Investment Overview
The World Gold Council reported that gold demand for third quarter 2017 was down by 9% from the same quarter last year. Gold has been range bound and has failed to sustain levels above $1,300 an ounce. These near-term factors, however, present an attractive long-term investment opportunity in physical gold and gold miners.
In the past, I have discussed the positive long-term triggers for gold. This includes growing global debt, higher geo-political tensions and the declining impact of debt on GDP growth.
With these factors likely to remain key catalysts in the next few years, stock has robust long-term prospects. Kinross Gold (KGC, Financial) is a gold miner with a diversified portfolio of mines in the U.S., Brazil, Chile, Ghana, Mauritania and Russia. The stock has performed well year to date in 2017 with returns of 33%, and the positive momentum is likely to sustain.
Financial stability
The company’s strong financial position is one of the key factors to be bullish on the stock in the coming years.
As of Sept. 30, Kinross Gold reported cash and equivalents of $1.0 billion, with $1.5 billion in an unused credit facility. With a strong liquidity buffer of $2.5 billion, the company is well positioned for growth investments.
To put things in perspective, Kinross Gold expects capital expenditures of $900 million for 2017. Assuming $1.0 billion to $1.2 billion in capital expenditures for the next 24 months, the company is fully financed through 2019.
From a financial perspective, the following points are also worth noting:
- The company’s net debt to EBITDA as of the third quarter was 0.7, and this gives sufficient headroom for leveraging.
- The company has no debt maturity prior to 2021 and therefore no debt refinancing concerns in the near term.
Attractive assets
With strong financial flexibility, Kinross Gold is well positioned to invest in attractive assets that are likely to deliver robust long-term returns.
The company’s Tasiast asset is worth mentioning here with the asset delivering the highest mill grade in seven years. Tasiast phase one is 77% complete and scheduled to reach full commercial production by second quarter 2018. At the same time, Tasiast phase two will begin construction in 2018 with engineering already 25% completed.
The reason to start the asset discussion with Tasiast is the point that the company expects it to become the largest producer after phase two, and the cost is also likely to be the lowest in the portfolio.
While phase one will have significant impact on the production profile from 2018, the second phase is likely to deliver growth from 2020. This will ensure that the company’s growth trajectory remains healthy in the coming years and AISC also declines.
Another attractive development project is Round Mountain Phase W with construction expected to be completed by second quarter 2019. While Tasiast adds to incremental growth in 2018 and 2020, Round Mountain Phase W will provide growth momentum in 2019.
With current focus on expanding mine life and adding new production locations, Kinross Gold is well positioned to deliver incremental production in the coming years. That is likely to be associated with an increase in gold prices.
I must mention here that for third quarter 2016, Kinross Gold reported all-in sustaining cost of $1,001 an ounce, which declined to $937 an ounce in third quarter 2017. While average realized gold prices are lower in third quarter 2017 as compared to third quarter 2016, I expect strong cash flows once gold trades in the region of $1,350 to $1,400 an ounce. In particular, the Tasiast project is likely to be the long-term cash flow game changer.
Conclusion
Gold demand has weakened in the third quarter according to the World Gold Council, but it’s important to note that central banks of China and Russia have been aggressive in currency diversification. Equity markets are trading at rich valuations globally, and I do see a gradual flow of money from overvalued assets to undervalued assets. It’s a matter of time before gold regains momentum, and current levels are attractive for exposure to physical gold as well as gold miners.
Kinross Gold is attractive with strong financial muscles, improving AISC, steady progress in development projects and prospects of incremental cash flows in the next two to three years. Even after 33% gains year to date, I would recommend Kinross Gold.
Disclosure: No positions in the stock.
