Macro thesis
Gold and silver miners have witnessed a surge in prices as the market thinks that ECB and the Fed will be forced to pump prime out of their debt issues. The trend has already been set as central banks have become net buyers instead of net sellers of gold as they diversified out of dollars. PIIGS collectively own 3,000 tons of gold and Italy, which owns the most at 2,400 tons, had used gold as collateral. Therefore, this could entice China to extend its assistance to euro zone countries, via swapping gold for cash.
We ran a stock screen for gold and silver stocks trading with an uptrend noted, and Kinross Gold Corporation (KGC, Financial) looks compelling at current price of $14.71, relative to other more expensive miners. KGC is poised for an uptrend with double bottom formation apparent, signaling for strong upside if whole sector rallies once more. Caveat is to scale down or exit position once the trend halts, in the near few weeks’ time.
Introduction of the company
Kinross Gold Corporation (KGC), together with its subsidiaries, engages in mining and processing gold ores. It also engages in the exploration and acquisition of gold bearing properties. The company’s gold production and exploration activities are carried out principally in the Americas, Africa and the Russian Federation. The company was founded in 1972 and is based in Toronto, Canada.
Its market cap $16.7 billion, beta 0.77, and has shares outstanding of 1.14 billion with 1.13 billion of share float.
Fundamentals
Strengths:
1) One of the longest reserve lives amongst peers
As of Dec. 31, 2010, KGC’s proven and probable mineral reserves were 62.4 million ounces of gold, 90.9 million ounces of silver, and 1.4 billion pounds of copper. These notional amounts support current output levels for an estimated 26 years, which is amongst the longest reserve lives for gold producers.
KGC expects to produce 2.4 million-2.5 million ounces of gold and 11.8 million-12.2 million ounces of silver byproduct from 11 operating mines in Russia, the U.S., Brazil, Chile, Mauritania and Ghana in 2011.
2) Increased portfolio diversification through acquisitions
KGC’s growth story has been fueled by acquisitions of Bema Gold in 2007, Aurelian Resources Inc. in 2008, Minera Santa Rosa, 60% equity interest in Teck Cominco Limited in 2009, Underworld Resources Inc. and Red Back Mining in 2010. It currently operates under 11 segments notably Paracatu, Fort Knox, Round Mountain, Kettle River-Buckhorn, Kupol, Crixas, Maricunga, La Coipa and Porcupine Joint Venture.
The company has various projects under development, including the expansion of the recently acquired Tasiast mine in Mauritania and greenfield projects such as Lobo-Marte and Cerro Casale in Chile, which should diversify its asset portfolio in the long term at the expense of large capex outlay. These projects represent the company’s most expansive organic growth plans ever (capex spending of $1 billion for TTM). Currently it mainly relied on two key assets, Paracatu in Brazil and Kupol in Russia, both accounts for about 40% of KGC’s output in next few years and contribute nearly half of production and operating income in fiscal 2010. Nevertheless, management had guided average capex spend of $1.2 billion per annum over next five years (or $1.5bil capex for 2011 excluding advanced payment to suppliers of $0.5 billion in 2011). Capex guidance of $1.5 billion for 2011 is allocated for $730mil in South America, $165 mil in North America, $440 million in West Africa and $155 million in Russia.
3) Competitive cost position
KGC’s cash costs for its operating mines is clustered around peer group average of $400~$500 per oz on a co-product basis. High gold and silver prices have contributed significantly to strong cash flow, with sustainable operating margins of 30% since fiscal 2009.
KGC’s cost is sensitive to USD, a 10% depreciation of USD relative to KGC’s operating countries’ currencies may result in $16 million rise in EBITDA. Therefore, KGC provides an almost pure play on rising gold prices, in addition to lowered costs from USD depreciation.
Weaknesses:
1) Reliance on strong metal prices to support its higher pro forma debt burden (see financial analysis below)
High financial leverage risk is mitigated as the company has the ability to defer development and exploration and focus on cash preservation.
Furthermore, liquidity profile was strong with cash on hand of $1.1 billion and $1.1 billion unutilized revolver ($1.2 billion limit due March 2015), allowed strong financial flexibility to KGC should metal prices deteriorate.
2) Exposure to higher-risk jurisdictions
Part 2 continues here
Gold and silver miners have witnessed a surge in prices as the market thinks that ECB and the Fed will be forced to pump prime out of their debt issues. The trend has already been set as central banks have become net buyers instead of net sellers of gold as they diversified out of dollars. PIIGS collectively own 3,000 tons of gold and Italy, which owns the most at 2,400 tons, had used gold as collateral. Therefore, this could entice China to extend its assistance to euro zone countries, via swapping gold for cash.
We ran a stock screen for gold and silver stocks trading with an uptrend noted, and Kinross Gold Corporation (KGC, Financial) looks compelling at current price of $14.71, relative to other more expensive miners. KGC is poised for an uptrend with double bottom formation apparent, signaling for strong upside if whole sector rallies once more. Caveat is to scale down or exit position once the trend halts, in the near few weeks’ time.
Introduction of the company
Kinross Gold Corporation (KGC), together with its subsidiaries, engages in mining and processing gold ores. It also engages in the exploration and acquisition of gold bearing properties. The company’s gold production and exploration activities are carried out principally in the Americas, Africa and the Russian Federation. The company was founded in 1972 and is based in Toronto, Canada.
Its market cap $16.7 billion, beta 0.77, and has shares outstanding of 1.14 billion with 1.13 billion of share float.
Fundamentals
Strengths:
1) One of the longest reserve lives amongst peers
As of Dec. 31, 2010, KGC’s proven and probable mineral reserves were 62.4 million ounces of gold, 90.9 million ounces of silver, and 1.4 billion pounds of copper. These notional amounts support current output levels for an estimated 26 years, which is amongst the longest reserve lives for gold producers.
KGC expects to produce 2.4 million-2.5 million ounces of gold and 11.8 million-12.2 million ounces of silver byproduct from 11 operating mines in Russia, the U.S., Brazil, Chile, Mauritania and Ghana in 2011.
2) Increased portfolio diversification through acquisitions
KGC’s growth story has been fueled by acquisitions of Bema Gold in 2007, Aurelian Resources Inc. in 2008, Minera Santa Rosa, 60% equity interest in Teck Cominco Limited in 2009, Underworld Resources Inc. and Red Back Mining in 2010. It currently operates under 11 segments notably Paracatu, Fort Knox, Round Mountain, Kettle River-Buckhorn, Kupol, Crixas, Maricunga, La Coipa and Porcupine Joint Venture.
The company has various projects under development, including the expansion of the recently acquired Tasiast mine in Mauritania and greenfield projects such as Lobo-Marte and Cerro Casale in Chile, which should diversify its asset portfolio in the long term at the expense of large capex outlay. These projects represent the company’s most expansive organic growth plans ever (capex spending of $1 billion for TTM). Currently it mainly relied on two key assets, Paracatu in Brazil and Kupol in Russia, both accounts for about 40% of KGC’s output in next few years and contribute nearly half of production and operating income in fiscal 2010. Nevertheless, management had guided average capex spend of $1.2 billion per annum over next five years (or $1.5bil capex for 2011 excluding advanced payment to suppliers of $0.5 billion in 2011). Capex guidance of $1.5 billion for 2011 is allocated for $730mil in South America, $165 mil in North America, $440 million in West Africa and $155 million in Russia.
3) Competitive cost position
KGC’s cash costs for its operating mines is clustered around peer group average of $400~$500 per oz on a co-product basis. High gold and silver prices have contributed significantly to strong cash flow, with sustainable operating margins of 30% since fiscal 2009.
KGC’s cost is sensitive to USD, a 10% depreciation of USD relative to KGC’s operating countries’ currencies may result in $16 million rise in EBITDA. Therefore, KGC provides an almost pure play on rising gold prices, in addition to lowered costs from USD depreciation.
Weaknesses:
1) Reliance on strong metal prices to support its higher pro forma debt burden (see financial analysis below)
High financial leverage risk is mitigated as the company has the ability to defer development and exploration and focus on cash preservation.
Furthermore, liquidity profile was strong with cash on hand of $1.1 billion and $1.1 billion unutilized revolver ($1.2 billion limit due March 2015), allowed strong financial flexibility to KGC should metal prices deteriorate.
2) Exposure to higher-risk jurisdictions
Part 2 continues here
