Gold miners have taken a blow to the head. Dazed, unsteady on their feet or down on the ground, casualties are everywhere. Year-to-date Barrick (ABX) is down nearly 47%, Goldcorp (GG) 31%, Yamana (AUY) 42% while the SPDR Gold Trust ETF (GLD) is down only 20%. Apparently, investors think that gold miners, after falling off a cliff, are going to hit the rocks instead of the water. Kinross (KGC) has joined its senior brethren, outdoing them with an even more stomach-churning swoon of -48% YTD. Gold bugs are screaming "just make it STOP!"
Kinross has rolled back the clock to May 2005, which was the last time you could've picked it up in the high four-dollar range. Buy and hold advocates would be about even after eight years, having collected 62 cents in dividends, a stunning 1.5% return. And now the dividend has been suspended.
Earnings have been patchy over the last 10 years to say the least. Net income was over $700 mil in 2010 but the company lost over $4 bil in 2011 and 2012 combined; the result of write-offs of investments. Consensus estimate for this year is 31 cents per share ($353 mil). The crystal ball crowd is looking for 24 cents in 2014. Even the low estimate of 9 cents per share for next year maintains profitability for the miner. Reducing the 2014 number to 20 cents per share gives a P/E of around 24. Hardly a bargain but enough to keep the company going until the good times return.
Management is currently saying balance sheet strength is their one and only motto. They have reduced capital spending through project delays and cutbacks. The dividend suspension saves $90 mil per year.
I can feel a pulse
Looking at the stock price action over the last few months it looks as if the grave diggers' shovels are out. But KGC is far from terminal:
- Current ratio as at June 30 was 3.69
- Cash on hand of $1.163 bil plus available credit of $1.5 bil is ample liquidity
- Net debt to equity is only about .15
- Bond ratings stand at lowest investment grade
- Trading below book value of $5.92/share (tangible book is $5.50)
- Production cost of $737/oz with AISC (all-in sustaining cost) of around $1100/oz
Moody's and S&P have not sounded any alarm over KGC's financial outlook. Of course they were a little behind with ratings during the financial crisis, but perhaps they have tightened up their standards. Looking at their investment grade ratings and stable outlook for Kinross, it seems a reasonable assumption that the company is here for the long term. But is it worth a buy rating?
Buy it and forget it
Barring an encore of 2009, during which KGC never came close to today's miserable levels (it hit a low of $8.41 in April 09), it's hard to imagine much downside here. Gold will rebound one day. Far off in the future perhaps, or maybe next month. As one of my favorite principles goes: predictions are the weak link in investing. And, of course, Warren's advice: "Be Fearful When Others Are Greedy and Greedy When Others Are Fearful." These days you can smell the stench of fear surrounding Kinross.