Introduction
Even though Kinross Gold (NYSE:KGC) has more than doubled from its March 13th lows of $3.47, the current macroeconomic environment has created a perfect storm where the price of gold is poised to skyrocket while oil, one of the largest costs associated with mining, is in free fall. With this, Kinross is dedicated to further reducing costs, keeping its gold output levels steady, and advancing on future developments all the while it trades at EBITDA levels severely depressed compared to peers.
Investing in a company that has more than doubled in the past 40 days can be scary, but I will detail why there still remains an incredible upside.
Gold
As mining stocks remain a leveraged play on gold, it is incredibly important to have an understanding of the underlying commodity and where it is headed in the future. Along with current economic pressures having people rush towards a storage of wealth, a very under-looked metric has turned negative. It is no longer published in any financial reports, but we can determine this rate with two components: the gold leasing rate and LIBOR.
This metric is called the Gold Forward Rate or GOFO. This rate is determined by taking the LIBOR rate minus the gold leasing rate (GLR). What this rate determines is how much interest an investor would have to pay to borrow dollars using gold as collateral.
For example, an investor would exchange gold for dollars, repay the interest plus principal, and receive the gold back. If the GLR is 3% and LIBOR is 1.5%, the investor would have to pay 1.5% interest.
Right now, it is much different. The GLR is, currently, lower than LIBOR signaling that the market is willing to pay a higher interest rate on a dollar loan than on a gold loan. This is important because it
