownership of a property.
To the extent Kinross is subject to uninsured environmental liabilities,
the
payment of such liabilities would reduce funds otherwise available for business
activities and could have a material adverse effect on Kinross. Should Kinross
be unable to fully fund the cost of remedying an environmental problem, Kinross
might be required to suspend operations or enter into interim compliance
measures pending completion of the required remedy, which could have a material
adverse effect. Kinross mitigates the likelihood and potential severity of
these
environmental risks it encounters in its day-to-day operations through the
application of high operating standards.
The
reserve and resource figures are estimates, and no assurance can be given
that
the anticipated tonnages and grades will be achieved or that the indicated
level
of recovery will be realized. Market fluctuations in the price of gold may
render the mining of ore reserves uneconomical and require Kinross to take
a
write-down of an asset or to discontinue development or production. Moreover,
short-term operating factors relating to the reserves, such as the need for
orderly development of the ore body or the processing of new or different
ore
grades, may cause a mining operation to be unprofitable in any particular
accounting period.
Proven
and Probable Reserves at Kinross’ mines and development projects were estimated
as of December 31, 2006, based upon a gold price of $475 per ounce of gold.
Prior to 2002, gold prices were significantly below these levels. Prolonged
declines in the market price of gold may render reserves containing relatively
lower grades of gold mineralization uneconomic to exploit and could materially
reduce Kinross’ reserves. Should such reductions occur, material write-downs of
Kinross’ investment in mining properties or the discontinuation of development
or production might be required, and there could be material delays in the
development of new projects and reduced income and cash flow.
There
are
numerous uncertainties inherent in estimating quantities of proven and probable
gold reserves. The estimates in this document are based on various assumptions
relating to gold prices and exchange rates during the expected life of
production and the results of additional planned development work. Actual
future
production rates and amounts, revenues, taxes, operating expenses, environmental
and regulatory compliance expenditures, development expenditures and recovery
rates may vary substantially from those assumed in the estimates. Any
significant change in these assumptions, including changes that result from
variances between projected and actual results, could result in a material
downward or upward revision of current estimates.
Kinross
has mining operations and carries out exploration and development activities
outside of North America in Russia, Brazil and Chile. There is no assurance
that
future political and economic conditions in these countries will not result
in
those countries’ governments adopting different policies respecting foreign
development and ownership of mineral resources. Any such changes in policy
may
result in changes in laws affecting ownership of assets, taxation, rates
of
exchange, gold sales, environmental protection, labour relations, repatriation
of income, and return of capital. Changes in any of these areas may affect
both
the ability of Kinross to undertake exploration and development activities
in
respect of future properties in the manner currently contemplated, as well
as
its ability to continue to explore, develop, and operate those properties
for
which it has obtained exploration, development, and operating rights to date.
The possibility that a future government of these countries may adopt
substantially different policies, which might extend to expropriation of
assets,
cannot be ruled out.
Kinross
is subject to the considerations and risks of operating in Russia. The economy
of the Russian Federation continues to display characteristics of an emerging
market. These characteristics include, but are not limited to, the existence
of
a currency that is not freely convertible outside of the country, extensive
currency controls and high inflation. The prospects for future economic
stability in the Russian Federation are largely dependent upon the effectiveness
of economic measures undertaken by the government, together with legal,
regulatory and political developments. Russian laws, licenses and permits
have
been in a state of change and new laws may be given a retroactive effect.
It is
also not unusual in the context of dispute resolution in Russia for parties
to
use the uncertainty in the Russian legal environment as leverage in business
negotiations. In addition, Russian tax legislation is subject to varying
interpretations and constant change. Furthermore, the interpretation of tax
legislation by tax authorities as applied to the transactions and activities
of
Kinross’ Russian operations may not coincide with that of management. As a
result, tax authorities may challenge transactions and Kinross’ Russian
operations may be assessed additional taxes, penalties and interest, which
could
be significant. The periods remain open to review by the tax authorities
for
three years. Kinross mitigates this risk through ongoing communications with
the
Russian regulators.
In
addition, the economies of Russia, Brazil and Chile differ significantly
from
the economies of Canada and the United States. Growth rates, inflation rates
and
interest rates of developing nations have been and are expected to be more
volatile than those of western industrial countries.
The
operations of Kinross require licenses and permits from various governmental
authorities. However, such licenses and permits are subject to change in
various
circumstances. There can be no guarantee that Kinross will be able to obtain
or
maintain all necessary licenses and permits that may be required to explore
and
develop its properties, commence construction or operation of mining facilities
and properties under exploration or development or to maintain continued
operations that economically justify the cost. Kinross endeavors to be in
compliance with these regulations at all times.
The
validity of mining claims which constitute most of Kinross’ property holdings in
Canada, the United States, Brazil, Chile, and Russia may, in certain cases,
be
uncertain and are subject to being contested. Kinross’ titles may be defective,
particularly related to undeveloped properties.
Certain
of Kinross’ United States mineral rights consist of unpatented lode mining
claims. Unpatented mining claims may be located on United States federal
public
lands open to appropriation, and may be either lode claims or placer claims
depending upon the nature of the deposit within the claim. In addition,
unpatented mill site claims, which may be used for processing operations
or
other activities ancillary to mining operations, may be located on federal
public lands that are non-mineral in character. Unpatented mining claims
and
mill sites are unique property interests, and are generally considered to
be
subject to greater title risk than other real property interests because
the
validity of unpatented mining claims is often uncertain and is always subject
to
challenges of third parties or contests by the federal government of the
United
States. The validity of an unpatented mining claim, in terms of both its
location and its maintenance, is dependent on strict compliance with a complex
body of United States federal and state statutory and decisional law. In
addition, there are few public records that definitively control the issues
of
validity and ownership of unpatented mining claims. The General Mining Law
of
the United States, which governs mining claims and related activities on
United
States federal public lands, includes provisions for obtaining a patent,
which
is essentially equivalent to fee title, for an unpatented mining claim upon
compliance with certain statutory requirements, including the discovery of
a
valuable mineral deposit.
The
mineral exploration and mining business is competitive in all of its phases.
Kinross competes with numerous other companies and individuals, including
competitors with greater financial, technical, and other resources than Kinross,
in the search for and the acquisition of attractive mineral properties. The
ability of Kinross to acquire properties in the future will depend not only
on
its ability to develop its present properties, but also on its ability to
select
and acquire suitable producing properties or prospects for mineral exploration.
There is no assurance that Kinross will continue to be able to compete
successfully with its competitors in acquiring such properties or
prospects.
Certain
of the operations in which Kinross has an interest are operated through joint
ventures with other mining companies. Any failure of such other companies
to
meet their obligations to Kinross or to third parties could have a material
adverse effect on the joint venture. In addition, Kinross may be unable to
exert
control over strategic decisions made in respect of such
properties.
Fluctuations
in interest rates can affect Kinross’ results of operations and cash flow. The
Company’s credit facilities are subject to variable interest rates.
To
determine its market risk sensitivities, Kinross uses an internally generated
financial forecast model that is sensitized to various gold prices, currency
exchange rates, interest rates and energy prices. The variable with the greatest
impact is the gold price, and Kinross prepares a base case scenario and then
sensitizes it by a 10% increase and decrease in the gold price. For 2007,
sensitivity to a 10% change in the gold price is $73.1 million on pre-tax
earnings. Kinross’ financial forecast covers the projected life of its mines. In
each year, gold is produced according to the mine plan. Costs are estimated
based on current production costs plus the impact of any major changes to
the
operation during its life. Quantitative disclosure of market risks is disclosed
below.
Kinross’
net earnings can vary significantly with fluctuations in the market price
of
gold and silver. At various times, in response to market conditions, Kinross
has
entered into gold forward sales contracts, spot deferred forward sales
contracts, purchased put options and written call options for some portion
of
expected future production in an attempt to mitigate the risk of adverse
price
fluctuations. Kinross is not subject to margin requirements on any of its
hedging lines. Kinross has made the decision not to continue with a
comprehensive gold hedging program. On occasion, however, the Company may
enter
into forward sales contracts or similar instruments if hedges are acquired
on a
business acquisition, or, on a limited basis when deemed advantageous
by management. As at December 31, 2006, Kinross had no forward sales contracts,
spot deferred forward sales contracts, purchased put options or written
call options outstanding.
Kinross
conducts the majority of its operations in the United States, Canada, Brazil,
Chile and Russia. Currency fluctuations affect the cash flow that Kinross
realizes from its operations as gold is sold in U.S. dollars, while production
costs are incurred in U.S. and Canadian dollars, Brazilian reais, Chilean
pesos
and Russian rubles. Kinross’ results are positively affected when the U.S.
dollar strengthens against these foreign currencies and adversely affected
when
the U.S. dollar weakens against these foreign currencies. Where possible,
Kinross’ cash and cash equivalent balances are primarily held in U.S. dollars.
The following analyses do not include the effects of Bema.
Kinross
has joint venture interests in the Refugio and La Coipa mines, both located
in
Chile. Kinross estimates a 10% change from a budgeted exchange rate of 525
pesos
to one U.S. dollar could result in an approximate $3.6 million change in
Kinross’
operating earnings. In addition, a 10% change in the exchange rate could
result
in an approximate $.02 million change in Kinross’ capital
expenditures.
Kinross
is a partner in the Crixás mine and, as of December 31, 2004, the 100% owner of
the Paracatu mine, both located in Brazil. Kinross estimates a 10% change
from a
budgeted exchange rate of 2.25 Brazilian reais to one U.S. dollar could result
in an approximate $5.5 million change in Kinross’ operating earnings. In
addition, a 10% change in the exchange rate could result in an approximate
$14.3
million change in Kinross’ capital expenditures.
Kinross
is a partner in the Musselwhite and Porcupine joint ventures. As a result
of
these ownership interests, plus expenses incurred by the Canadian corporate
office, Kinross has Canadian dollar denominated operating, exploration, and
administrative expenses. The Company estimates a 10% change from a budgeted
exchange rate of CDN $1.12 per U.S. dollar could result in an approximate
$153
million change in Kinross’ operating
earnings. In addition, a 10% change in the exchange rate could result in
an
approximate $3.5 million change in Kinross’ capital and reclamation
expenditures.
Credit
risk relates to accounts receivable and derivative contracts and arises from
the
possibility that a counterparty to an instrument fails to perform. The Company
only transacts with highly-rated counterparties and a limit on contingent
exposure has been established for each counterparty based on the counterparty’s
credit rating. As at December 31, 2006, the Company’s gross credit exposure was
$nil and at December 31, 2005, the gross credit exposure was $0.1
million.
Cautionary
Statement on Forward-Looking Information
All statements, other than statements of historical fact, contained or incorporated by reference in this MD&A, including any information as to the future financial or operating performance of Kinross, constitute “forward-looking statements” within the meaning of certain securities laws, including the “safe harbour” provisions of the Securities Act (Ontario) and the United States Private Securities Litigation Reform Act of 1995 and are based on expectations, estimates and projections as of the date of this MD&A. Forward-looking statements include, without limitation, statements with respect to the future price of gold and silver, the estimation of mineral reserves and resources, the realization of mineral reserve and resource estimates, the timing and amount of estimated future production, costs of production, expected capital expenditures, costs and timing of the development of new deposits, success of exploration activities, permitting time lines, currency fluctuations, requirements for additional capital, government regulation of mining operations, environmental risks, unanticipated reclamation expenses, title disputes or claims and limitations on insurance coverage. The words “plans,” “expects,” or “does not expect,” “is expected,” “budget,” “scheduled,” “estimates,” “forecasts,” “intends,” “anticipates,” or “does not anticipate,” or “believes,” or variations of such words and phrases or statements that certain actions, events or results “may,” “could,” “would,” “might,” or “will be taken,” “occur” or “be achieved” and similar expressions identify forward-looking statements. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by Kinross as of the date of such statements, are inherently subject to significant business, economic and competitive uncertainties and contingencies. The estimates and assumptions of Kinross, which may prove to be incorrect, include, but are not limited to, the various assumptions set forth herein and in our Annual Information Form as well as: (1) there being no significant disruptions affecting operations, whether due to labour disruptions, supply disruptions, damage to equipment or otherwise; (2) permitting, development and expansion at Paracatu proceeding on a basis consistent with our current expectations; (3) permitting and development at the Kettle River Buckhorn project proceeding on a basis consistent with Kinross’ current expectations; (4) that a long-term lease replacing the short term lease for the Kupol lands and construction permits required from time to time will be obtained from the Russian authorities on a basis consistent with our current expectations, (5) that the exchange rate between the Canadian dollar, Brazilian real, Chilean peso, Russian Ruble and the U.S. dollar will be approximately consistent with current levels; (6) certain price assumptions for gold and silver; (7) prices for natural gas, fuel oil, electricity and other key supplies remaining consistent with current levels; (8) production forecasts meet expectations; and (9) the accuracy of our current mineral reserve and mineral resource estimates. Known and unknown factors could cause actual results to differ materially from those projected in the forward-looking statements. Such factors include, but are not limited to: fluctuations in the currency markets; fluctuations in the spot and forward price of gold or certain other commodities (such as diesel fuel and electricity); changes in interest rates or gold lease rates that could impact the mark-to-market value of outstanding derivative instruments and ongoing payments/receipts under any interest rate swaps and variable rate debt obligations; risks arising from holding derivative instruments (such as credit risk, market liquidity risk and mark-to-market risk); changes in national and local government legislation, taxation, controls, regulations and political or economic developments in Canada, the United States, Chile, Brazil, Russia or other countries in which we do or may carry on business in the future; business opportunities that may be presented to, or pursued by, us; our ability to successfully integrate acquisitions, including the acquisition of Bema Gold Corporation; operating or technical difficulties in connection with mining or development activities; employee relations; the speculative nature of gold exploration and development, including the risks of obtaining necessary licenses and permits; diminishing quantities or grades of reserves; adverse changes in our credit rating; and contests over title to properties, particularly title to undeveloped properties. In addition, there are risks and hazards associated with the business of gold exploration, development and mining, including environmental hazards, industrial accidents, unusual or unexpected formations, pressures, cave-ins, flooding and gold bullion losses (and the risk of inadequate insurance, or inability to obtain insurance, to cover these risks). Many of these uncertainties and contingencies can affect Kinross’ actual results and could cause actual results to differ materially from those expressed or implied in any forward-looking statements made by, or on behalf of, Kinross. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. All of the forward-looking statements made in this MD&A are qualified by these cautionary statements, those in the “Risk Analysis” section hereof, and our most recent Annual Information Form and other filings with the securities regulators of Canada and the United States. These factors are not intended to represent a complete list of the factors that could affect Kinross. Kinross disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, or to explain any material difference between subsequent actual events and such forward-looking statements, except to the extent required by applicable law.
The
technical information about the Company’s material mineral properties contained
in this MD&A has been prepared under the supervision of Mr. Rob Henderson an
officer of the Company who is a “qualified person” within the meaning of
National Instrument 43-101.