Gold miner Kinross Gold Corporation (KGC) reported record adjusted net income of $226.5 million or $0.20 per share in the second quarter of 2011, above last year’s $111.4 million or $0.16 per share, outpacing the Zacks Consensus Estimate of $0.16.
GAAP net earnings were $247.4 million or $0.22 per share in the second quarter of 2011 compared with $110.4 million, or $0.16 per share in the prior-year quarter.
Quarterly revenues leaped 42% to $987.8 million, driven by strong performance at all operations, notably Kupol, Maricunga, and Fort Knox amid continuing strong gold prices.
Gold production increased 26% year over year to 676,245 ounces in the second quarter of 2011 with an average realized gold price of $1,449 per ounce sold compared with $1,158 per ounce sold in the prior-year quarter. The increase was mainly attributable to the addition of production from the Kupol and the West Africa operations. Production cost per gold equivalent ounce was $576 versus $494 in the prior-year quarter. Production costs per ounce increased mainly due to a rise in labor costs, diesel and power costs, and royalties.
Kinross margin per ounce sold was a record $873 during the quarter, up 31% year over year.
Financial Review
In second-quarter 2011, adjusted operating cash flow was $413.1 million, up 46% year over year. Adjusted operating cash flow per share was $0.36 during the quarter versus $0.40 in the prior-year quarter.
Cash and cash equivalents was $1,080.3 million as of June 30, 2011 compared with $1,466.6 million as of December 31, 2010.
Capital expenditures were $415.6 million during the quarter compared with $120.5 million for the same period last year.
The board of directors declared a dividend of $0.06 per share payable on September 30, 2011 to shareholders of record as of the close of business on September 23, 2011, an increase of 20% from the previous dividend paid on March 31, 2011.
Company Update
Drilling at Tasiast has upgraded 6.4 million gold ounces of inferred resource to measured and indicated mineral resource categories, and added approximately 2.9 million gold ounces to the total mineral resource inventory. Recent drill results from within the West Branch and Piment zones also indicate significant new opportunities beyond those incorporated in the initial project scoping study, including potential for supplemental heap leach production and a potential new zone of mineralization that, if fully delineated, may result in an expansion to the proposed pit.
The company is extending its Tasiast feasibility study to analyze and incorporate this new drill data into the project scope, while exploring infrastructure development options to reduce project capital costs, which have been subject to industry-wide cost pressures. The feasibility study extension is not expected to impact the project’s development schedule, which remains as previously disclosed, with construction expected to commence on mid-2012 and production start-up targeted for early 2014.
Kinross’ other growth projects remain on track. At Fruta del Norte (FDN), the underground exploration decline is advancing on schedule and negotiations with the Ecuadorian government for an exploitation contract continues. At Lobo-Marte, approximately 70% of the 20,000 metre drilling is now complete and the feasibility study remains on schedule. At Dvoinoye, development of the exploration decline and the construction of surface facilities are advancing as planned. At Paracatu, the third ball mill was successfully commissioned and construction of the fourth ball mill is proceeding as planned.
Recent exploration results have been highly encouraging, including positive results at Pompeya and Purén West at La Coipa; continued positive results at Valy (Lobo-Marte); and indications of deep mineralization beneath the Obra pit at Chirano.
Outlook
Kinross remains on track to produce 2.6 – 2.7 million attributable gold equivalent ounces in 2011. The average cost of sales per gold equivalent ounce is expected to be toward the lower end of the previously-stated guidance range of $565 – $610.
Kinross expects its capital expenditures for the full year to be within the previously stated guidance of $1.5 billion. The company also expects to make approximately $190 million in advance payments to suppliers, compared with the previous guidance of $130 million, primarily as a result of accelerated purchases for the Tasiast expansion project.
The company plans to increase its total aggregate exploration expenditure by approximately $10 to $20 million for the remainder of 2011, above the previously stated forecast of $175 million in total expensed and capitalized 2011 exploration expenditures.
By 2015, Kinross expects production to grow to 4.5-4.9 million ounces, as new projects start up in 2013 and 2014. With new studies completed at Tasiast, FDN, Lobo-Marte, and Dvoinoye, Kinross is making significant and steady progress in advancing the projects that give the company the best growth profile among senior gold producers.
Zacks Recommendation
Kinross Gold Corporation, like other gold producers, Barrick Gold Corporation (ABX) and Newmont Gold Mining (NEM), benefits from rising gold prices. We expect Kinross’ exploration projects and acquisitions to boost its top line going forward.
Currently, Kinross Gold has a short-term (1 to 3 months) Zacks #3 Rank (Hold) and a long-term Neutral recommendation.
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