- Kinross Gold pulls back from highs as global market optimism puts pressure on gold mining shares.
- Meanwhile, the price of gold has hardly changed since the beginning of April, which will translate into solid cash flow generation in the second quarter.
- The company has suffered no coronavirus-related disruptions and is positioned for a very strong year.
I’ve last written about Kinross Gold (NYSE:KGC) back in March when the sudden drop in the price of gold during the acute phase of the coronavirus crisis created a buying opportunity in the gold mining space. The stock has had significant upside since then but has recently pulled back from its highs, and it’s high time to revisit the thesis.
In my opinion, the recent downside move is due to the outflow of short-term speculative money, as the huge market upside forced traders and investors to chase stocks in the “riskier” groups and get out of “safe haven” gold-related equities.
However, the situation has not changed fundamentally for Kinross Gold. As I write these words, gold is trading at $1700 per ounce. Gold has been priced at or above $1700 per ounce since early April, creating a great environment for gold mining companies.
During the first-quarter earnings call, Kinross Gold stated that an average gold price of $1700 for the rest of the year will lead to free cash flow of more than $700 million. Sure, a high gold price is not a given, and additional optimism in the global markets could ultimately lead to a sell-off in gold. However, I think that many optimistic projections are already baked in global stock prices, while the money printing from the world central banks has no signs of weakening. These conditions create a favorable environment for gold.
In my above-mentioned article, I noted that the location of Kinross Gold mines decreased risk of coronavirus-related disruptions. So far, this projection turned out to be true. The suspected cases at the remote Russian mine were not confirmed to be COVID-19 (and now, the positive effects of the Russian lockdown together with the geographical position of the mine almost guarantee there’ll be no cases going forward), while other mines did not suffer from coronavirus as well.
The only disruption for Kinross Gold was the sudden strike at Tasiast in Mauritania. During the earnings call, management hinted that the strike was purely opportunistic in order to take advantage of the world turmoil during the pandemic. As it turned out, the government of Mauritania has requested to suspend the strike, which is not surprising given the country’s financial position - obviously, it needs income from mining at these unprecedented times.
Kinross Gold finished the first quarter with $1.1 billion of cash and $2.5 billion of debt as it decided to increase its cash position by using the credit facility - a move done by many miners as a precaution during the pandemic. It generated $300 million of operating cash flow due to favorable gold price environment and solid operating performance. Meanwhile, it spent $191 million on capex, so the company is firmly in the positive free cash flow zone thanks to the gold price environment.
While the virus will have some impact on productivity through social distancing measures, the favorable exchange rates of the Russian ruble and Brazilian real will continue to provide support despite the recent strengthening of both currencies.
In the first quarter, Kinross Gold recorded all-in sustaining costs (AISC) of $993 per ounce, which means the company has a very solid margin at current prices and also in case gold price dips below $1700 per ounce. The first-quarter average realized gold price was $1581 per ounce, and it was sufficient to generate more than $100 million of free cash flow.
Source: Seeking Alpha Premium
As analysts got more comfortable with the recent gold price upside, Kinross Gold’s earnings estimates steadily increased. The company is valued significantly cheaper than its bigger peers, and some of this discount appears justified, but it’s hard to say why Kinross Gold should be much cheaper than Yamana Gold (AUY), for example.
In my opinion, the recent downside in Kinross Gold shares provides an interesting opportunity. The stock has fallen to the levels seen at the high point of the February rally when the price of gold was below $1600 per ounce and when the global central banks had not started to print money at alarming rates. The rapid sell-off in March has highlighted the fact that Kinross Gold shares can be highly volatile and divert from rational levels for some time, so it may pay off to wait for the uptick before initiating a position. At the same time, the current levels are attractive unless you believe that gold is due for a significant pullback, which will put pressure on the whole gold mining sector.
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Analyst’s Disclosure: I am/we are long AUY. 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.
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