Kinross Gold: Potential Buy for Risky Portfolios

Mar. 1.11 | About: Kinross Gold (KGC)

Kinross Gold (NYSE:KGC) is a mid-tier gold producer with a globally diverse portfolio of projects ranging from the United States and Ecuador to West Africa and the northern reaches of Eastern Russia.

For fiscal year 2010, gold production was up 4% to 2.3 million ounces from 2009 with revenue rising by 25% to $3 billion dollars on the back of strong gold prices. EPS more than doubled to $0.93 from $0.44 a year ago despite an increase in shares outstanding of more than 130 million shares.

The balance sheet is in good shape with $1.46 billion in cash on hand and $630 million in long-term investments. Proven and Probable (P&P) reserves rose by 23% from 51 million ounces in 2009 to 62.4 million ounces in 2010 and Measured, Indicated & Inferred (MII) resources rose from 32.8 million ounces in 2009 to 41.7 million ounces in 2010.

Kinross was extremely busy on the acquisition and divestiture front in 2010 with 8 transactions completed, the largest of which was the acquisition of Red Back Mining with an acquisition cost of approximately $7.4 billion, of which $5.1 billion is classified on the balance sheet as goodwill. The Red Back purchase gave Kinross a 90% stake in the Chirano gold mine in Ghana and a 100% stake in the Tasiast Mine in Mauritania.

Tasist reserves have grown from 4.5 million P&P and MII reserves at year end 2008 to 18.3 million P&P and MII reserves at the end of 2010. Estimated capex is $1.8 billion with an additional $400 million contingency. A feasibility study is scheduled to be completed in mid-2011 with construction expected to start in mid-2012 with operations commencing in the first half of 2014. Some key processing equipment has already been ordered.

The Fruta del Norte deposit was acquired in the 2008 purchase of Aurilian Resources. The Fruta del Norte deposit is a large scale gold mine in Ecuador, which ran into some problems in the exploration phase due to the Ecuadorian governments limited experience with respect to large scale mines. Kinross has been working with the government and expects to be the first major project approved under the 2009 mining law with an estimated capital cost of $1.1 billion.

By end of the third quarter 2011, Kinross should be delivering feasibility studies on the Fruta del Norte, Tasist, and Lobo-Marte projects and investors should get some clarity on how the projects are expected to be funded.

Kinross stock is down heavily on the year as the company has been hit by problems relating to the global rerating of risk along with higher oil prices. Technically, the stock is in a very difficult position and is nearing key support levels. If support holds this may be a good position to average into a long-term position as the company’s history and ability to work in difficult situations globally is an asset.

There will continue to be execution risk based on the new projects coming into production in the coming years and dilution risk due to questions surrounding how the new projects will be funded once the feasibility studies are delivered.

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