Click to enlargeGold miner Kinross Gold Corporation (NYSE:KGC) recorded net income of $121.6 million or 17 cents per share in the third quarter of 2010, significantly higher than last year’s $1.7 million or zero cents per share and surpassed the Zacks Consensus Estimate of 16 cents per share. Including one-time charges, the company earned $123.6 million or 16 cents per share during the quarter. (See conference call transcript here.)
The results of the company were positively impacted due to the acquisition of the West African company, Red Back Mining Inc. (OTC:RBIFF), in the third quarter of 2010. Due to this acquisition, Red Backs’ Chirano Gold Project in Ghana and the Tasiast Gold Mine in Mauritania were added to Kinross’ portfolio.
Quarterly revenues leaped 26% to $735.5 million due to an increase of 24.5% in average realized gold price to $1,190 per ounce. About 11,000 ounces of Red Back assets were also sold.
Gold production increased 7% to 575,065 ounces driven by improved performance at the Paracatu expansion plant, the addition of new production from the heap leach at Fort Knox and the acquisition of Red Back assets. Production in the third quarter also included 20,238 ounces from the Red Back Mining assets in West Africa.
Cost of sales per ounce for Kinross operations (excluding the impact of the Red Back acquisition) was $508, an increase of 9% versus the prior-year quarter. Cost of sales including the impact of the Red Back acquisition was $517 per ounce.
US: Kinross operates 3 major mines in the US, namely Fort Knox, Round Mountain and Kettle River-Buckhorn. In the third quarter of 2010, gold sales went up 18% to 209,685 ounces against production of 203,844 ounces, up 20.3% year over year.
At Fort Knox, Kinross sold 112,797 ounces of gold against production of 108,680 ounces. Sales increased significantly by 46% and production surged 79.3%. Cost of sales was $501 per ounce down 17.6% from $313 per ounce in the year-ago quarter
At Kettle River, gold sales declined by 18.7% to 46,996 ounces. Production went down 5.7% to 46,687 ounces at costs of $647 per ounce (up from the prior-year cost of $529 per ounce). Sales at the Round Mountain mine also declined 15.4% to 49,892 ounces while production plunged 18.4% to 48,477 ounces. Costs were up by 22.3% at $647 per ounce.
Russia: Kinross holds 100% interest in the Kupol mine in Russia, where sales went down by 24% to 164,392 ounces on production of 159,393 ounces, a decline of 25.7% year over year. The decline in sales and production was attributable to lower ore grades at the mine. Costs increased 25.7% to $347 per ounce.
Brazil: In Brazil, Kinross owns two mines - Paracatu and Crixas. At Paracatu, sales volume shot up by 59% to 134,702 ounces while production grew by 50.7%. Paracatu recorded its highest quarterly production and lowest costs for the year. Cost of sales per ounce of $505 was down 33.9% from the prior-year quarter.
At Crixas, Kinross sold 20,743 ounces of gold against production of 19,866 ounces. Both sales and production were lower than the last year’s level. Cost of sales at Crixas was $483 per ounce compared with $437 in the year-ago quarter.
Chile: At the La Coipa mine in Chile, Kinross recorded sales volume of 43,747 ounces, a decline of 6.7% year over year. Production of 53,471 ounces was down by 22.5%. Cost of sales was significantly higher by 60.9% at $729 per ounce. Lower filter plant capacity impacted production at the mine leading to an increase in costs.
At the Maricunga mine, sales were down 44.7% to 31,215 ounces and production also declined considerably by 49.6% to 28,844 ounces. Costs escalated 61.5% to $868 per ounce. Both costs and production at the Maricunga mine were affected by bad weather.
Africa: Production at Tasiast Gold Mine in Mauritania was 8,853 gold ounces at cost of sales of $1,098 per ounce. Production was below Red Back’s previous forecast due to leaks in one of the two water supply lines, which limited dump leach operations during the quarter.
Kinross has completed engineering for an Adsorption, Desorption and Refinery plant for the dump leach facilities. Construction has commenced and the plant is expected to be operational in the third quarter of 2011.
Production at Chirano Gold Project in Ghana was 11,385 gold equivalent ounces at cost of sales of $970 per ounce.
Kinross continues to realize the benefits of its growth strategy. Stronger gold prices have led to the increase in revenue and cash flow before changes in working capital. Adjusted operating cash flow of $258.7 million or 37 cents per share was up 27% in the same quarter of the previous year. Cash and cash equivalents and short-term investments were $1,380.8 million versus $632.4 million as of December 31, 2010.
Acquisitions and Divestures
Kinross expects to benefit from the Red Backs’ Chirano Gold Project and the Tasiast Gold Mine due to the acquisition completed in September 2010. The acquisition gives Kinross a strong position in West Africa, one of the world’s fastest-growing and most prospective gold regions.
In the reported quarter, Kinross also acquired 100% interest in the Dvoinoye deposit and the Vodorazdelnaya property after receiving approval by the Russian Government. Further, to consolidate its position in the Kupol mine in Russia, Kinross completed its agreement with B2Gold Corp. (BGLTF.PK) for acquiring B2Gold’s rights in the Kupol East and West exploration licence areas adjacent to the Kupol mine site.
Kinross Gold also completed the sale of its Harry Winston’s (HWD) common shares of 15.2 million. Net proceeds were $185.6 million and a gain of $146.4 million was realized. The company also completed the sale of its 22.5% stake in the Harry Winston's Diavik Diamond Mines back to Harry Winston' for net proceeds of $189.6 million. The transaction resulted in a gain of $95.5 million.
Following the completion of the Red Back acquisition, Kinross also included the production from Red Back Mines and revised its production forecast in the range of 2.3 to 2.5 million ounces for fiscal 2010, up from its previous forecast of 2.2 million ounces. The company expects the cost of sales to be in the range of $505–$520 per ounce, up from $460–$490 per ounce.
Capital expenditure guidance has been raised to $550 million (for operations excluding West Africa) from its prior expectation of $590 million. However, Kinross expects capital expenditures for the West Africa operations, from closing of the Red Back transaction until end of 2010, to be $80 million. Total capital expenditures for all Kinross operations are thus expected to be $630 million.
Kinross expects production of about 2.2 million ounces of gold in 2010 at a cost of $460–$490 per ounce. The company expects costs to average at the higher end of the range. In Chile, Kinross expects production of 350,000–380,000 ounces of gold at an average cost of $630–$680 per ounce, down from the initial forecasts of 460,000–480,000 ounces at an average cost of sales of $500–$520 per ounce.
As a result of the Red Back acquisition, Kinross has increased its 2010 exploration forecast from $102 million to $130 million.
Kinross Gold Corporation, like other gold producers, Barrick Gold Corporation (NYSE:ABX) and Newmont Gold Mining (NYSE:NEM) benefits from rising gold prices. We expect Kinross’ exploration projects and acquisitions to boost its top line going forward.
However, production levels are shrinking at some of Kinross’ existing operations. About 40% of Kinross’ gold reserves are located in Chile, which is presently experiencing significant production declines. We expect higher mining and administrative costs to further constrain margins.
Currently, KGC has a short-term (1 to 3 months) Zacks #3 Rank (Hold) and a long-term recommendation of Neutral.
Disclosure: No position