Kinross Gold Corporation
/ (KGC-NYSE)We are retaining our Neutral recommendation on Kinross Gold. The company posted a wider loss on a reported basis in the fourth quarter of 2014, hurt by a hefty impairment charge. Adjusted lossmissed the Zacks Consensus Estimate. Revenues fell on lower gold pricing, but beat expectations. The company saw higher gold production in the quarter. However, its gold production guidance for 2015 reflects a year over year decline. Kinrossis making steady progress inadvancing the projects that give ita strong growth profile among leading gold producers. It also remains focused on managing costs and improving cash flows. However, macroeconomic issues could weaken the demand for gold.In addition, the gold price environment remains challenging. Its falling gold and silver reserve base is another concern.
/ Equity Research / KGC | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 01/05/2001
Current Price (02/20/15) / $2.71
Target Price / $2.75
SUMMARY
/ Equity Research / KGC | Page 1SUMMARY DATA
52-Week High / $5.2852-Week Low / $2.00
One-Year Return (%) / -48.28
Beta / 0.31
Average Daily Volume (sh) / 10,156,474
Shares Outstanding (mil) / 1,145
Market Capitalization ($mil) / $3,103
Short Interest Ratio (days) / 0.82
Institutional Ownership (%) / 60
Insider Ownership (%) / 1
Annual Cash Dividend / $0.00
Dividend Yield (%) / 0.00
5-Yr. Historical Growth Rates
Sales (%) / 6.4
Earnings Per Share (%) / -35.1
Dividend (%) / 20.4
P/E using TTM EPS / 24.6
P/E using 2015 Estimate / 38.7
P/E using 2016 Estimate / 24.6
Zacks Rank*: Short Term
1–3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / High,
Type of Stock / Mid-Value
Industry / Mining -Gold
Zacks Industry Rank * / 75 out of 267
OVERVIEW
Based in Ontario, Canada, Kinross Gold Corporation (KGC) is primarily involved in the exploration and operation of gold mines. It ranks among the top 10 gold mining companies in the world with 2014 production of 2.71 million gold equivalent ounces. The company holds major assets in Canada, the U.S., and Russia, and is primarily involved in the exploration and operation of gold mines. It also produces and sells silver.
The company has facilities in the U.S., Canada, Brazil, Chile, Russia, and Africa, and caters to a diverse clientele in Brazil, Chile, Canada, and Greece. It runs several mines, including Fort Knox, Round Mountain and Kettle River-Buckhorn in the U.S.; Dvoinoye and Kupol in Russia; Maricunga in Chile; and Paracatu in Brazil. The company’s development projects include La Coipa in Chile and Tasiast in Mauritania. As of December 31, 2014, the company’s proven and probable mineral reserves were 34.4 million ounces of gold, 44 million ounces of silver and 1.4 billion pounds of copper.
REASONS TO BUY
Kinross has a world class gold deposit under its jurisdiction in the form of Tasiast, which is its primary focus to attain growth targets. As Tasiast is an already operating mine, it has a basic infrastructure and a well-documented mineral resource. Kinross, in March 2014, released encouraging results from the full feasibility study on the 38,000 ton per day (tpd) mill expansion which showed opportunities for significant cash flows and production at lower costs. The expansion has been designed to deploy the existing 8,000 tpd mill capacity at Tasiast in addition to a new 30,000 tpd mill. Average annual production from expanded Tasiast operation has been projected at around 850,000 ounces at cash cost of roughly $500 per ounce for the first 5 years starting 2018.Estimated mineral reserves from this mine are expected to increase almost 50% to 9.6 million ounces in the same time period. Moreover, the mine is expected to generate free cash flow of $2.2 billion during this period. However, Kinross recently revealed that it will not move ahead with the Tasiast expansion project as the current gold pricing environment may not allow it to fund the expansion. However, the company is confident that Tasiast mill expansion has the ability to contribute to its growth in the future. It will continue to evaluate market conditions with a view for a potential expansion. The company will also remain focused on reducing operating costs at the mine.
Kinross’ second most important project is also pretty much on track. Construction of the Dvoinoye mine in Russia’s Chukotka Region completed on time and within budget and commercial production started in Oct 2013.First ore from development activities was delivered to the Kupol mine during the second-quarter 2013.Study confirmed that the mine would potentially produce at a rate of around 1,000 tons of ore per day. Kinross expects the mine to produce 235,000 to 300,000 gold equivalent ounces a year in its first three years of full production, which will be incremental to gold produced from the Kupol underground mine. Dvoinoye is the fourth mine that Kinross has operated in Russia. The low-cost mine reflects the company’s strong focus on maximizing margins and cash flow at its existing operations as well as growth projects. The mine is expected to have a life of seven years.
Kinross has decided on its development priorities and will incur capital expenditure accordingly. Moreover, Kinross is not going over the top to develop its resources and will make capital spends out of the capital available with it. It has its priorities clearly defined and is focused on maintaining its investment grade rating and also return cash to shareholders. As such, Kinross reduced its capital expenditure in 2014 to $631.8 million from $1.26 billion in 2013. Capital spending in 2015 is expected to be around $725 million. The company has also identified savings opportunities on the general and administrative costs front. The integration of its North and South American regions into a single Americas region has resulted in meaningful overhead cost reduction opportunities.
Kinross, in June 2012, completed the sale of its 50% interest in Brazil's Crixas gold mine to AngloGold Ashanti Ltd. (AU) in an all cash deal worth $220 million. The divestment is in line with the company’s philosophy of focusing on its core assets in a bid to improve its production profile by turning its attention towards more important assets.The sale is also in conjunction with Kinross’ strategy of optimizing its capital expenditure program. It is focused on spending cash on development moves only out of its available capital. Hence, the proceeds from the transaction will help Kinross in developing its primary growth projects.
REASONS TO SELL
A sluggish global economy, especially in emerging markets like India, could weaken the demand for gold. India, which absorbs about 50% of the world’s production has seen gold consumption slow down. A strong dollar, weakness in the country’s currency and government’s move to cut importsto control the current account deficit could impede the Indian gold market. The Indian government has imposed import restrictions and increased the taxes on gold imports, which is affecting gold sales in the country. The prevailing weak gold price environment represents another concern. Average realized gold prices fell roughly 5% year over year in the most recent quarter. Kinross has suspended its semi-annual dividend considering weak gold pricing and its negative impact on its cash flows.
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’s proven and probable gold reserve fell to 34.4 million ounces in 2014 from 42.8 million in 2013. Also, silver reserve dropped to 44 million ouncesin 2014 from roughly 44.7 million a year ago. 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.
The decision to stop further development of Fruta del Norte (FDN) project in Ecuador represents a setback for the company. Kinross had been in talks with the Ecuadorian government regarding the project. However, Kinross decided to halt the FDN project after the government of Ecuador and the company failed to agree on certain key economic and legal terms.While an extension of the economic evaluation phase of the project for up to 18 months or suspension the commencement of the exploitation phase was permissible under the Ecuadorian law, the government did not consented to such extension or suspension. Additionally, the government did not support Kinross seeking a potential new partner or buyer for the project. The discontinuation of the FDN project will hinder the growth profile of Kinross and will further complicate its reserve position.
We also remain cautious about the company’s production costs given the industry-wide cost pressures. Lower grades across most of the company’s mines and higher maintenance costs may contribute to higher costs.The company’s guidance for production and all-in sustaining costs for 2015 reflects year over year increase.
RECENT NEWS
Kinross Gold Posts Loss in Q4, Beats on Revenues–February10, 2015
Kinross incurred a net loss of $1,473.5 million (or $1.29 per share) on a reported basis in the fourth quarter of 2014, significantly wider than a net loss of $740 million (or $0.65 a share) recorded in the year-ago quarter.
The loss in the reported quarter resulted from $932.2 million of after-tax non-cash impairment charge related to property, plant and equipment and an inventory charge of $167.6 million. The year-ago quarter’s results were dragged down by impairment charges of $544.8 million.
Adjusted (excluding one-time items) loss was a $0.01 per share in the fourth quarter compared with adjusted loss of $0.02 recorded in the year-ago quarter. The results missed the Zacks Consensus Estimate of earnings of $0.01. The bottom line was hit by lower gold prices.
Revenues decreased roughly 9.8% year over year to $791.3 million in the reported quarter due to untimely gold shipments and reduced average realized gold price. However, revenues came ahead of the Zacks Consensus Estimate of $698 million.
For full-year 2014, adjusted earnings were $0.11 per share, down roughly 61% from earnings of $0.28 per share recorded in 2013. The results missed the Zacks Consensus Estimate of $0.14. Reported net loss totaled $1,400 million or $1.22 per share versus a loss of $3,012.6 million or $2.64 per share in 2013.
For full-year 2014, revenues decreased 8.3% to $3,466.3 million from $3,779.5 million in 2013, but were ahead of the Zacks Consensus Estimate of $3,456 million.
Operational Performance
Attributable gold production was 672,051 equivalent ounces from continuing operations for the quarter, up around 4% year over year, driven by higher production at the Kupol segment and partly offset by the suspension of mining at La Coipa. Average realized gold price was $1,201 per ounce, down 5.3% from the year-ago quarter.
Production cost per gold equivalent ounce decreased to $714 in the quarter from $765 in the prior-year quarter primarily as a result of the costs incurred at Paracatu, Maricunga, and Tasiast. Margin per gold equivalent ounce sold was $487 in the fourth quarter, down 3.2% from the year-ago quarter.
Financial Review
Adjusted operating cash flow was $197.6 million, down 11.3% from $222.8 million in the prior-year quarter. Cash and cash equivalents were $983.5 million as of Dec 31, 2014, up roughly 34% year over year. Total long-term debt declined roughly 3% year over year to $1,998.1 million.
Capital expenditures were $189.4 million for the reported quarter versus $331.1 million in the comparable period last year. The decrease was due to lower spending at Tasiast and Chirano.
Growth Projects
Kinross, after a comprehensive study, has decided not to move ahead with the Tasiast expansion project. The present gold price environment does not offer the company enough confidence to maintain a strong balance sheet and fund the expansion.
Kinross is continuing with the pre-feasibility study (PFS) of the La Coipa project that began in second quarter of 2014 and is on track to be completed by third quarter of 2015.
Outlook
For 2015, Kinross expects to produce roughly 2.4-2.6 million gold equivalent ounces from its current operations. This outlook is lower than full-year 2014 production of 2.71 million owing to expected lower grades at Chirano, Kettle River-Buckhorn and Dvoinoye due to mine sequencing, and reduced production from the Tasiast dump leach. The production guidance assumes power rationing in Ghana and possibilities of power rationing in Brazil, which may affect operations in both countries.
Production in the first quarter of 2015 is anticipated to be lower year-over-year adversely affecting production cost of sales due to mine plan sequencing and seasonal impact on the heap leach at Fort Knox.
The company expects production cost of sales of $720-$780 per gold equivalent ounce in 2015 due to higher expected costs in West Africa. Kinross also anticipates its all-in sustaining cost for 2015 to be $1,000-$1,100 per gold equivalent ounce.
Kinross Gold Tops Q3 Earnings & Revenue Estimates–November5, 2014
Kinross posted adjusted earnings of $70.1 million or $0.06 per share in the third quarter of 2014, up nearly 29% from adjusted earnings of $54.4 million or $0.05 per share in the year-ago quarter, aided by an increase in gold sales. Earnings per share surpassed the Zacks Consensus Estimate of $0.03.
On a reported basis, Kinross posted net loss of $4.3 million, or a breakeven in the quarter, compared to net earnings of $46.9 million, or $0.04 per share posted in the prior-year quarter. Net loss in the third quarter of 2014 resulted from higher delayed non-cash income tax expense in Chile, partly offset by higher revenues.
Revenues increased roughly 8% year over year to $945.7 million in the reported quarter due to higher gold equivalent ounces sold from Russia. Sales came ahead of the Zacks Consensus Estimate of $840 million.
Operational Performance
Gold production was 693,818 equivalent ounces for the quarter, up around 2% year over year, mainly due to a rise in production at Maricunga, backed by processing of higher grade ore from the Dvoinoye mine, offset by the suspension of mining operations at La Coipa in Oct 2013. Average realized gold price was $1,268 per ounce, down 4.7% from the year-ago quarter.
Production cost per gold equivalent ounces fell 5.7% to $698 in the third quarter from $740 in the prior-year quarter due to sales of lower-cost gold ounces from Russia and cost-reduction measures taken by the company. All-in sustaining cost per gold equivalent ounces sold decreased 15% to $919 in the quarter from $1,082 in the year-ago quarter, mainly due to the decline in sustaining capital and exploration and business development costs, backed by higher sales of gold equivalent ounces.
Margin per gold equivalent ounce sold was $570 in the third quarter, down 3.6% from the year-ago quarter.
Financial Review
Adjusted operating cash flow was $312 million, up 21.7% from $256.4 million in the prior-year quarter. Cash and cash equivalents came in at $835.9 million as of Sep 30, 2014, down 10.3% year over year. Total long-term debt declined 3% year over year to $1,997.1 million.
Capital expenditures fell to $153.5 million for the reported quarter from $300.8 million in the comparable period last year. The decrease was due to lower spending at Tasiast and Fort Knox.
Growth Projects
Kinross, in Mar 2014, announced the Tasiast expansion feasibility study results. The study, which is based on an optimal mill size of 38,000 t/d, produced promising results, indicating Kinross’ potential to generate significant additional cash flow per share and production at overall lower costs. The optimization of the project’s construction scope was mostly completed in the third quarter with no material changes. The project is under progress for securing financing. The company is expected to make a decision on the Tasiast mill expansion in 2015.
Kinross, on Oct 21, 2014, announced that it will ink an agreement with Fortress Minerals Corp. to divest all of its interests in Aurelian Resources Inc. and the FDN project in Ecuador for $240 million in cash and shares.
Kinross expects to receive of $100–$190 million in cash depending on the net proceeds from Fortress' announced equity financing. The deal is anticipated to be completed by mid-Dec 2014, subject to Fortress’ shareholder and stock exchange approval, and that of the Ecuadorian Government.
Outlook
Kinross expects production for 2014 to be at the top end of its narrowed guidance range of 2.6–2.7 million from the previous outlook of 2.5–2.7 million gold equivalent ounces. The company lowered its production cost of sales guidance for 2014 to $720–$750 from $730–$780 per gold equivalent ounce and its all-in sustaining costs guidance to $950–$990 from the previous outlook of $950–$1,050 per gold ounce sold for 2014.
The company also lowered its capital expenditure forecast for 2014 from $675 million to a range of $630–$650 million.
VALUATION
Currently, shares of Kinrossare trading at 38.7x our 2015 EPS estimate of $0.07. The company’s current trailing 12-month earnings multiple is 24.6x, compared with the 62.1x average for the peer group and 19.3x for the S&P 500. Kinross is expected to gain from various exploration and acquisition activities. However, we remain concerned about its earnings volatility and pricing pressure. Our long-term Neutral recommendation on the stock indicates that it will perform in line with the broader market.Our price target of $2.75 is based on 39.3x our 2015 earnings estimate.
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