Given the expansion of the base of the producing fields, perfectly optimized chain of production, the lowest cost of production per ounce (and expected growth of gold as a conservative asset), for any scenario movement of the world economy I assign Kinross gold a medium term recommendation of BUY.
In this article you will not find in-depth macroeconomic analysis, searching for causes and effects, and forecasts. The main purpose of this research is to show the existing asymmetry in the market's assessment of the company's shares.
First we look at the global picture, listing the most important facts relating to gold mining industry.
With a maximum value of 1813 USD per ounce in 2011, gold lost almost 38% of value and fell to 1,100 USD in 2016.
This fact adversely affected the gold mining industry, knocking out some smaller players from the market and forcing the biggest companies to suffer losses for a long time.
From 2007 to 2011 the change in the global demand for gold (cumulative growth of +52% ) spurred its price, but since 2011 the situation has changed: from 2011 to 2015 (-10.6%).
At the same time the average total cost of production of a Gold ounce at the end of 2015 amounted to $1,100/oz (an increase of 8% from 2014).
In practice, when the gold price goes below $1,300 per ounce the major manufacturers start to suffer losses (covered by borrowed funds).
Kinross gold - Fundamental factors.
Let's compare the dynamics of the fundamental factors for KGC in best 2008 year (by value of shares) and in 2015.
There is a disparity in the growth of indicators:
1) For the period cost of sales increased by 64% while revenue grew 114%
2) On the world market the gold price decreased by 39%, and margin per ounce sold for KGC slipped only 10% (taking into account changes in the price of gold).
3) Comparing the Cash flow of the company during the reporting and previous years it is necessary to consider the difference in capital expenditures: in 2008, capital expenditures amounted $714.7 million, and in the period from 2011 to 2015 we can see an average capex of $1.3 billion. KGC has invested in the development of new formation and support of existing fields.
4) Compare Cost of sales per ounce sold for the biggest players of the in 2015:
Kinross Gold Corporation : $668 (NYSEARCA:USD)
Barrick Gold Corporation : $1100 (USD)
Gold Corporation : $934
Newcrest Mining : $789
Newmont Mining : $706
These factors indicate serious competitive advantages for KGC: the industry's best optimization of cost and a wide network of fields.
KGC - The asymmetry of risk and potential return.
KGC reached the lowest cost of sales in the industry and increased production volume. Despite low gold prices company continues to generate significant cash flow and make a net profit.
In a situation of global stagnation and the emergence of crisis phenomena in the global economy, investors are moving into defensive assets. Although the role of gold in the last decade has changed, the scenario of its using as a defense asset is still quite real. So, the task of raising its value is real.
In case of increasing of gold value, KGC has potentially unlimited growth. When the value of gold ounce comes to $1700, we can expect based on fundamental factors the cost of KGC at the level of 16-18 USD per share, which is more than 1000% growth.
Moreover, the company's margin of safety still high. Even with the price of gold at the level of USD 700 the company will be able to maintain the viability, in contrast to its competitors.
Therefore, KGC is a long term investment opportunity, with low level of risk and a potentially large profit.
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.