Kinross Gold: Time To Ring The Register

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About: Kinross Gold Corporation (KGC)
by: Taylor Dart
Summary

Kinross Gold is up 70% in two months and is outside its acceleration bands for the first time in over two years.

The company beat earnings in its most recent report and expects to see annual earnings per share grow 140% from FY-2018 to FY-2020.

While I believe the stock is a hold medium term, I believe this is a prudent spot to take some profits for traders.

Kinross Gold (KGC) reported strong earnings for Q2, and even managed to pick up a new project in Russia with a lot of promise. While there are certainly positive developments long term, the stock is getting quite ahead of itself short term. The last time the stock went outside its acceleration bands to this degree, all further upside progress over the next three weeks was given back immediately. For this reason, I believe this to be a prudent spot to take partial profits for position traders holding the stock. There's certainly a possibility for the stock to head higher and break out of its $5.50 area resistance later this year, but the stock looks to be quite susceptible to a pullback in the meantime.

(Source: TC2000.com)

Kinross Gold is a name I've shied away from in the past due to its less attractive operating jurisdictions, but the company is undoubtedly making progress from an earnings standpoint. The company is expecting to see annual earnings per share grow by more than 100% in FY-2019 and plans to follow that up with another year of double-digit growth in FY 2020. This will place the company's earnings trend back near the highs of its multi-year range. The new acquisition of the Chilbaktan project this week will likely be accretive to the company by FY-2022 assuming all goes smoothly with development and would be an excellent low-cost addition to their portfolio.

(Source: YCharts.com, Author's Chart)

Taking a look at revenue growth, Kinross Gold has gone from a period of negative year-over-year sales growth to a double-digit quarter in their most recent results. This is an excellent start, and I would expect another double-digit beat after what was a soft Q3 last year with $753.9 million in revenues, the lowest revenue quarter in FY-2018. The company initially provided 2019 cost guidance of $995/oz all-in sustaining costs, and the company is well on track to meet these targets thus far. Company-wide all-in sustaining costs for the first half of the year came in at $925/oz, which is 7% below guidance, and Tasiast has now seen the third quarter in a row of improved costs. Thus far, operational performance is exceeding the estimates from the feasibility study.

(Source: YCharts.com, Author's Chart)

While Kinross Gold has not seen much improvement in all-in sustaining costs the past several years, I believe this has the potential to change as we head into the future. Looking at the below chart of all-in sustaining costs below, we can see that if Kinross' all-in sustaining costs come in at my estimates for FY-2019, this will mark the second best year for costs since FY-2014. In addition, Round Mountain Phase W is nearing completion and on budget, and achieved its first gold pour in May. All-in sustaining costs per the Feasibility Study are below $900/oz and below the company's current cost average.

Taking a further look into the future, shareholders should be pleased with Kinross' recent acquisition of the Chilbatkan Project in Russia. The company purchased the project for $283 million, with 40% cash and 60% shares. The company spent 16 months completing extensive due diligence on the project involving metallurgical testing and a small drill program, with the company ensuring sample validity during the process. The company believes that Chilbatkan could produce more than 1.8 million ounces over a six-year mine life, at all-in sustaining costs near the $550/oz range. Even if we aim to be conservative given how preliminary these numbers are, and assume all-in sustaining costs will come in 15% higher at the $630/oz range, this is still more than 35% lower than the company's all-in sustaining costs on a consolidated basis. I would be shocked if all-in sustaining costs deviated more than 15% from Kinross' estimates as open-pit heap leach deposits are quite predictable as long as the metallurgical work for recoveries is correct.

(Source: Company Presentation)

The project currently holds a resource of 4 million ounces at an average grade of 1.4 grams per tonne gold, and confirmatory drilling seems to have hit a high-grade structure within the resource. The current resource estimate represents less than 1% of the footprint of the 120 square kilometer license area, with multiple targets still to test. The only negative about the acquisition is the high capital costs for the project at an estimated $500 million, but I'm confident they can bring down these estimates with further optimization studies. The construction timeline is currently estimated at two years.

(Source: Company Presentation)

Based on Kinross Gold coming in significantly lower than its all-in sustaining cost guidance for the first half of the year and the majority of their mines performing better than last year, investors should be pleased to see the company executing exceptionally on their plans. The company's vision to go after low-cost projects with minimal complexity also is a huge plus as it shows they've learned from their Aurelian days when they were more likely to go after high-reward projects that also carried high risk. While sustaining capital is expected to peak in Q3, I'm still confident the company will beat cost guidance for FY-2019, and would not be surprised to see the company come in at $960/oz - $970/oz to finish the year. These costs in the lower end of the range, in addition to gold prices at the highest end of the range over this period should drive revenue growth and put a tailwind under earnings per share going forward.

So why would we consider selling a stock with such a positive outlook that's growing annual EPS at over 100% this year? Let's take a look at the technical picture:

As a reminder, I do not think cleaning out one's full position in Kinross Gold is wise here, but I do believe this is a prudent spot to trim a little off the top. The reason for this is that while Kinross Gold saw a great quarter fundamentally, the stock has gotten a little ahead of itself short term. Looking at the below weekly chart of the stock, the company has jumped nearly 10% outside of its acceleration bands, and this tends to provide a headwind to further gains. The last time this occurred, Kinross ran up another 15% over the next two weeks, before falling 30% and giving up all of those gains. For this reason, I believe that any further strength above the $5.10 level is providing position traders an opportunity to trim one's position. This does not mean that further gains aren't possible or that the stock can't run up to $5.50 first, the point is that these gains typically are not sustainable.

(Source: TC2000.com)Moving to a zoomed-in daily chart of the stock, Kinross Gold is trading in a large box between $2.50 and $5.50, and I would be shocked if the stock busted through $5.50 resistance on its first attempt. While this area might be overcome sometime later this year, the stock looks to be low on gas as it approaches this level currently. For this reason, nimble position traders could take advantage of selling into this area and looking to repurchase the stock on its next pullback. Judging by how Kinross Gold acted the last time it went through its weekly bands, a pullback of 10%-15% is undoubtedly on the table here from the $5.15 level. A correction of this magnitude would be completely normal after a 70% run higher in a straight line.

(Source: TC2000.com)

To summarize, Kinross Gold is in the best shape it has been in for a while, and the company's recent acquisition was a great move by management. Ultimately, the project looks like it could easily hold more than the 4 million-ounce current resource, and the company has a history of success operating in Russia. While I believe the stock is a hold for the core of one's position, I see the current rally as providing both investors and traders an opportunity to sell one-third of their position. I always take advantage of sharp rallies in stocks to take some profits, and it's not every day you get a stock up 70% in two months. Kinross Gold could easily break the $5.50 resistance level later this year, but I'm less convinced it's going to do it on its first try this time around.

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.