Kinross Gold Corporation Is Destroying Value

| About: Kinross Gold (KGC)

Summary

Kinross Announces 2015 Q4/full-year results and 2016 guidance on February 10, 2016.

I estimate Kinross Gold Corporation's (USA) returns' exposure to changes in gold price and stock market.

Cost of capital vs. ROI: Kinross destroys value.

Kinross to Announce 2015 Q4/Full-Year Results and 2016 Guidance on February 10, 2016

January 07, 2016

Company Provides 2016 Quarterly Reporting Schedule

TORONTO, ON -- (Marketwired) -- 01/07/16 -- Kinross Gold Corporation [KGC] will release its fourth quarter and 2015 full-year financial statements and operating results on Wednesday, February 10, 2016, after market close. The 2015 Q4 and full-year release will also include the Company's full-year guidance for 2016 and its mineral reserve and mineral resource statement as of December 31, 2015. Kinross will hold a conference call and audio webcast on Thursday, February 11, 2016 at 8 a.m. ET to discuss the results, followed by a question-and-answer session.(here).

Kinross Gold Corporation (NYSE:KGC) is a senior gold mining company. The Company is engaged in gold mining and related activities, including exploration and acquisition of gold-bearing properties, the extraction and processing of gold-containing ore, and reclamation of gold mining properties. The Company's segments include Fort Knox, Round Mountain, Kettle River-Buckhorn, Kupol, Paracatu, Maricunga, Tasiast and Chirano. Its gold production and exploration activities are carried out principally in Canada, the United States, the Russian Federation, Brazil, Chile, Ghana and Mauritania. Its gold is produced in the form of dore, which is shipped to refineries for final processing. It also produces and sells silver.

Kinross may be adversely affected by global financial conditions.

The volatility and challenges that economies are experiencing around the world continues to affect the profitability and liquidity of businesses in most industries, which in turn has resulted in the following conditions that may have an effect on the profitability and cash flows of the Company:

  • Volatility in commodity prices and foreign exchange rates;
  • Tightening of credit markets;
  • Increased counterparty risk; and
  • Volatility in the prices of publicly traded entities.

The volatility in commodity prices and foreign exchange rates directly impacts the Company's revenues, earnings and cash flows, as noted above.

Although tighter credit markets have restricted the ability of certain companies to access capital, to date this has not affected the Company's liquidity.(here).

I want to estimate Kinross Gold Corporation's (USA) returns' exposure to the stock market and changes in gold price through a two-factor model. The betas coefficients measure the market's and gold price's explanatory power to the gold stock returns.

First a summary of past financial results (annual and quarterly) and operating results.

Past financial results of the gold stock - a summary:

The following table summarizes total attributable production and sales from continuing operations by Kinross in the last three years:

Click to enlarge

Gold is a metal that is traded on world markets, with benchmark prices generally based on the London market. Gold has two principal uses: product fabrication and bullion investment. Fabricated gold has a wide variety of end uses, including jewellery manufacture (the largest fabrication component), electronics, dentistry, industrial and decorative uses, medals, medallions, and official coins. Gold bullion is held primarily as a store of value and a safeguard against devaluation of paper assets denominated in fiat currencies. Kinross sells all of its refined gold to banks, bullion dealers, and refiners.(here).

The following table set forth for the years indicated the high and low London Bullion Market afternoon fix prices for gold:

Exposure of Kinross Gold Corporation's returns to changes in the stock market (S&P 500) price and to changes in the gold price (London bullion market), over the period 2004-2014. Frequency: monthly. Aggregation method is average for gold price.

Here are the results (2004-2014):

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Intercept

-0,01320987

0,010628753

-1,24284

0,215974

-0,03422091

0,007801161

Rmkt

0,650085533

0,257952012

2,52018

0,012836

0,140163168

1,160007899

Rgold

1,096556715

0,255380695

4,293812

3,24E-05

0,591717358

1,601396072

Click to enlarge

AVG

Rmkt

Rgold

Monthly

0,55%

0,91%

Annual

6,63%

10,92%

Click to enlarge

Kinross Gold Corporation's returns are less volatile than the stock market (S&P 500) and slightly more volatile than the commodity price over the period 2004-2014.

Both variables are statistically significant in explaining the returns on KGC.

Rkgc = [-0.013 + (0.65 x 6.63% + 1.10 x 10.92%)] x 100 = 15.02%.

As of December 31, 2014:

E/(E+D) = 0.70 is the percentage of financing that is equity.

D/(E+D) = 0.30 is the percentage of financing that is debt.

As of Dec. 2014, Kinross Gold Corp.'s interest expense was $80.1 million

Cost of Debt = 80.1/2,058 = 3.89%.

I used the latest four-year average tax rate to do the calculation, that is -13.61%.

I have all what we need to compute Kinross's cost of capital:

Kinross' cost of capital = (0.70 * 15.02% + 0.30 * 3.89% * (1-0.1361)) x 100 = 11.52%.

Ratio: ROI

Company

industry

sector

Return on Investment (TTM)

-19.07

1.18

12.38

Return on Investment - 5-Year Avg.

-12.95

6.16

18.00

Source

Click to enlarge

Conclusion:

Exposure of Kinross Gold Corporation's returns to changes in the stock market (S&P 500) price and to changes in the gold price (London bullion market), over the period 2004-2015. Frequency: monthly. Aggregation method is average for gold price.

Waiting for Kinross Gold Corp. to release its 2015 Q4/full-year results. As of December 31, 2014, the company's cost of capital is 11.52%. Its return on invested capital is -12.95% (5-years average). Kinross Gold Corp. earns returns that do not match up to its cost of capital. It destroys value as it grows.

Here are the results (2004-2015) of the stock returns' exposure to the stock market and changes in the precious metal price:

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept -0,01320987 0,010628753 -1,24284 0,215974 -0,03422091 0,007801161
Rmkt 0,650085533 0,257952012 2,52018 0,012836 0,140163168 1,160007899
Rgold 1,096556715 0,255380695 4,293812 3,24E-05 0,591717358 1,601396072
Click to enlarge
AVG Rmkt Rgold
Monthly 0,47% 0,77%
Annual 5,62% 9,24%
Click to enlarge

Kinross Gold Corporation's returns are less volatile than the stock market (S&P 500) and slightly more volatile than the commodity price over the period 2004-2015.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.