We maintain our Neutral recommendation on Kinross Gold Corporation (KGC), primarily involved in the exploration and operation of gold mines.
Kinross reported record adjusted earnings per share of $0.20 for the second quarter of 2011, outpacing the Zacks Consensus Estimate of $0.16. Strong performances at all operations, notably Kupol, Maricunga, and Fort Knox, amid continuing strong gold prices drove the result.
The company has cleared its hedge book and stands fully leveraged to spot gold prices. We expect Kinross’ exploration projects and acquisitions to boost its top line in the long term. Production is expected to grow to 4.5–4.9 million ounces by 2015.
Kinross is making significant and steady progress in advancing the projects that give the company the best growth profile among senior gold producers. However, we are concerned about Kinross’ earnings volatility and lower gold reserve base. Higher mining and administrative costs should further constrain margins in the near term.
Kinross is extending its Tasiast feasibility study to analyze and incorporate 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.
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.
However, we remain cautious about Kinross’ near-term performance due to rising cash costs and falling production levels at some of its existing operations. The increased costs were attributable to the use of poor ore grades, resulting from declining production levels. Kinross is experiencing production slowdowns at the Maricunga Arequipa operations in Chile. Restricted supply of ores and production outages at the Verde pits are hurting production and increasing costs.
Kinross’ current below-average reserve base is a concern, as it will compel the company to make acquisitions or search for exploration projects in a bid to replace reserves. The company has already made various acquisitions to increase its exploration activities and boost reserves. Although these acquisitions are likely to help the company’s future growth, it remains vulnerable to integration risk.
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.
BARRICK GOLD CP (ABX): Free Stock Analysis Report
KINROSS GOLD (KGC): Free Stock Analysis Report
NEWMONT MINING (NEM): Free Stock Analysis Report
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