What Is Going On With Kinross Gold?

| About: Kinross Gold (KGC)

By Cagdas Ozcan

The recent collapse in the gold market has caused many gold stocks to plunge. Kinross Gold Corporation (NYSE:KGC) also suffered from the panic in the gold market. KGC shares sank 30% in the last month. The stock lost almost 43% since January.

Following the fall of gold, KGC shares plummeted in the second week of April, and further tumbled when the gold market collapsed. This led many analysts, including Deutsche Bank (NYSE:DB) to downgrade the stock from buy to hold. Deustche Bank also reduced its price target on KGC to $6 from $9.

However, shares have now stabilized along with the uptick of gold. Kinross shares slightly rebounded from the low point of the year at $5 on April 17. On April 29, the stock closed at $5.49. So can Kinross continue its rebound or is it just a dead cat bounce?

The Gold Market and Kinross

The price of gold was downbeat since the start of the month. It fell sharply on April 15 from $1535.50 to $1395. The precious metal lost 9.15% in a single day. By April 16, gold further fell to its lowest point of the year at $1380.

However, the price immediately rebounded the following day on April 17 and closed at $1392. Interestingly, SPDR Gold (NYSEARCA:GLD) performed slightly better. Its year to date loss is only 13% so far. However, the fall of Kinross was bigger than the gold market. But it fared relatively well compared to its major competitor Barrick Gold (NYSE:ABX). ABX lost 43% in the last quarter.

Some analysts of World Gold Council reported that the recent collapse of gold was probably triggered by speculative traders in the futures market. As a result of the massive fall, gold now became much cheaper. This led to massive buying of physical gold in many countries like India, Japan, and even in the U.S. The supply became constrained amid increasing demand. Yet, prices still remained low. Many investors are still overcome by fear. There are growing concerns on increasing costs of gold production in the midst of cheaper gold prices.

There is a higher chance for gold to rebound in the coming months. The demand is high and rising while the supply is limited. However, speculations and fears may still keep the prices low for a while.

Kinross Earnings and Financial Report

Kinross is yet to release its first quarter earnings report. For the 4th quarter 2012, Kinross reported revenue from metal sales at $1186.9 million. This is 29% up versus the $919.8 million revenue from metal sales during the same period in 2011. The full fiscal year 2012 also saw growth in revenue by 12%. It posted record high revenue of $4.3 billion compared to the $3.8 billion in 2011.

The increase in revenue is a result of increased gold production for the quarter by 16%. The additional productions were coming from the La Coipa and the Fort Knox mines. For the full year, gold production was increased by 3% at 2,617,813 gold equivalent ounces. This further beats the firm's expectations for the year at 2.5 million to 2.6 million.

Another reason for the growth in revenue is the higher price of gold in the fourth quarter. The same is true for the full year. The average gold price was $1707, up 7% versus the year-ago quarter average price of $1598 per ounce. For the full year, the annual average price was $1643 per ounce. This is 9.5% higher than the 2011 average gold price of $1500 per ounce.

To maximize profitability, Kinross minimized the increase in production cost of sales per gold equivalent ounce. The production costs were within the company's estimates. For the 4th quarter 2012, the productions cost of sales was $686 per gold equivalent ounces.

This is higher than the $635 production cost of sales per gold equivalent ounce in the year-ago quarter. For the entire year, the average production cost was $706 per gold equivalent ounce. On the other hand, the all-in sustaining cost of gold was pegged at $1100 per ounce.

In the income statement, Kinross still ended up with a net loss of $2.5 billion for the full year 2012. This is tantamount to $2.24 per share. The net loss increased by 21.7% versus the previous year at only $2.09 billion, or 1.84 per share. For the past two years, Kinross has been incurring losses. The net loss in 2012 was even higher than the 2011 net loss of only $2.013 billion. The last time net income was reported was in 2010 when the firm posted net earnings of $760 million.

Despite the net loss, Kinross still managed to provide a dividend payout for this year. In fact, it steadily pays the shareholders a dividend payout year over year since 2008. The amount is increasing, as well. But for this year, there is no increase. The dividend remains at $0.08 per share.

2013 Outlook

During the 4th quarter report, Kinross has an optimistic outlook for the year 2013. But there are also aspects of the business where it already projected a decline. In terms of production, Kinross lowered its projection versus the 2012 figure. It estimated to produce about 2.4 to 2.6 million gold equivalent ounces for this year. The estimated production cost of sales is pegged at $740 to $790 per gold equivalent ounce.

In line with its focus to have strong operational fundamentals, it will continue to control the costs. It will also improve the margin and the free cash flow. Kinross lowered the estimated capital expenditure by $325 million dollar at $1.6 billion.

Final Notes

Note that the above projections were based on the assumption that the price of gold will average $1600 per ounce. Since gold prices have massively dropped, it is more likely that the projections will not be hit. This will greatly affect all other aspects of the financials, including the earnings and the cash flow.

Therefore, when the company releases its latest financial report, shares will probably plunge again for failing to hit the estimates. This further supports the downgrade of Deutsche Bank to hold. However, it could be a good contrarian play as the stock is trading 50% below its previous highs. Its debt and liquidity ratios are also better than many of its peer companies.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Efsinvestment is a team of analysts. This article was written by one of our equity analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.