The first half of the year has been challenging for the gold miners as the gold price has declined sharply. For the first half of 2013, the price of gold fell by almost 29% and the gold sub-industry fell by 40.2% in that period. The biggest drag on a performance basis was the metals and mining industry, plummeting 20.1% in the first half of the year. It is very important for the investors to select a company within the sector with valuations right around the long-term average.
Canadian based Kinross Gold Corporation (NYSE:KGC) is a gold mining company with nine of its mines and projects located in the United States, the Russian Federation, Brazil, Chile, Ghana, (click to enlarge)
Mauritania, Ecuador and Canada.
Source: Annual Report 2012
The role of gold price in the U.S. Economy
The price of gold indicates the U.S. economy's health. When gold is trading high, the economy's performance is not healthy. The reason being, investors find an alternative way to invest their money in gold and protect their investments from inflation or crisis. A fall in gold price indicates that the economy is healthy, as investors have divested their money into more lucrative investments like stocks, bonds or real estate. On Friday, Aug. 23, 2013, the price of gold increased and had crossed the $1,400 level, which was psychologically important, because it will attract investors for gold mining stocks.
Will Russian gold mining sector repeat history?
Russia had been the second-largest global gold producer in the 1980s, contributing nearly 21% to global gold production. In terms of production and reserves, Russia's gold production is a very important determinant in the global supply puzzle. Currently, Russia is ranked as the fourth-largest gold producer after China, Australia and the United States. Referring to future gold production, Russia is a sleeping giant, which has potential to position it as the second-largest gold producer.
Head of the Russian Gold Industrialists' Union, Sergei Kashuba said, "If gold price remain at a high level, gold output in Russia will continue to grow by 4-5 percent per year, which will allow it to become the third largest producer in the world in 2015."
Source: Kinross Q2 2013 Results Conference Call & Webcast
Geographic Segments Overview
North America: The performance of the region was strong as it alone contributed nearly 27.43% to the total amount of gold produced for first half of the year. The higher production and sales from the Fort Knox and Kettle River mines were primarily due to the improved mill throughput and recoveries. As compared to Q212, regional production of gold increased by approximately 16.5%. Though the production from Round Mountain for the first half of 2013 declined by 17.84% versus the corresponding first half of 2012, the ounces produced are ahead of expectations.
Russia: 2Q13 productions at Kupol were almost the same as in 1Q13, but were lower compared with 2Q12 primarily due to the expected lower grades. The expansion of the mill at Kupol was successfully completed in July, which expanded the production capacity to 4,500tpd. They maintained hefty mill throughput and recoveries throughout the quarter.
- Dvoinoye as reclassified into Kupol remains on schedule. During 2Q, the first 20,000 tons of ore were delivered to Kupol from the developing activities at Dvoinoye. Kinross expects that the mine at Dvoinoye will start its first planned stopping operations in Q3 and is expected to attain the budgeted production in Q4. The overall construction progress at the mine is at 73% completion. As per the terms, the Dvoinoye subsoil license will expire on September 30, 2013. Kinross has already filed an application for the renewal of the license. The approval process for the renewal of the license is expected soon.
- Paracatu's production was almost the same as reported in the previous quarter, but it adds significantly to the region's production. Nearly 50% of the region's production is from Paracatu.
- Maricunga's decrease in production compared with 1Q13 and 2Q12 was lower as heap leach performance and grades were less than favorable from transitional ore mined from the bottom of the current phase.
- La Coipa's production increased relative to 2Q12 primarily due to stronger grades, but if compared to 1Q13, the productions were slightly down. The foremost reason being the lower mill throughput and an unexpected gold/silver ratio shift. Kinross is expecting to put mining of the present ore body on hold in 4Q 13.
West Africa: The region's performance remained strong since the beginning of the year and is very well focused to meet the targeted production and production cost of sales for the year.
- The second-quarter productions at Tasiast recorded the highest production level since acquisition for the 2nd consecutive quarter. The production increase was primarily due to higher grades feeding the mill supported by an improved performance from the dump leach. Kinross is primarily focusing on cash conservation and capital reduction due to the current challenging lower gold price environment. Though the feasibility study for the Tasiast mine states the potential of producing 38,000tpd, Kinross does not intend to proceed with the mill expansion until 2015. The study remains on schedule for completion in 1Q14. The decision would reduce projected capital expenditures of 2013 by about $85 million, as the decision to purchase equipments, stripping, and infrastructure development has been deferred in favor of proportionate resizing of the Tasiast team. These cost reductions are further expected in 2014.
- Chirano's production decreased slightly compared to 1Q13 and 2Q12 primarily due to expected lower grades. Chirano successfully completed the transition to self-perform mining in the open pits.
Unfortunate for Kinross to cease operations at FDN project, Ecuador
Fruta del Norte is another legacy of the administration of former Kinross CEO Tye Burt, a former investment banker who had previously worked for Barrick Gold. In 2009, Kinross paid $1.2 billion or $8.20 per share for junior explorer Aurelian Resources, which owned the Fruta del Norte deposit.
In a statement, J. Paul Rollinson CEO of Kinross said, "After a great deal of effort to arrive at a mutually agreeable outcome, it is unfortunate that the parties were unable to reach an agreement on FDN which would have met those criteria. That said we respect the Government of Ecuador's sovereign authority and its right to determine how the resources are developed."
Kinross called FDN "one of the most exciting gold discoveries of the past 15 years." For the year ended 2012, FDN had reported a proven and probable reserves of 6.715 million ounces of gold along with 67,000 ounces of measured and indicated gold resources. The proven and probable silver resources include 9 million ounces of silver with indicated and measured resources for a total 1.412 million ounces of silver.
Strong fundamental operations for 2Q13
Though the revenues for 2Q13 decreased by 4% versus 2Q12, the company has posted an increase of 4% gold equivalent production for 2Q13. Relatively, the lower gold price prevailing for 2Q13 resulted in the decrease in revenues. The operating margin decreased by 22% per gold equivalent ounce sold, which was $657 for 2Q13, versus $844 per gold equivalent ounce for 2Q12. The decrease in the margin was primarily due to the significant increase in the production costs. For the year 2012, the production cost of sales per gold equivalent ounce as recorded was $706, which is expected to rise and range between $740-790 for 2013.
For the second quarter 2013, the company has efficiently posted decent earnings. The reported net loss of $2,481.9 million ($2.17 per share) versus net earnings of $113.9 million ($0.10 per share) in 2Q12 was primarily due to a hefty impairment charge of $2.29 billion. The company is focused on rendering the best results and treating its shareholders, but due to the challenging environment, the company had to record the impairment loss for the quarter.
Decreasing price in gold leads to a hefty impairment loss.
As per the current scenario, the continuous decline in the price of gold, along with the decision to defer the construction on Tasiast, indicates potential impairment for Kinross.
- Short- and long-term metal prices.
- After-tax non-cash impairment charges were reported to be $2,289 million.
- Also recorded an impairment loss of $219 million related to Cerro Casale.
- Wrote off the $720 million carrying value of Fruta del Norte.
Maintaining a strong Balance Sheet
As of June 30, 2013, the company had around $2.66 billion in liquidity that constitutes $1,501.4 million of available credit facilities and $1.16 billion in cash and cash equivalents. Through cost reduction, Kinross continues to maintain balance sheet liquidity and strength as a key priority objective. On June 10, 2013, Kinross announced the extension of the maturity dates of its $1.0 billion term loan and $1.5 billion revolving credit facility to Aug. 10, 2017, and Aug. 10, 2018, respectively. With these extensions, Kinross will have no debt maturities prior to 2016, and for the remaining $170 million balance of the Kupol term loan, only regular principal amortization payments.
In its efforts to gain a strong growth profile among leading gold producers, Kinross has made steady progress in advancing its projects. It has streamlined its capital expenditure program, while focusing on its priorities, and avoiding getting overboard in its expansionary moves.
The Tasiast gold deposit of Kinross has 20 million ounces of mineral resource base. A full feasibility study is being conducted on the Tasiast expansion project, and is expected to be completed in 1Q14. The construction of the second-most important project, Dvoinoye mine in Russia, is in progress, with first operations expected to begin in 3Q13 (targeted production by 4Q13).
The unfavorable gold price environment and strengthening dollar is weighing on the gold price. Considering the shaky environment for the gold price and its negative impact on the company's cash flows, Kinross suspended its semi-annual dividend. The world's largest gold consumer, India, has placed restrictions on its imports, which has affected the price as well as demand for the yellow metal. For the reasons explained above, I tend to have a bullish approach on the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by an Analyst at ResearchCows, ResearchCows is not receiving compensation for it (other than from Seeking Alpha). ResearchCows has no business relationship with any company whose stock is mentioned in this article. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the company's SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.