Look for This Catalyst to Drive Kinross Gold Shares
Kinross Gold (NYSE:KGC) has been a major disappointment in the gold mining sector. While the stock is up nearly 4-fold from its 2000 trough, it has performed terribly in the past few years. The company has failed to grow production, it has seen rising production costs, and it has made some poor investment decisions.
In 2012, the company started to turn itself around under the guidance of a new management team headed by CEO J. Paul Rollinson. So far, he and his team have done an excellent job. They have shed less valuable and high risk projects, they have refigured existing projects so that they are more efficient, and they have improved the company’s finances. While the process of righting this ship has been a long and laborious one, things seem to be headed in the right direction.
Nevertheless, the stock has continued to be a serial underperformer, with shares flat for the year versus the Market Vectors Gold Miner ETF (NYSEARCA:GDX), which is up 13 percent. Apparently investors are still waiting for the company to show positive bottom-line results before jumping on board Kinross shares.
Next week, however, the company is releasing a significant update on one of its largest mines — the Tasiast project in Mauritania. The company announced that on Monday it is going to release the results from its feasibility study for the Tasiast mine. This means that it is going to be providing investors with details pertaining to various characteristics of the mine such as how much gold it will produce and how much it will cost the company to produce this gold.
While the mine’s 247,000 ounces of production accounted for just under 10 percent of the company’s overall production in 2013 going forward the mine is expected to produce more than this — about 275,000 ounces per year. More importantly, however, it is going to produce for a long time given that it has over 6.5 million ounces of gold.
The wild card is going to be the company’s estimated production costs at Tasiast. Last year, costs were elevated. However, this is often the case with newly producing mines, which portends well for future production costs at Tasiast. Furthermore, the ore grade produced last year — 1.99 grams of gold per tonne of ore — is significantly below the 2.27 grams per tonne average of the company’s resource estimate. This means that going forward the company should be able to mine gold about 14 percent more efficiently, and this should put downward pressure on production costs. Given that cash-costs came in last year at $1,050/ounce, this reduction is crucial to the mine’s long-term success.
Furthermore, given the amount of gold that Kinross expects to produce at Tasiast, even a small change in estimated production costs will have significant results. For instance, if overall costs come in at $1,050/ounce then the company will generate about $260/ounce of gold, or about $70 million annually before taxes at the current gold price. However, if the company is able to operate more efficiently at, say, $950/ounce it will generate $360/ounce of gold produced or about $100 million annually. Considering that the mine will be operating for over 20 years, and considering that the company has a valuation of just over $5 billion this difference of $600 million in cash flow over the life of the mine can effect the company’s value by 12 percent.
With this being the case investors who own Kinross Gold, those who are considering taking a position need to look for the following pieces of information next week.
- Gold reserves: How much gold does the Tasiast project have? If the number rises above the most recent estimate of 6.5 million ounces then this should drive the shares higher.
- Average annual production: Will the company be able to meet the 275,000 ounce per year figure I give above? If it can beat this then the mine will generate more cash flow in the next few years, and this should benefit shareholders.
- Production costs: How much will it cost Kinross to mine an ounce of gold at Tasiast? You should see two numbers. The first is “cash costs,” which refers to how much it costs to dig up an ounce of gold and refine it and turn it into bar-form that is ready to be sold into the market. The second is “all-in” costs, and this is the more important number. It refers to cash-costs plus other expenses such as managing the mine, fixing equipment, exploring for more gold, and administering the business. If the latter number is below $1,050/ounce, I think that shares should move higher.
Given that the Tasiast project will be one of Kinross Gold’s cornerstone properties for years to come, next week’s announcement is very important — probably more so than an earnings release. A strong feasibility report from Kinross may send shares higher, and I think given the strength of the company’s portfolio that a positive feasibility report is reason enough to buy the shares even if there is a 5 percent pop on the news.
Disclosure: Ben is long Kinross Gold shares.