Kinross Gold: Unlocking The Value In The Ground

| About: Kinross Gold (KGC)

Kinross Gold (NYSE:KGC) has been busy on the exploration and development front in the first half of 2012, which will yield significant benefits going forward.

The second quarter of 2011 saw revenue jump to $987.8 million dollars and EPS of $0.22 as production jumped 26% from a year ago.

The average realized gold price during the quarter came in at $1,449 per ounce, held back $63 per ounce by hedges acquired in the Kupol deal along with remaining hedges from Bema. The hedges have been offset by Kinross but mark to market losses will continue to accrue until they expire in June of next year.

Currency risk was appropriately hedged in the second quarter with a recorded gain of $6.7 million dollars.

Tasiast expansion has been pushed back to 2012 in order to incorporate the new drill results. As mentioned in a different article, 6.4 million ounces were upgraded from Inferred to Measured and Indicated showing that the drill program is yielding strong results and the deposit continues to be open to the north, south, and below the ore body.

Management is reviewing the potential for a LNG plant to be added onsite for power in a move away from Heavy Fuel Oil to mitigate rising costs.

On August 10, Kinross announced a 20% increase in the dividend to $0.06 per share indicating a strong view on the gold price and margins going forward.

On August 16, Kinross priced a $1 billion dollar debt offering to cover expanded capex costs.

Due to the purchase of the remaining 25% interest in Kupol gold production forecast for 2011 was upped from 2.4-2.5 million ounces of production to 2.6-2.7 million ounces and 11.8-12.2 million ounces of silver.

Kinross has taken flak from investors over the past year for the price paid for the Tasiast deposit in Mauritania, but the recent drilling program is yielding strong results. Challenges continue such as the remaining gold hedges, but if one takes a look at Kinross’s market value in relation to the Proven and Probable Reserves along with total overall reserves and resources, the stock is significantly undervalued.

The ability of Kinross’s management to operate in difficult jurisdictions should not be overlooked by investors. This is an undervalued asset that cannot be easily quantified on financial statements.

Technically, the stock continues to move higher after making a double bottom in March and May as investors realize the value on Kinross’s balance sheet.

As the new projects come online and the gold in the ground is converted to cash Kinross’s stock price will likely outperform the market and investors will take a look at a company whose stock has been beaten down.

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