Kinross Gold: Assessment Of Risks For Russian Operations

| About: Kinross Gold (KGC)
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Summary

Russia could impose capital control to stop the fall of the ruble.

The increase of the key rate to 17% could bring problems for local suppliers of Kinross Gold.

Russia could sell its gold from reserves in order to stabilize its financial market.

Are these risks real?

In my previous article on Kinross Gold (NYSE: KGC), I stated that fears about the company's Russian assets were greatly exaggerated. Now, given the recent turmoil on the Russian financial market, it's time to revisit my stance.

The initial fears for Kinross Gold's Russian assets were based on the premise that the war of sanctions could go too far, and these assets could be nationalized. In my previous article on Kinross Gold, I argued that these fears were greatly exaggerated, and that Kinross Gold had no real risk for its operations in Russia. My position on this topic has not changed. However, other potentially dangerous possibilities emerged. First, the Russian government could enforce capital control if the ruble continues to fall further. Second, the Russian Central Bank has lifted its key rate to 17%. This was a move to stop the collapse of the ruble, but this rate is extremely dangerous for the already fragile economy. Third, there are rumors that Russia could start selling gold, in order to get more foreign currency and stabilize the ruble.

Let's start with the first threat. Inside Russia, many analysts called for capital control in order to stabilize the financial market of the country. UBS recently stated that there was a risk of introducing mild capital control measures in Russia. However, the government officials have repeatedly stated that the country was not considering capital control measures. The Russian prime minister Dmitry Medvedev echoed this view, and stated that it made no sense to impose severe foreign exchange regulation. However, he stated that the government would monitor the daily sale of foreign exchange earnings by exporters. On Wednesday, the Russian Central Bank came out with new measures for stabilizing situation, and there were no words on capital control in this document. In my view, the risk of real capital control measures is small. I believe that the government will discuss the problem with main Russian exporters (mostly oil and gas exporters) and ask them not to hold the foreign currency for too long. I think that the government will not go beyond these measures. Capital control would bring even more problems for an already battered economy, and everyone seems to understand this fact.

The situation with the new key rate is a bigger problem, as it affects the local contractors of Kinross Gold. The Russian version (please note that the link is in Russian) of Kinross Gold's web site states that Kinross Gold buys goods and services from local providers. Currently, uncertainty is immense for any local supplier because of high volatility of the ruble and the draconian key rate. However, the collapse of the ruble will make local costs cheaper for Kinross Gold. Russian mines have already been cost leaders for the company, and I expect that they will become even cheaper.

I don't typically comment on rumors, but the possibility of selling Russian gold from reserves looked like an interesting one, so I decided to elaborate on this. At the beginning of December, Russian foreign reserves stood (please note that the link is in Russian) at $419 billion. Monetary gold was just $45 billion. Given this fact, there is no urge for Russian government to sell gold while it has that much foreign currency, and I think that was the kind of the rumor that always comes with panic.

To sum it up, I do not see significant risks for Kinross Gold's operations in Russia in current environment. What's more, these operations could become cheaper in the best-case scenario. I remain bullish on Kinross Gold.

Disclosure: The author is long KGC.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.