Kinross Gold Corporation recently announced that its wholly-owned subsidiary, Kinross Brasil Mineraçao, has agreed to acquire two hydroelectric power plants in Brazil from a subsidiary of Gerdau SA for $257 million. The two plants are expected to secure a long-term supply of power for Kinross’ Paracatu mine, resulting in lower production costs over the life of mine. The strategic rationale for the acquisition were given as follows:
- Lower production costs – expected to lower production cost of sales by approximately $80 per ounce over the life of mine.
- Attractive returns – expected to generate a levered internal rate of return of approximately 15% – 30%, depending on the final terms of a planned debt financing.
- De-risked supply chain – expected to secure approximately 70% of Paracatu’s anticipated power needs for the life of mine at a low, fixed cost and reduces market exposure for a key input in an environment where the Company expects input costs to rise.
- Strategic investment in core asset – expected to further strengthen and enhance Paracatu, a large, long-life operation that is a cornerstone asset in Kinross’ portfolio.
Kinross has agreed to acquire the Barra dos Coqueiros (BCQ) and Caçu hydro power plants located on the Claro River in the neighbouring state of Goias, approximately 660 km west of Paracatu. Additional infrastructure is not required for BCQ and Caçu to provide power to Paracatu due to Brazil’s well-developed infrastructure and existing market mechanisms for the transmission and utilisation of power.
The acquisition is expected to allow Kinross to significantly lower operating costs at Paracatu by eliminating approximately 70% of future power purchases. In addition, Brazilian legislation provides reduced power tariffs to companies that generate their own power supply. Due to reduced tariffs, the Company expects savings of approximately $15 per ounce, which is included as part of the total expected savings of approximately $80 per ounce of production cost of sales over the life of mine. The plants are also expected to have relatively low operating and maintenance costs, as is typical with hydroelectric power plants.
Both plants have been in operation since 2010 and have a total installed capacity of 155 MW (BCQ – 90 MW; Caçu – 65 MW), and are expected to supply approximately 70% of Paracatu’s future power needs. The remaining 30% of Paracatu’s power demand is expected to continue to be fulfilled by third party suppliers under fixed term power purchase agreements. The operating concessions for both plants expire in 2037, five years after Paracatu’s mine life is expected to end.
To help facilitate a transition of ownership and management, Kinross expects to assume the existing BCQ and Caçu operations and maintenance contract. Kinross also self-generates power at Tasiast, Kupol and Dvoinoye. The acquisition is expected to close in approximately three to six months, subject to regulatory approvals and the satisfaction of other conditions precedent.