Kinross Gold Corporation: Repercussions On The Value Of A Weak Cost Structure

| About: Kinross Gold (KGC)

Summary

In my previous article, I have shown why NYSE:KGC is destroying value.

Kinross' mediocre production costs weighed on its ability to generate returns in excess of its cost of capital.

I have measured the impact of a “bad news” (estimate EPS > actual EPS) on the value of the gold stock.

Latest analysts' estimates.

In my previous article, I have shown why NYSE:KGC is destroying value. The company earns returns that do not match up to its cost of capital.

With an event study on Q4, 2014 NYSE:"KGC earnings announcements, I have measured the impact of a "bad news" (estimate EPS > actual EPS) on the value of the gold stock; the impact of a weak cost structure on the market value of the stock.

Analyzing what happened in the recent past is very important and, therefore, should also be taken into account..

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

Company Provides 2016 Quarterly Reporting Schedule

TORONTO, ON -- (Marketwired) -- 01/07/16 -- Kinross Gold Corporation (TSX: K) (NYSE: 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).

Fourth quarter of 2014, Kinross Gold Corporation (NYSE:USA) reported EPS of -$0.01 while analyst estimate was $0.01; a surprise of -200.00%.

Third quarter of 2015, the gold company reported EPS of -$0.02 vs. analyst estimate of -$0.03; a surprise of 33.30%.

I will examine the impact of the two earnings announcements on the value of NYSE:KGC.

Event study:

"Kinross Reports 2014 Fourth-Quarter and Full-Year Results Record Production of 2.71 Million Au eq. oz. Exceeds Guidance; Approximately $1 Billion in Cash on Balance Sheet; Company Not Proceeding With Tasiast Mill Expansion at Present Time

Kinross Gold Corporation February 10, 2015 5:00 PM

TORONTO, ON--(Marketwired - February 10, 2015) - Kinross Gold Corporation (TSX:K.TO) (NYSE:KGC) today announced its results for the fourth quarter and year-end December 31, 2014.

[…]

Earnings/loss: Adjusted net loss2,3 was $6.0 million, or $0.01 per share, for Q4 2014, compared with an adjusted net loss of $25.1 million, or $0.02 per share, for Q4 2013. Full-year 2014 adjusted net earnings were $131.1 million, or $0.11 per share, compared with $321.2 million, or $0.28 per share, for full-year 2013.

[…]. " (here).

Event day: "Kinross Reports 2014 Fourth-Quarter and Full-Year Results", (February 10, 2015 5:00 PM).

Event window (from January 12, 2015 to March 11, 2015): 20 days prior to the event day plus the event day plus 20 days post the event day.

This was 'Bad News' since EPS actual was more than 2.5% less than expected. It was -200.00% surprise.

I use the 250-trading-day period prior to the event window as the estimation window (from January 14, 2014 to January 09, 2015) for this announcement ('Bad News').

So I will estimate the 2-factor model parameters (intercept and the beta coefficients of the function Rabx = f(Rsnp500; Rgoldpr.), where Mkt = S&P 500 and goldpr = Gold Fixing Price 3:00 P.M. (London time) in London Bullion Market, based in U.S. Dollars [GOLDPMGBD228NLBM],over the 250 days prior to the event period.

I run the regression tool in excel to estimate the beta coefficients:

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Intercept

-0,000923716

0,00188

-0,49132

0,623639

-0,004626757

0,002779326

SnP500

0,748276312

0,262135

2,854546

0,004676

0,231971471

1,264581154

Goldpr

1,567373404

0,232662

6,736702

1,13E-10

1,109119262

2,025627546

Click to enlarge

R^kgc = -0,000923716 + 0,748276312*Rmkt + 1,567373404*Rgoldpr, is the mathematical expression that roughly summarizes the normal return of NYSE:KGC.

Now that I have the parameters of the 2-factor model, I can calculate the expected return, E(r), the abnormal return, AR, the abnormal cumulative return, CAR, and the abnormal return t-test, AR t-test. To calculate the expected return, E(r), we will substitute Rmkt and Rgoldpr. with the daily returns on S&P 500 and on GOLDPMGBD228NLBM in the 2-factor model over the event window.

To calculate the abnormal return (NYSE:AR), we need to subtract from the daily return on Kinross (which is the actual return) the expected return (E(r)) over the event window.

Then I calculate the cumulative abnormal return. The t-test is calculated instead as the abnormal return divided by the standard error. The standard error is 0,029658729.

The table represents the abnormal returns of KGC as well as the cumulative abnormal returns for earnings announcement of February 10,, 2015, categorized as 'Bad News'.

For this 'Bad News', the abnormal return of the event day has statistical significance. Thus, the earnings announcement had an impact on the value of the stock on February 11, 2015 (t-test is -2.11), abnormal return is -6.26%.

"Kinross Gold Stock Declining Today Despite Jefferies Price Target Hike (By

Krysta Michaelides), 02/11/15 - 11:02 AM EST

NEW YORK (TheStreet) -- Kinross Gold (KGC - Get Report) stock is slumping 7.25% to $3 in morning trading on Wednesday, even though Jefferies hiked its price target to $2.60 from $1.80 and retained its "underperform" rating.

"We remain concerned about KGC's future growth if the current gold price environment persists," Jefferies said.

COMEX Gold is down 0.67% to $1,223.90 as of 10:21 a.m. ET."(here).

As you can see from the screen shot below (from Google Finance), NYSE:KGC closed at $2.99 on February 11, 2015, volume: 15.55m. One week later, on February 18, 2015, the share price was $2.77, volume: 08.78m.

On February 13, 2015, 3 days after the event day, abnormal return is -7.2%, with an AR t-test of -2.427 (less than -1.96 or more than 1.96 in absolute value).

Gold price slumped because of low demand for gold,

"Low US inflation is negative for gold stocks such as Goldcorp (NYSE:GG), Barrick Gold (NYSE:ABX), Newmont Mining (NYSE:NEM), Kinross Gold , and gold-backed exchange-traded funds like the SPDR Gold Trust (NYSEARCA:GLD) and the Market Vectors Gold Miners ETF (NYSEARCA:GDX). Goldcorp makes up 10.7% of GDX, the largest percentage of the fund's holdings. These ETFs invest in all of the stocks mentioned above."(here).

And despite record production in 2014, Kinross' mediocre production costs weighed on its ability to generate returns in excess of its cost of capital (see my previous article).

"the company's total production costs are not low enough to earn an economic moat." (already quoted).

Kinross Gold Corporation 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.

Over the last year (Jan 29, 2015 - Jan 28, 2016) NYSE:KGC fell by 50.29%, the Market Vectors Gold Miners ETF (GDX), fell by 35.65%, the SPDR Gold Shares (GLD) fell 13.48%.

Barrick Gold Corporation, Goldcorp, Newmont, and AngloGold Ashanti (NYSE:AU) fell by 22.19%, 52.85%, 22.42%, and 25.96%, respectively, during the same period.

Gold Price (in London Bullion Market) fell by 12.51% during the same period:

Over the last month NYSE:KGC fell by 8.74%, the Market Vectors Gold Miners ETF (GDX), raised 2.97%, the SPDR Gold Shares (GLD) raised 5.29%.

Barrick Gold Corporation raised 30.67%, Goldcorp fell by 5.84%, Newmont Mining Corp. raised 5.08%, and AngloGold Ashanti raised 25.00%, during the same period.

Gold Price (in London Bullion Market) raised 4.85% during the same period: from $1,067.250 (December 29, 2015) per troy ounce to $1,119.000 per troy ounce (January 28, 2016).

Kinross Gold Corporation closed at $1.64 per share on January 29, 2016.

Analysts' estimates:

For the last quarter of 2015, average analysts' estimate of EPS is -$0.04. The high estimate for EPS is $0.00 and the low estimate for EPS is -$0.09.

Average estimate of revenue is $677.83M ranging from $575.00 to $735.83M.

Conclusion:

As I have explained in my previous article, NYSE:KGC is destroying value as the company earns returns that do not match up to its cost of capital.

Kinross's mediocre production costs weighed on its ability to generate returns in excess of its cost of capital (see my previous article, already quoted).

With an event study on Q4, 2014 KGC earnings announcements I have measured the impact of a "bad news" (estimate EPS > actual EPS) on the value of the gold stock; the impact of a weak cost structure on the market value of the stock.

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.