Kinross Gold: New Bullish Trend May Have Just Begun

Summary

• Shares rally 5%+ to kick off April. A change in trend may be in the works here.
• The long-term chart points to a successful retest of a bullish triangle.
• Growing production on the back of increasing reserves will drive shares higher here.
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If we look at a long-term chart of Kinross Gold (NYSE:KGC), we can see that every time shares broke out above their 10-month moving average from oversold conditions, we witnessed a sustained rally. This happened back in early 2016 and then took place once more in late 2018. The question at present is whether a similar setup is taking place. Although shares didn't quite reach the same type of similar oversold levels which we saw in the periods mentioned above, bullish technicals are forming which we will get into here.

The chart below depicts a possible ascending triangle which is a bullish pattern. Because of the breakout to the upside out of this pattern in early 2020, we continue to believe downside risk remains pretty limited in here. Suffice it to say, even if shares do not manage to breakout out above their 10-month moving average on this latest bullish move, the $6 level looks like it will provide pretty solid support here.

On the daily chart, we see a bullish divergence with respect to price-action versus the underlying volume trend. Since we believe volume trends precede share-price action, this divergence gives weight to the potential bottom we see on the monthly chart. Suffice it to say If indeed the share-price in April can gain traction and get back above its 200-day moving average, then we could state with a deal of certainty that a solid bottom is in.

Followers of our work will be aware that we believe gold is currently in its 5th year of a broader 8-year multi-year cycle. These lows offer the best buying opportunities in this sector. The next best buying opportunities come at yearly cycle lows which gold may be in the process of forming at present.

Therefore, if indeed gold has another 2+ years of rising prices in this broader multi-year cycle, we want to make sure we are invested in miners which are profitable, are growing their production, have a keen valuation and reward shareholders handsomely.

From a profitability standpoint, Kinross definitely finished 2020 with momentum on its side in its fourth quarter. The firm reported production of around 624,000 of gold equivalent ounces which once more aided the firm in meeting its annual guidance. While some investors will focus on the above-average costs the company has been reporting (compared to other miners) as well as the company's chequered past with respect to acquisitions, we would point investors to the actual metrics and forward-looking projections. The reason being that in a gold bull-market for the mining industry, it is all about selling as much metal as possible at the best margins possible. What use is it per-say if one is invested in a gold-miner with ultra-low all-in sustaining costs but is having trouble growing production?

Production in Kinross for example is expected to increase by roughly 20% over the next three years. We acknowledge that costs are expected to increase somewhat in 2021 due to not as much low-cost ounces being available from the Dvoinoye mine in Russia, etc., but 2022 should come in on a par with 2022 which should drive earnings forward. Kinross' Russian operations are low-cost operations and recent drilling added over 400koz of reserves which compensated for the declines at Dvoinoye as well as Kupol. More capital will be put to work in this region in 2021 to see if more meaningful reserves can be achieved. The key is that production is being increased at the optimum time and we are seeing this in the numbers. Kinross' return on equity percentage over a trailing average of 22.53% and operational cash flow of almost $2 billion are well ahead of what the industry is reporting at present.

Speaking of cash flow, Kinross still delivered almost $1 billion in free cash flow in 2020 after spending close to the similar amount in capital expenditure. This means the recently introduced dividend of $0.03 per quarter equates to an annual cash flow pay-out ratio of close to 30% so plenty of room for sustained increases here. We saw a marked improvement in the interest coverage ratio (21.07) as well as the debt-to-equity ratio (0.22) on the balance sheet which again point to improving financials. Kinross now has available liquidity of $2.8 billion and has $500 million in senior notes coming due in the fall later this year. Considering the present debt position (just under $2 billion) and how the financials have been trending, we expect these maturities to be paid which will decrease the firm's leverage even more.

From a valuation standpoint, despite the solid 2020 bottom-line print, Kinross' earnings, cash flow and assets in particular remain well behind the average multiples in this sector. With meaningful reserve growth reported recently at Chirano as well as Paracatu & Kupol, we maintain Kinross' assets are cheap from a valuation perspective.

Therefore, to sum up, we acknowledge that some may be disinterested in Kinross due to above-average production costs on some of its mines. However, the investment case here is that growth which is projected to come over the next few years looks pretty dependable given the diversification of the company's assets and how these assets have consistently met targets in the past. The technicals point to an ascending triangle and a successful retest of long-term support. If the gold price gets in gear this year, Kinross also should be a real viable candidate for investors due to its keen valuation and dividend. We look forward to continued coverage.

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.