Seeking Alpha
Profile| Send Message|
( followers)  

As part of the world's top six gold producers series, the last article was discussing about Goldcorp (NYSE:GG) ranked 5th. Today, we will look at the 4th ranked gold producer in the gold industry (NYSEARCA:GLD). This article will provide in-depth analysis of its assets, financial health and the future outlook of the company. This series is intended to offer an insight for potential investors to guide them on wise investment decisions in the gold market.

Kinross Gold (NYSE:KGC)

Founded in 1993, Kinross has quickly grown to become one of the world's leading gold mining companies. The producer is focusing its portfolio in four key regions: South America, North America, West Africa and Russia. The company has nine mines in operation and five projects or upgrades are under development.

(click to enlarge)

Source: BMO Metals & Mining Conference, February 2013

Kinross produced 724,510oz of gold for Q4 2012, a 7.8% increase over Q3 with 672,173oz and over 23% growth over the first quarter of 2012.

Source: Q4 2012 Results Conference Call & Webcast

Total production achieved 2.6Moz of gold in 2012, the same total as 2011. However, since 2008 the company has increased its gold production. Kinross is projecting for 2013 the same level of production as last year, between 2.4Moz to 2.6Moz of gold. Does the total production has plateaued since 2011? Only the future can tell. Looking at the projects under development and key financials about the company will provide some answers.

Source: Q4 2012 Results Conference Call & Webcast

Before looking at the assets of this gold producer, let's see how much it costs to produce an ounce of gold. As shown below, the production costs of the metal varied during last year. From $740/oz in the first quarter, the costs decreased for the next quarters to $686/oz for Q4 2012 with a 7.3% drop. For 2012, the total costs to produce an ounce of gold rose by 19% to $706/oz from 2011.

Source: Q4 2012 Results Conference Call & Webcast

Furthermore, to have a better understanding of how Kinross' production costs accounted to that level, we will analyze these costs by region. For the properties located in North America, the production costs totaled $637/oz. The South America region assets proved to cost more to produce an ounce of gold with $870/oz, a significant higher cost than the annual average of $706/oz.

West Africa's sole mine production costs was also high with $788/oz. Finally, the asset in Russia produced gold at $472/oz, the cheapest by-product cost of them all. Therefore, producing gold in Russia is a great advantage compared to the high costs of mines located in South America and West Africa at this time.

Knowing where it costs less to produce gold, the company has an obvious reason to focus its production in these regions. Looking later at the assets will give us a good hint of what's in store for Kinross. It is interesting to note that in North America, total production in 2012 reached 708,371oz of gold with production costs slightly below the annual average.

In South America where the production costs are the most expensive, the mines managed to produce more gold with 881,945oz. The sole mine of West Africa produced 449,245oz last year, far less than the last two. Finally, the only property located in a remote region of Russia produced 578,252oz at the cheapest price.

Top Mines In North America

Fort Knox, Alaska

Source: Kinross Gold

The open-pit mine is located within the Fairbanks mining district, a northeast trending belt of lode and placer gold deposits including one of the largest gold producing areas in the state of Alaska. Production of gold started in 1997 and Kinross began to build a new heap leach facility in 2008 in the purpose of extending the mine's life. Production started in late 2009.

For 2012, the mine produced 359,948oz of gold, a 24.2% rise over 289,794oz produced in 2011 with a drop in production costs of $663/oz in 2012 compared to $692/oz the prior year. Proved and probable reserves of Fort Knox are estimated at 3.6Moz of gold at 0.47 g/t.

Round Mountain, Nevada

Source: Kinross Gold

Round Mountain is a joint venture gold mine acquired by Kinross with 50% ownership interest and became the operator in January 2003. Barrick Gold (NYSE:ABX) owns the remaining 50% interest.

Round Mountain is an open-pit mining operation located in Nye County, Nevada. The mine began commercial production back in 1977 and reached the significant milestone of 10Moz of gold poured that was achieved over a 20-year period. The mine uses conventional open-pit mining methods. Most of the ore is heap leached.

Production for 2012 was 192,330oz compared to 187,444oz in 2011. The slight increase followed the same trend with the production costs where it reached $717/oz last year from $697/oz the year before. Proved and probable reserves of the mine is about 1.24Moz at 0.60 g/t.

Top Mines In South America

Paracatu, Brazil

Source: Kinross Gold

The Paracatu mine in Brazil is a large-scale open-pit operation located near the city of Paracatu and about 143 miles from Brasília, the capital of Brazil. Kinross acquired 49% ownership interest in the mine in January 2003 and the company purchased the remaining 51% from Rio Tinto (NYSE:RIO) in December 2004.

The open-pit mine is using milling, flotation, carbon-in-leach and gravity to process ore. In 2006, Kinross began an expansion of the mill facilities with the 4th ball mill commissioned in Q3 2012 in the purpose of tripling throughput to 61Mt per year. Production of gold from the expansion plant began in September 2008 and it should extend the life of the mining operations to 2042.

Paracatu produced 466,709oz of gold last year at a production costs of $881/oz compared to 453,396oz in 2011 at $720/oz, an average rise of 22.4% for a little difference of 13,313oz of gold produced. Proved and probable reserves are estimated at 17.98Moz of gold at a grade of 0.40 g/t. According to the NRH, the deposit is ranked 15th on the world's top 50 gold producers listed by global resources.

Maricunga, Chile

Source: Kinross Gold

The Maricunga open-pit mine is located in the highly prospective Maricunga mining district in central-east Chile. The property is about 74.5 miles east of Copiapó. Kinross acquired the first 50% interest and became operator of the mine in June 1998. In February 2007, Kinross acquired the remaining 50% through the acquisition of Bema Gold Corporation.

The mine went into commercial production in Q4 2005 and achieved its average targeted production rate of 40,000 tonnes per day in November 2005. The Maricunga mine is operated using a three-stage crushing and high altitude heap leach processing method.

Production was similar between 2011 and 2012 with 236,369oz and 236,249oz respectively. However, the costs were quite different with $779/oz produced in 2012 compared to $457/oz the year before. Proved and probable reserves are estimated at 4.31Moz of gold with a grade of 0.72 g/t. The NRH ranked the deposit 26th on the world's top 50 gold producers listed by global resources.

Tasiast Mine And Expansion Project Of West Africa

Source: Kinross Gold

The Tasiast mine is an open-pit gold mine located about 186 miles north of the capital Nouakchott in north-western Mauritania within an extensive gold system that is largely under explored. The mine began commercial operations in 2008. Kinross acquired the Tasiast gold mine in September 2010 upon completing the acquisition of Red Back Mining Inc.

To optimize the operations to produce more efficiently, several exploration operations and studies were realized. In 2011, the initial phase of the project expansion started. The firm completed the construction of the West Branch dump leach and ADR (Adsorption, Desorption and Refining) facilities.

Source: Kinross Gold

Kinross focused its exploration efforts at Tasiast testing high-quality geological, geochemical and geophysical targets throughout the 46.6 miles greenstone belt.

Source: Kinross Gold

The company is realizing a PFS (pre-feasibility study) for construction of a mid-sized, expandable CIL mill in the 30,000 tonne per day range. The PFS is expected to be completed in the first quarter of 2013.

According to Kinross, the company has undertaken a review of project development alternatives to those included in the original Tasiast scoping study to improve the overall project economics, reducing capital cost and project execution risk. The Tasiast expansion project is Kinross' top development priority and is the cornerstone asset in the company's long-term growth strategy.

The mine produced 185,334oz of gold in 2012 at $889/oz compared to 200,619oz at $702/oz the prior year. Thus, the costs rose by 26.6% with less gold produced last year. Proved and probable reserves are estimated at 7.96Moz with a grade of 1.66 g/t. According to the NRH, the deposit is ranked 18th on the world's top 50 gold producers listed by global resources.

The capital expenditure for the expansion is estimated at $625 million for ongoing infrastructure, construction of a permanent water pipeline, purchase of mining equipment and pre-stripping. However, the capex is subject to revision pending completion of the project's PFS.

Kupol Mine, Russia

Source: Kinross Gold

The Kupol underground deposit is located in the Chukotka Autonomous Okrug of the Far East Region of the Russian Federation. The total distance between the Kupol property and Bilibino, the nearest major city is about 124 miles.

Development and construction of the project began in 2005. In May 2008, the mine begun processing ore. Since the beginning of its operations, Kupol produced over 2Moz of gold and has also produced over 20Moz of silver. Kinross acquired a 75% interest in February 2007 through the acquisition of Bema Gold. In April 2011, the company acquired the remaining 25% giving Kinross the total ownership of the Kupol mine.

Source: Kinross Gold

The Kupol-West Moroshka exploration project conducted in 2012 revealed the presence of high-grade mineralization over a strike length of 984.3 Ft and a vertical range of 492 Ft. The geology appears to be similar to Kupol.

Kupol produced 578,252oz of gold at $472/oz in 2012 compared to 587,048oz at $378/oz in 2011. Proved and probable reserves are estimated at 2.41Moz with a grade of 9.29 g/t. According to the NRH, the deposit is ranked 13th on the world's top 50 gold producers listed by grade.

Top Development Projects

Dvoinoye, Russia

Source: Kinross Gold

Kinross acquired 100% of the high-grade Dvoinoye deposit and the Vodorazdelnaya property in August 2010. Both properties are located about 62 miles north of Kinross' Kupol operation in the Chukotka region of the Russian Far East. The Vodorazdelnaya property encompasses about 356 miles surrounding the Dvoinoye license area and includes an exploration and mining license.

A feasibility study on the Dvoinoye project was completed in Q1 2012. The study confirmed the financial viability of the mine which is expected to produce at a targeted rate of about 1,000 tonnes of ore per day. The Dvoinoye reserve will be mined entirely using underground mechanized mining equipment similar to that in operation at Kupol.

Source: Kinross Gold

Going forward, Dvoinoye and Kupol results will be reported as a joint operation. The project is expected to have a life expectancy of seven years and remains on schedule to deliver first ore to the upgraded Kupol mill in 2H of 2013. As of December 2012, the surface infrastructure construction was completed at 60%.

Proved and probable reserves are estimated at 1.11Moz of gold with a high-grade of 17.80 g/t and 1.37Moz of silver also with a high-grade of 21.8 g/t. The NRH ranked the deposit 1st on the world's top 50 gold producers listed by grade.

Fruta Del Norte, Ecuador

Source: Kinross Gold

Fruta del Norte Project is located within a 366 Sq. Ft land in southeastern Ecuador in the province of Zamora-Chinchipe. Kinross acquired 100% of the project in September 2008 through the acquisition of Aurelian Resources Inc. The mine is a high-grade, intermediate sulfidation epithermal gold-silver system hosted in andesitic volcanics.

The company is continuing its feasibility study work and has restarted negotiations with the government of Ecuador on an enhanced economic package for developing the project. As a matter of fact, various legislative proposals to enhance the fiscal and legal mining regime in Ecuador including the windfall profits tax remain under consideration by the government. Needless to say, the timing of the feasibility study will depend on the successful conclusion of these negotiations.

Source: Kinross Gold

Proved and probable reserves are estimated at 6.7Moz of gold grading 8.21 g/t and 9Moz of silver at 11 g/t. The NRH ranked the deposit 21st on the world's top 50 gold producers listed by grade.

Financial Highlights

Revenues of the company are in steady progression since 2008. Thus, revenue from 2011 went from $3.84 billion to $4.31 billion in 2012, a growth of 12.2%. However, as shown on the chart below, the net income took a huge drop in 2011 after increasing from 2008 to 2010. The drop reached ($2.07) billion from $759.7 million in 2010. Last year, the net income was even worse, accounting for ($2.5) billion. This is clearly not a good situation for the company.

Source: Google Finance

The adjusted cash flow decreased from $1.56 billion in 2011 to $1.52 billion last year, a slight drop of 2%.

Source: Q4 2012 Results Conference Call & Webcast

On the good side, the adjusted operating cash flow remained steady since 2009 with $1.36/share to $1.41/share in 2011.

Source: BMO Metals & Mining Conference, February 2013

Let's look at the total debt of the firm. Pictured on the chart below, Kinross used massively its financing between 2010 to 2012 to make key moves. The net income losses of the last two years are the direct impact of Kinross' aggressive portfolio upgrades during that period such as improvements and exploration at Tasiast and Paracatu, development of Fruta Del Norte and the purchase of the remaining 25% interest for total ownership of Kupol.

Source: Google Finance

Kinross' total debt went from $47.4 million in 2010 to $2.63 billion in 2012, a huge rise of 455% in only two years. That could be scary to any cautious and conservative shareholder. Will it pay off over the long run? That remains to be seen. The total capex for the company reached $1.9 billion last year and the company is expecting to see its capex decrease to $1.6 billion with more discipline spending for 2013.

(click to enlarge)

Source: BMO Metals & Mining Conference, February 2013

Finally, with all the turmoil of investments last year, questions arise regarding management. Focusing on margin improvement is one step in the right direction but will it be sufficient? An aggressive style of management can accomplish great things but we need to know if they are managing the business with efficiency before getting on board.

Comparing the ROA (return on assets) can give us a hint. Kinross is having a -16.27% ROA for the TTM and -6.69% for the 5-years average. The industry has a 2.75% ROA TTM and 2.86% for the 5-years average while the sector is achieving 4.47% and 10.61% respectively. Kinross' management is not doing so good using its current assets to generate earnings. Other ratios to measure the management effectiveness could have been used but unfortunately, the results are drawing the same conclusions.

Future Outlook

The company worked very hard to achieve its position comparing to its peers in the gold industry. However, I am afraid that it came at a price. Kinross' assets are great although not as great as its development projects which are packed with huge potential. The next coming years will be very exciting.

Proved and probable reserves are growing from year to year, with 24.7Moz of gold in 2005 which vastly increased by 221% to 59.6Moz last year.

(click to enlarge)

Source: Q4 2012 Results Conference Call & Webcast

The current exploration activities of the company in various assets will probably increase gold reserves in the next few years to ensure a steady production level.

Source: BMO Metals & Mining Conference, February 2013

Bottom Line

Kinross' future success will largely depend on achieving the potential of some jewel assets currently under development. It is crystal clear that its growth has not been financed by generating enough earnings when producing gold the last few years and they had to rely heavily on capital expenditures that are proving to be costly. However, that little gamble can pay off in the not too distant future.

The dividend yield of Kinross is superior than the industry average of 1.09% with 2.1%. However, the higher yield comes with higher risk. Kinross' management has been aggressive the past two years and its strategy seems to be the same this year with more focus on costs control. Not for the faint of heart, Kinross could nevertheless represent a good investment for investors looking for above average dividend yields offered by producers in the gold market play. However, definitely for long-term investments to let Kinross make some profits from its new developed assets increasing its total gold production.

Within the next few days, my next article will reveal the company holding the 3rd place out of the top six gold producers around the globe with its focus on mining operations mostly in Africa.

Source: World's Top 6 Gold Producers: 4th Place, Kinross Gold