We are reaffirming our Neutral recommendation on Kinross Gold Corporation (KGC). Revenues and adjusted earnings for third-quarter 2012 beat the Zacks Consensus Estimates. Sales rose nearly 7% year over year, boosted by strong performance at the company’s Fort Knox mine.
Gold production rose roughly 6% year over year to 672,173 gold equivalent ounces in the quarter. The company expects to achieve the higher end of its production guidance of 2.5–2.6 million gold equivalent ounces for 2012.
Kinross is expected to continue to reap the benefits of rising gold prices moving forward. In addition, the company possesses the Tasiast gold deposit which has 20 million ounces of mineral resource base under its jurisdiction.
Kinross expects this mine to become productive from 2015 and provide more value to shareholders. Construction of the Dvoinoye mine in Russia, the company’s second most important project, is progressing well and ore processing is expected to begin in the second half of 2013.
Also, Kinross has streamlined its capital expenditure program, focusing on its priorities and not going overboard in its expansionary moves. The company has trimmed its capital expenditures expectation for 2012 to approximately $2 billion from its earlier guidance of $2.2 billion.
However, Kinross may see some difficult times in the near-term due to increasing cash costs. Higher production costs continue to suppress its margins. The company’s production cost of sales per gold equivalent ounce rose 8% to $677 in the third quarter due to higher energy, labor and consumables costs. Production cost of sales for 2012 is now expected to be at the top end of the company’s guidance range of $690–725 per gold equivalent ounce.
Moreover, Kinross’ current below-average reserve base is a concern, as it will compel the company to make acquisitions or scout for exploration projects in a bid to replace reserves. These measures may give rise to integration risk. In addition, macroeconomic issues could weaken the demand for gold.
Kinross, which competes with Barrick Gold Corporation (ABX) and Newmont Mining Corp. (NEM), retains a Zacks #3 Rank, indicating a short-term Hold rating.
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