Gold Is Still Cheap, And Kinross Gold Is Dirt Cheap

Summary

• Valuations are cheap.
• Cash flow and earnings are expected to increase.
• Risks include a declining gold price and possible union strikes.

The next company I decided to write about was Kinross Gold (NYSE:KGC). Kinross Gold is a senior gold producer, with a production rate of 2.5 million ounces of gold equivalent at an all in sustaining cost of $983 per ounce of gold equivalent produced. 56 percent of its production comes from the Americas, 23 percent comes from West Africa, and 21 percent comes from Russia.

What I like about this company most is its financial evaluations. Currently, Kinross Gold is trading at an Enterprise Value to EBITDA ratio of 4.87, a price to sales ratio of 2.17, and a price to book ratio of 1.45. In terms of the company's financials, I calculated Kinross to have a current ratio of 3.58, and a total assets to total liabilities ratio of 2.2.

Kinross Gold has also been able to double its net earnings on a year over year (YOY) basis. Net earnings has increased from a roughly $64.6 million net income in 2019 to a net income of $122.7 million in 2020. I would attribute the increase in net earnings to the increase in the price of gold. If you look at the chart below:

(Chart brought to you by Kitco.)

One can see that the price of gold has risen substantially. But if you look at the production rate, the amount of gold produced by Kinross Gold on a YOY basis declined by 39,490 ounces of gold equivalent.

In terms of future production growth, Kinross Gold has a new mine ramping up into production called the Tasiast mine, which is located in Mauritania. Kinross has withdrawn $200 million from its $300 million Tasiast credit facility in order to advance the project. But what I mainly like about this mine is the economics of it.

(Source)

What I like in the screenshot above pertaining to the Tasiast mine is the all-in sustaining cost of the mine ($560), the internal rate of return (60 percent), and the mine life (ends in 2033).

Kinross Gold also has a refocused business plan, with its mainline objectives being to bring down costs and increase its operating and financial margins.

If you look at the screenshot above, Kinross has already reduced its AISC measures by $100 per ounce of gold, and is anticipating bringing down those costs in the future, which would further enhance profitability margins. They are also looking to reduce its capital expenditures, which would increase its free cash flow. I have confidence that Kinross Gold will be able to execute its plan, because over the past 8 years, they have met, or exceeded production and cost guidance.

Even though there isn't overall production growth in the guidance stated above in the screenshot, I do believe that these higher margins will result in a growth of cash flow generation, and in its earnings per share (EPS).

Looking at this screenshot above, one can see that this company is able to generate robust free cash flow at the current price of gold. This will enable them to pay down debt, make more accretive acquisitions, and/or return money to shareholders in the form of dividends or share repurchases. I personally would like for them to start aggressively paying down their debt before they engage in any dividends or share repurchases.

Currently, if you look at the Kinross Gold's debt maturity profile, see below:

Kinross Gold has roughly $500 million due in 2021 and in 2024. It also has $750 million from its revolving credit facility, which has to be paid back. I personally think that due to the fact that Kinross Gold has $1 billion of cash on its balance sheet, combined with future operating cash flows, that they will be able to pay off this debt. However, I think that profits going forward should be directed towards paying down current and long-term debts of the company.

Risks associated with this company remain with the gold price, and its debt. As stated above, the catalyst for the increase in earnings on a YOY basis was mainly due to the increase in gold prices. And its forward guidance is issuing robust amounts of free cash flow from its current producing mines at the current gold price. If the price of gold declines, I believe that its free cash flow will turn into a cash burn, and that could result in asset sales to pay off debts, a merger with another company, or possibly a bankruptcy. I personally don't think Kinross will go bankrupt; however, I think if the price of gold declines significantly over the next couple of years, that it will merge with another company, or sell some of its current assets to pay down existing debt. Another risk associated with this company is strikes at the Tasiast mine. Recently, Kinross had to deal with a strike by its unionized employees, which began on May 5th. On May 26th, this strike was suspended. But there is a possibility of this resuming.

Lastly, I want to say, don't expect any share repurchases or dividends to be paid by this company in the near future, as I believe they will have to refocus on paying down on current and long-term debt.

In conclusion, I think Kinross Gold will do well in the future due to the company's valuation metrics, improved performance in the company's operating and financial margins, and I believe that this company will aggressively pay down its debt, thus even increasing its margins as interest costs will decline. The risks associated with the company are a decline in gold price. I want to reiterate that this is not a company that one should own in my opinion if they are not bullish on price of gold in the future, or are bearish in the near term. This company is a play on a rising gold price.

I hope that you enjoyed this article, it is hard to write about everything pertaining to a senior miner, as these projects are in greater amounts than a typical two to three mines producing junior or mid-tier gold company, which is what I generally write about.

Analyst’s Disclosure: I am/we are long KGC. 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.

Lastly, I want to make it clear, that this article was written for informational purposes only, and should not be construed as investment advice. I am not a financial advisor, this is only my thoughts about a specific stock, if you have any interest in investing in this stock, please talk to an investment professional, and do your own research.

Comments

[exf]

@John Manfreda

A very, very nice article. Great job. Liked.

[John Manfreda]

Thank you very much

[RideTheCurve]

In your initial summary, I might also include jurisdictional risks (Russia, West Africa). Good work on researching and numbers presented. Liked.

[G1949]

Gold price ain’t coming down. It’s going higher from here and won’t be back down here for many years. Kgc is a good company I just wish I bought more of it on that last big pull back

[John Manfreda]

Never say never, remember after Q3 gold crashed. Markets are irrational.

[Nicklaas]

Buy with what? They sold most of their $ holdings / treasuries for fear of a politicised $ being used against them.

N

[halba12]

also Chulbatkan- Russia , acquisition with over 4mil ounces of gold.

[Derek Syph]

KGC - is cheap but not nearly the cheapest gold miner out there. Management is great too, but my big ax to grind with KGC is the lack of reserve growth, and in fact the reserve depletion for the last 7 years has been horrific... they need to get off their lazy buts and add to proven reserves.

I say this as a shareholder KGC is is good... but its only good not great.

Cheaper miners with more upside include:

EQX - 100% production growth in next 2-3 years... nearly same cash flow multiple as KGC and they have increased reserves exponentially over last 3 years.

Other Gold Miners that I think offer more upside are:

GAU: Trades at about 2x next years cash flow and has no debt (in JV with Goldfields now).

IAG: 100% production growth by 2023-2024 and history of growing gold reserves, new mines will lower AISC (production costs) by about 20%.

GFI: Has nearly 2x gold reserves as KGC, trades at 3x cash flow vs. KGC at 5x

TORXF (TXG Toronto) 3x Cashflow reducing costs 20% with robotic mine 1.9x 2021 Cashflow

PMNXF (PRU - Toronto) Trades at 1.9 x 2021 Cash Flow, and has large land positions in West Africa... trades 0.7x 2024 cash flow & 1700 Gold and and 2x 2024 Cash flow at $1300 Gold

KL: Trades at same multiples as KGC, but has production costs of $400 and history of reserve growth.

could go on... but KGC is only good... not great.

[halba12]

numerous flaws. some of the ones listed are much smaller, less diversified and deserve lower multiples.

Iamgold has significant country risk and much smaller - most of its production is from Africa, whereas Kinross is majority in jursidictions in North america and Europe(russia).

Iamgold re double production- u failed to take into account the $1.1Bil + capex at ontario. they may not be able to finance this adequately. The Senegal one also requires $270m plus capex. these are not small numbers.

ive got KL @ 4x EV/EBITDA 2023, KGC @ 3.34X. Thats a substantial 20% valuation discount for no real reason.

[Derek Syph]

RE: HALBA - "numerous flaws"

1. IAG has jurisdictional risk, but not nearly as much as KGC has operating a 500koz mine in Africa...and now Russian reserves (explain how KGC scores better than IAG on jurisdictional risk)

Where as IAG has 2 mines in CAnada a 367oz growth op in Canada and large cost reductions... IAG is not a lot smaller than KGC in 2-3 years and IAG has much better credibility around reserve growth.

In fact when global gold miners were ranked by jurisdictional risk by a third party org... IAG came in #4.

2. smaller miners do deserve a smaller multiple (sometimes, but often its just a consistent mis-pricing of cash-flow & mis-pricing of a higher potential for a buyout event... so frankly I think the discount on smaller miners is often far to big and ultimately the market proves that over and over as they are bought). Further many of the smaller miners I mentioned are growing much faster than KGC ... so on a GARP basis they are the superior opportunities.

Additionally- when you are talking about miners trading at forward cash flow of sub 2x... the multiple argument rings hollow.

3. Frankly I will double down on my thoughtful analysis and say again KGC is good but not great... and frankly it explains why many of the others I listed have been outperforming KGC... but if you want go ahead and tell the market its wrong for rewarding the stocks I named more than KGC. But nothing really supports that idea...

4. if you want to say KGC trades at a discount to Newmont or Barrick... that would be true, in the case of the discount to Newmont, that is quite deserved... the discount to barrick is debatable, but generaly speaking KGC has no one to blame but themselves for that discount.

[leehan]

As much as eqx is undervalued, NAV isn’t everything. Often with many of these miners, selling pressure exists when weak hand merger shareholders exist and millions of warrants are outstanding. The predicament with growth stories is that management that try to accelerate their narrative does so with great dilution and/or risk. I like two of the stocks you mentioned but they have more risk and therefore as you have put it, are undervalued.

[Nicklaas]

Yes Ms. Manfreda, KGC is cheap and on balance, I agree, it offers value (It is my largest Gold / Precious Metal position, ± 2.5% of portfolio).

As for Tasiest the economics look stunning. We shall see how much KGC will be allowed to keep. There is a bit of history behind it or may it is just my take: They planned a conventional ramp up of the mine, when the local .govs approached them for more $$ -- thinking, now that they sunk the $$ we have them over a barrel. There was some blah-blah. In the end not much changed, as far as is know publicly. Anyway one interpretation KGC got careful and looked for a minimum Capex growth option -- and found it ramping up the mill.

As for cheap - yes quite so (they have had a comparison slide on their presentation for yrs.), but look at their jurisdictions:
Mauritania - they show up regularly in UN reports about slavery...current, not history.
Russia - they are. on the other side of the new Cold War - lets see how long you get gold or $$ out of there (Their .govs are very keen on upping their reserves so as to avoid being harassed by the politicised $
Brazil - As Mr. Authers pointed out on Bloomberg point of returns today their market and currency has become a risk-on proxy for Wallstreet (and thereby it is long-vola, regardless of fundamentals)
This is not just FUD (fear, uncertainty, doubt) -- ± 40% of KGC's production is from jurisdictions without US $ - seaplanes - exposing you maybe local currencies, maybe desperate potentates. (source: The Importance of Dollar Swap Lines and What it Means for Your Gold Positions -- by Marin Katusa -- I found it online but lost the link -- sorry)

So I have a feeling that some discount is here to stay.

It might narrow thru a skilful combination of buy-backs (way to many shares anyway) and paying down debt -- hopefully helped by a strong gold trajectory. But we have to remember that gold miners are in the doghouse for a reason and that is epic capital destruction over decades.

The comparison to Yamana has been raised in the comments. I concur.

As for merger, yes, somebody might be tempted to snap them up. As a holder I would prefer a merger of equals as seen in a few recent actions in the gold sector.

They ride on the gold price and it will not be going up as per elevator. But as we are likely headed for stagflation, as in the 70ies (regardless of the talk by the deflation crowd), long gold and KGC looks about right.

Thanks for sharing your thoughts

Greetings

NIcklaas

[John Manfreda]

Personally I think Russia will just buy the gold, in terms of political risk, I think almost every country is risky at the moment.

[Effen]

You talk up OCF, but don't mention how much OCF was reported: "2020 Q1 highlights: ... adjusted operating cash flow of $418.6 million, a ... 81% increase respectively compared with Q1 2019."
With stronger PoG,they might do close $2B OCF in 2020.

[John Manfreda]

as gold increases, so will this company's cash flow. OCF isn't what matters, its free cash flow.

[Effen]

@John Manfreda OCF and FCF only differ by capex. Every extra dollar of OCF normally drops down to FCF. I don't see why I shouldn't look at changes in FCF to see how operations are going without the distraction of capex, which is usually lumpy and forward-looking expenses.

[PHILIP TINSLEY III]

I do like KINROSS, however, the current performance of the stock forced Me to trade it for some better performers ... . I guess that I will have to wait for 2021 A.D.😞

[John Manfreda]

good luck. I view it as a Turnaround.

[craftbrewinfo]

Long B2G

[Negative Carry1]

i thought Tasiast was in Mauritania, NOT Russia?

[John Manfreda]

Sorry, correction was made.

[claymore58]

Tasiast is located in Mauritania. I'm assuming that was a typo.

[DropnsumNYC]

Agreed, debt repayment needs to be a focus. Look no further than what Yamana has done paying down their debt over last 18 months and how the stock has responded.

[John Manfreda]

Thank you, I hope you enjoyed the article.