Over the past few months the stocks in the gold mining sector have fallen dramatically. This has provided an excellent opportunity to investigate companies in this sector for investment purposes. One company worth considering is Kinross Gold (KGC). While there are many different factors to look at and consider when investing, in the article below I will look at the debt side of the company. I will analyze Kinross Gold's total debt, total liabilities, debt ratios and WACC. From this analysis we should get an idea if the company is highly leveraged, how much it is paying for its debt, what it's paying in taxes and how much to expect in return for investing in this company over the long term.
Gaining knowledge about a company's debt and liabilities is a key component in understanding the risk of a company. In 2008 and 2009 we were able to see some of the repercussions that highly leveraged companies with large amounts of debt succumbed to. Taking into account the debt side of a company might not reveal the "pop" on the upside that an investor would like, but it will help ensure that the company is able to keep its capital and use it for growth in the future.
Kinross is a Canadian-based gold mining company with mines and projects in Brazil, Canada, Chile, Ecuador, Ghana, Mauritania, Russia and the United States. The map below indicates Kinross Gold's production and development properties.
Map sourced at (company website)
In the article below, I will calculate important ratios in understanding the amount of debt and liabilities the company has incurred. From this analysis we will understand more about the company's debt, liabilities and financial risk. If this summary is compared with other companies in the same sector such as Newmont Mining (NEM) or Yamana Gold (AUY) you will be able to see which company has the most debt, thus adding to the company and investor risk. If you would like a direct debt-side comparison please read: Newmont Mining: Strong Company But Timing Is Everything or Yamana Gold: Strong Upside Potential From This Low Debt Producer.
1. Total Debt = Long-Term Debt + Short-Term Debt
Total debt is the sum of long-term debt, which is debt that is due in one year or more, and short-term debt, which is any debt due within one year.
- 2008 - $784 million + $0 million = $784 million
- 2009 - $515 million + $0 million = $515 million
- 2010 - $426 million + $0 million = $426 million
- 2011 - $1.600 billion + $0 million = $1.600 billion
- 2012 - $2.116 billion + $0 million = $2.116 billion
Kinross Gold's total debt has increased over the past five years. In 2008 Kinross posted a total debt of $784 million while in 2012 the company posted a total debt of $2.116 billion. This signifies an increase of 169.90%.
2. Total Liabilities
Liabilities are a company's legal debts or obligations that arise during the course of business operations, so debts are one type of liability, but not all liabilities. Total liabilities are the combination of long-term liabilities, which are the liabilities that are due in one year or more, and short-term or current liabilities, which are any liabilities due within one year.
- 2008 - $2.600 billion
- 2009 - $2.454 billion
- 2010 - $3.264 billion
- 2011 - $4.118 billion
- 2012 - $5.032 billion
Just like the total debt the liabilities have also increased over the past five years. In 2008, Kinross reported liabilities at $2.600 billion while in 2012 Kinross reported liabilities at $5.032 billion. This marks an increase of 93.54%.
In analyzing Kinross Gold's total debt and liabilities, we can see that the company currently has a total debt of $2.116 billion and liabilities at $5.032 billion. From the numbers above, we can see that over the past five years Kinross Gold's total debt has increased by 169.90%, while the total liabilities have increased by 93.54%. As the company's amount of debt and amount of liabilities have increased, the next step will reveal if the company has the ability to pay them.
1. Total Debt to Total Assets Ratio = Total Debt / Total Assets
This is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. It is calculated by adding short-term and long-term debt and then dividing by the company's total assets.
A debt ratio of greater than 1 indicates that a company has more total debt than assets. Meanwhile, a debt ratio of less than 1 indicates that a company has more assets than total debt. Used along with other measures of financial health, the total debt to total assets ratio can help investors determine a company's level of risk.
- 2010 - $426 million / $17.795 billion = .02
- 2011 - $1.600 billion / $16.508 billion = .10
- 2012 - $2.116 billion / $14.882 billion = .14
Kinross Gold currently has a total debt to total assets ratio of .14. The total debt to total assets ratio has significantly increased over the past three years. As the total debt to total assets ratio has increased, this indicates that since 2010, the company has added more total debt than assets. As the number is currently well below 1, this indicates that the company has more assets than total debt. Because this number is very low, this metric indicates low financial risk to the company.
4. Debt ratio = Total Liabilities / Total Assets
Total liabilities divided by total assets. The debt ratio shows the proportion of a company's assets that is financed through debt. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt. Companies with high debt/asset ratios are said to be "highly leveraged." A company with a high-debt ratio or that is "highly leveraged" could be in danger if creditors start to demand repayment of debt.
- 2010 - $3.264 billion / $17.795 billion = .18
- 2011 - $4.118 billion / $16.508 billion = .25
- 2012 - $5.032 billion / $14.882 billion = .34
In looking at Kinross Gold's total liabilities to total assets ratio over the past three years, we can see that this ratio has also increased. The ratio has increased from .18 in 2010 to .34 in 2012. As the 2012 numbers are still below the 0.50 mark, this indicates that Kinross Gold has not financed the company's assets through debt. As the number has increased, so is the risk to the company.
5. Debt-to-Equity Ratio = Total Liabilities / Shareholders' Equity
The debt-to-equity ratio is another leverage ratio that compares a company's total liabilities with its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligators have committed to the company versus what the shareholders have committed.
A high debt-to-equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in the company reporting volatile earnings. In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations, and therefore is considered a riskier investment.
- 2010 - $3.264 billion / $14.531 billion = .22
- 2011 - $4.118 billion / $12.390 billion = .33
- 2012 - $5.032 billion / $9.850 billion = .51
Compared with 2010, Kinross Gold's debt-to-equity ratio has increased. The ratio has increased from .22 to .51. As the ratio is currently well below 1, this indicates that shareholders have more invested than suppliers, lenders, creditors and obligators. .51 indicates a low amount of risk for the company. As the ratio is below 1 and considered low, so is the risk for the company.
6. Capitalization Ratio = LT Debt / LT Debt + Shareholders' Equity
(LT Debt = Long-Term Debt)
The capitalization ratio tells the investors the extent to which the company is using its equity to support operations and growth. This ratio helps in the assessment of risk. Companies with a high capitalization ratio are considered to be risky because they are at a risk of insolvency if they fail to repay their debt on time. Companies with a high capitalization ratio may also find it difficult to get more loans in the future.
- 2010 - $426 million / $14.957 billion = .03
- 2011 - $1.600 billion / $13.990 billion = .11
- 2012 - $2.116 billion / $11.966 billion = .18
Over the past three years, Kinross Gold's capitalization ratio has increased from .03 to .18. This is a significant increase and this implies that Kinross has acquired more long-term debt than shareholders' equity. As this is the case, the company has less equity to support its operations and add growth. As the ratio is increasing, financially this implies an increase of risk to the company.
7. Cash Flow to Total Debt Ratio = Operating Cash Flow / Total Debt
This coverage ratio compares a company's operating cash flow with its total debt. This ratio provides an indication of a company's ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company's ability to carry its total debt. The larger the ratio, the better a company can weather rough economic conditions.
- 2010 - $1.002 billion / $426 million = 2.53
- 2011 - $1.417 billion / $1.600 billion = 0.88
- 2012 - $1.255 billion / $2.116 billion = 0.59
Over the past three years, the cash flow to total debt ratio has decreased significantly. The ratio has decreased from 2.53 in 2010 to 0.59 in 2012. As the current cash flow to debt ratio is below 1, this implies that the company does not have the ability to cover its total debt with its yearly cash flow from operations.
Based on the five debt ratios listed above, we can see a significant increase in financial risk when compared to 2010. All of the ratios listed above show a degradation in financial strength but as the ratios were so low in 2010, the company still shows no risk of being highly leveraged, or in any financial distress. As the price of gold looks to be strong in 2013, the company should be able to make money on its assets and will not be burdened by massive amounts of debt and debt obligations. The next step will reveal how much the company will pay for the debt incurred.
Cost of Debt
The cost of debt is the effective rate that a company pays on its total debt.
As a company acquires debt through various bonds, loans and other forms of debt, the cost of debt is a useful metric. It gives an idea as to the overall rate being paid by the company to use debt financing.
This measure is also useful because it gives investors an idea as to the riskiness of the company compared with others. The higher the cost of debt, the higher the risk.
8. Cost of debt (before tax) = Corporate Bond rate of company's bond rating.
- Kinross Gold 144A 5.125% Notes due 09/01/2021 = 5.125%
- Current cost of Debt as of March 28th 2013 = 5.125%
9. Current tax rate
According to the Kinross Gold press release on December 5, 2011, the company has "a corporate income tax rate of 22%, to be fixed under the proposed terms of the investment protection agreement."
10. Cost of Debt (After Tax) = (Cost of Debt Before Tax) (1 - Tax Rate)
The effective rate that a company pays on its current debt after tax.
- .05125 x (1 - .22) = Cost of debt after tax
The cost of debt after tax for Kinross Gold is 4.0%
Cost of Equity or R Equity = Risk Free Rate + Beta Equity (Average Market Return - Risk Free Rate)
The cost of equity is the return a firm theoretically pays to its equity investors (for example, shareholders) to compensate for the risk they undertake by investing in their company.
- Risk Free Rate = U.S. 10-year bond = 1.85% (Bloomberg)
- Average Market Return 1950 - 2012 = 7%
- Beta = (MSN Money) Kinross Gold's Beta = 0.47
Risk Free Rate + Beta Equity (Average Market Return - Risk Free Rate)
- 1.85 + 0.47 (7- 1.85)
- 1.85 + 0.47 x 5.15
- 1.85 + 2.42 = 4.27%
Currently, Kinross has a Cost of Equity or R Equity of 4.27%, so investors should expect to get a return of 4.27% per-year average over the long term on their investment to compensate for the risk they undertake by investing in this company.
(Please note that this is the CAPM approach to finding the cost of equity. Inherently, there are some flaws with this approach and that the numbers are very "general." This approach is based off of the S&P average return from 1950 - 2012 at 7%, the U.S. 10-year bond for the risk-free rate, which is susceptible to daily change and Google Finance beta.)
Weighted Average Cost of Capital or WACC
The WACC calculation is a calculation of a company's cost of capital in which each category of capital is equally weighted. All capital sources such as common stock, preferred stock, bonds and all other long-term debt are included in this calculation.
As the WACC of a firm increases, and the beta and rate of return on equity increases, this is an indicator of a decrease in valuation and a higher risk.
By taking the weighted average, we can see how much interest the company has to pay for every dollar it finances.
For this calculation, you will need to know the following listed below:
Tax Rate = 22.00%
Cost of Debt (before tax) or R debt = 5.125%
Cost of Equity or R equity = 4.27%
Debt (Total Liabilities) for 2012 or D = $5.032 billion
Stock Price = $7.94 (March 28th, 2013)
Outstanding Shares = 1.14 billion
Equity = Stock price x Outstanding Shares or E = $9.052 billion
Debt + Equity or D+E = $14.083 billion
WACC = R = (1 - Tax Rate) x R debt (D/D+E) + R equity (E/D+E)
(1 - Tax Rate) x R debt (D/D+E) + R equity (E/D+E)
(1 - .22) x .05125 x ($5.032/$14.083) + .0427 ($9.052/$14.083)
.78 x .05125 x .3573 + .0427 x .6428
.0143 + .0274
Based on the calculations above, we can conclude that Kinross Gold pays 4.17% on every dollar that it finances, or 4.17 cents on every dollar. From this calculation, we understand that on every dollar the company spends on an investment, the company must make $.0417 plus the cost of the investment for the investment to be feasible for the company.
Debt Side Summary
All indications above reveal that Kinross Gold has significantly increased in financial risk when compared to 2010. Having stated that, as the ratios were so low in 2010, the company still shows no risk of being highly leveraged, or in any financial distress. I would watch the debt ratios and if they keep sliding I would consider this a "red flag." The CAPM supports the stability of the company by revealing that the investor needs 4.27% year-over-year over the long term to get good value on his or her money.
2013 Operational Guidance
On Feb. 13th, 2013, Kinross Gold released fourth quarter and year end results. In this press release Kinross Gold stated they expect to produce approximately 2.4-2.6 million gold equivalent ounces in 2013 at a production cost of sales per gold equivalent ounce of $740-790. For 2013, Kinross is expecting all in sustaining cost between $1,100 and $1,200.
Over the next few years analysts at MSN Money are predicting Kinross to have an EPS of $0.79 for FY 2013 and an EPS of $0.93 for FY 2014. Analysts at Bloomberg are estimating Kinross Gold's revenue to be $4.4 billion for FY 2013 and $4.6 billion for FY 2014. On February 04, 2013, Barclays gave Kinross Gold a rating of "Equal Weight" with a target price of $11.00 while Finviz has a stock price target price of $11.64 for the company.
Chart sourced by (FINVIZ)
The above analysis reveals that Kinross Gold is a sound company on the debt side. It has increased its debt levels over the past 3 years but all of the ratios imply that the company is not "over leveraged" or currently in any financial distress. Currently, analysts at Barclays have an $11.00 price target on this stock. Based on the chart, the stock does look to be forming a bottom, if the stock price begins to break to the upside, this could be an excellent opportunity to invest in a gold mining company with a nice dividend and good upside potential.