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Coverage Initiation: Kinross Gold Corporation
We are initiating coverage on Kinross Gold Corporation (KGC), a Canadian-based mining company with mines and projects in the United States, Canada, Russia, as well as parts of Africa and South America. While the company’s principal product is Gold, it also turns out silver and copper. As of December 31, 2010, Kinross’ proven and probable mineral reserves were 62.4 million ounce of gold, 90.9 million ounces of silver, and 1.4 billion pounds of copper.
The primary factor in determining profitability is the price of gold. With the divide between demand and supply wide, this precious metal should continue to shine after recently establishing record highs. Growing incomes of people in China and India are empowering consumers to purchase gold, a metal admired culturally and seen as a symbol of progress. Investors are also getting in on the act, through the establishment of ETF’s. In an effort to encourage its people to purchase bullion, China recently opened the PanAsia Gold Exchange. This, along with the relaxation of gold ownership rules, indicates the country’s appetite for the metal should remain healthy. Lastly, uncertainty in global equities should keep gold an integral part of investor portfolios.
Major sources of supply are gold production and sales by central banks globally. In the 20 years leading up to 2007, the latter disposed of between 400 and 500 metric tons of gold each year. Since the recession and its lingering effects on the global economy, however, central banks have turned off the tap, and have actually become buyers. With that, production has become the primary source of gold supply.
During the 1990s and the first half of the first decade of this century, low gold prices made mining and exploration activities economically infeasible. Moreover, this period of under-investment resulted in the lack of discoveries sufficient to replenish dwindling supplies at maturing mines. With the price of gold rising in recent years, companies such as Kinross Gold Corporation have boosted capital spending in their search for new reserves. But a lagging effect between exploration and production should lead to excess demand for years to come.
Kinross Gold’s production reached a new record in 2010, with production and revenue approximating 2.3 million gold equivalent ounces and $3 billion, respectively. Furthermore, a spate of ongoing developments and expansion projects position the company to build on recent successes. Improving performance at the Paracatu mine is notable, with advancing recovery and throughput. In all, management expects the largest gold mine in Brazil to keep churning out the precious metal until 2040.
With the acquisitions of Red Back Mining in 2010, the company added two mines, Tasiast and Chirano, in the flush West African region. The latter, located in an under-explored area, is purported to be one of the most promising gold deposits in the world. An ongoing drilling campaign has added new reserves, and additional gains are probable. Recent analysis showed sufficient reserves to generate 1.5 million gold ounces a year during the first eight years of production, and advances in subsequent years. Moreover, the transaction has transformed Kinross into one of the fastest growing gold producers, contributing to a 23% increase in proven and probable reserves during 2010 alone.
Supported by expansion efforts at Tasiast, as well as those at other assets, the company is on pace to generate nearly a two-fold increase in production, to between 4.5 and 4.9 million ounces by 2015. Higher metal prices should offset the rising cost of sales, which is partially due to a growing portfolio (higher depreciation and amortization) and development objectives (greater spending on exploration).
A confluence of factors, including expectations of heady output gains and auspicious gold market fundamentals, should empower Kinross Gold to register sharp share-profit gains in the years ahead. Another reason this commodity play may pique the interests of investors is the fact gold typically provides a steady and safe return in periods of uncertainty, much like those we are currently experiencing.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.