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Kinross sees lower costs at Paracatu with acquisition of 2 hydro power plants

Kinross Gold Corp. agreed to acquire two hydroelectric power plants in Brazil from a subsidiary of Gerdau SA for US$257 million, according to Feb. 14 statements.

The two plants, Barra dos Coqueiros and Caçu, will help secure a long-term power supply for Kinross' Paracatu gold mine in Minas Gerais, Brazil.

Kinross plans to fund the acquisition through a debt financing of about US$200 million, with the balance from existing liquidity, which totaled about US$2.6 billion at the end of 2017.

The plants will cover about 70% of Paracatu's expected power needs for the life of the mine, while the remaining 30% will be covered by third-party suppliers under fixed-term power purchase agreements.

"Paracatu is also the largest power consumer in our portfolio. With power cost projected to rise, we have been exploring options to reduce the cost of this key input as part of our ongoing continuous improvement efforts," Kinross President and CEO Paul Rollinson said on a Feb. 15 earnings call.

In addition to Paracatu's power needs, the transaction is expected to lower production cost of sales by about US$80/oz over the life of the mine and to generate a levered internal rate of return of about 15% to 30%, depending on the final terms of the planned debt financing.

According to Kinross, the operating concessions for both plants expire in 2037, five years after Paracatu's mine life is expected to end.

The acquisition is expected to close in three to six months, subject to regulatory approvals and the satisfaction of other conditions.

Kinross also booked an after-tax impairment charge of US$167 million at Paracatu, which was mainly the result of changes to the fiscal regime in Brazil.

In 2018, the company expects to produce 2.5 million gold equivalent ounces at a production cost of sales per gold equivalent ounce of US$730.

The production guidance was lower compared to 2017 and considered the potential for a temporary curtailment of mill operations at Paracatu due to the possibility of seasonal rainfall shortages in the area.

Paracatu produced 359,959 gold equivalent ounces in 2017.

Rollinson noted that the acquired plants are about 660 kilometers west of Paracatu on the Claro River in the neighboring state of Goias, which typically experiences more rainfall and less volatility.

Kinross swung to net profit of US$217.6 million in the fourth quarter of 2017 from a year-ago loss of US$116.5 million.