On Aug 26, we reaffirmed our Neutral recommendation on gold miner Kinross Gold Corporation (KGC). While Kinross should gain from its exploration projects, we maintain a cautious stance considering the current weak gold price and demand environment.
Kinross slipped to a sizable loss in second-quarter 2013 (reported on Jul 31) on a hefty impairment charge and write-off related to the discontinuation of its Fruta del Norte (FDN) project in Ecuador. Revenues fell on lower gold prices. However, both sales and adjusted earnings beat Zacks Consensus Estimates. The company saw higher gold production in the quarter.
Kinross, a Zacks Rank #3 (Hold) stock, is making steady progress in advancing the projects that give it a strong growth profile among leading gold producers. Also, the company has streamlined its capital expenditure program, focusing on its priorities and not going overboard in its expansionary moves.
Kinross possesses the Tasiast gold deposit which has 20 million ounces of mineral resource base under its jurisdiction. The company is conducting a full feasibility study on the Tasiast expansion project with completion expected in the first quarter of 2014. Moreover, construction of the Dvoinoye mine in Russia, Kinross’s second most important project, is progressing well and first operations are expected to begin in the third quarter of 2013 (with targeted production by the fourth quarter).
However, the gold price environment is still not favorable. A strengthening dollar is weighing on gold price. Kinross has suspended its semi-annual dividend considering the weak gold price environment and its negative impact on its cash flows. Import restrictions by India, the world’s largest gold consumer, are weighing on price as well as demand for the yellow metal.
We also remain cautious about Kinross’s production costs given the industry-wide cost pressures. Production cost (per gold equivalent ounce) rose year over year in the second quarter, hurting the company’s margins in the process. Production cost of sales per gold equivalent ounce for 2013 is expected to be in the range of $740–790, higher than $706 recorded in 2012.
Other Stocks to Consider
Other companies in the mining industry with favorable Zacks Rank are Avalon Rare Metals Inc. (AVL), US Energy Corp. (USEG) and Denison Mines Corp. (DNN). All of them retain a Zacks Rank #2 (Buy).
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