- 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 Kinross has withdrawn $200 million from its $300 million Tasiast credit facility in order to advance the project.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.
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).
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.
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.
This article was written by
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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.