Kinross Gold Corporation (TSX: K) is a Canada-based gold mining company. Its areas of operations include gold mining and related activities, including exploration and acquisition of gold-bearing properties, the extraction and processing of gold-containing ore, and reclamation of gold mining properties.

Investment Rationale

• Solid financial strength: The company maintains investment grade balance sheet with manageable debt profile. Further, Kinross’ senior notes are rated investment grade with the next repayment planned for September 2021. At the end of the third quarter of FY20, the company’s Long-term debt and credit facilities stood at US$ 1,423.1 million, approximately 22.5% lower against the Long-term debt and credit facilities reported on December 31, 2020. Further, at the end of September quarter, the company’s Cash and cash equivalents stood at US$ 933.5 million and total liquidity at US$ 2.5 billion on September 30, 2020. The Company also further improved its debt metrics, including its net debt to EBITDA ratio.

Source: Company Presentation

• More than two-fold increase in operating cash flow: During the third quarter, the company’s operating cash flow more than doubled to US$ 544.1 million and adjusted operating cash flow increased by 86% to US$ 549.6 million compared with Q3 2019. Further, Net operating cash flow increased by 135% to US$ 544.1 million for Q3 2020, compared with US$ 231.7 million for Q3 2019.

• Robust free cash flow: The company delivered another strong quarter, generating robust free cash flow and a significant increase in earnings. The group’s mines continued to perform well as their global teams have effectively managed the operational challenges caused by the COVID-19 pandemic. Further, a growing production profile and declining cost trend over the next three years are expected to drive strong free cash flow performance, placing Kinross in an excellent position to generate substantial value for its shareholders.

Source: Company Presentation

• Top Tier Corporate Governance: The group maintained a strong corporate governance culture, with 9 of 10 Board members are independent. Further, all of their board committees are composed of 100% independent directors. The company was among top-ranked gold mining companies in The Globe and Mail’s annual corporate governance survey for the past several years. Also, the company achieved 33% target for Board gender diversity.

• Solid Attributable Margin: During the third quarter, the company’s margin expansion outpaced the increase in average realized gold price. The company’s attributable margin per Au eq. oz. sold increased 60% to US$ 1,171 per Au eq. oz. compared with Q3 2019, significantly outpacing the year-over-year 30% increase in the average realized gold price. 

• Solid 2021-2023 Outlook: The company announced a robust three-year production profile, with production expected to increase 20% to 2.9 million Au eq. oz. in 2023. The company is bullish on production outlook from 2021 – 2023, which is based on expected additional ounces from:

• expected enhancements to the Fort Knox mine plan, including accelerating production at the Gilmore project.
• continued outperformance at Paracatu through expected improvements in throughput, more ounces from the tailings reprocessing and accelerated mining of the western area of the pit.
• higher anticipated production from the north area of Bald Mountain.
• higher planned production at Kupol and planned life of mine extension at Chirano, both derived from successful exploration programs.

Source: Company Presentation

• Promising Gold Outlook: Looking at the Federal Reserve’s new inflation target of an average of 2% has created even more long-term potential for the precious metals price and mining sector, and we believe that gold prices would be averaging above US$ 1,800 an ounce for an extended period of time. Also, looking at the current scenario, we believe that the market should remain in its current range as it doesn’t expect to see real bond yields pushing much further into negative territory, nor pushing into positive territory anytime soon.

• Risk Associated to Investment: The Company’s performance is subject to fluctuations in the market prices for gold. Gold prices are affected by many factors that are outside the Company's control including global or regional consumption patterns, the supply of and demand for metals, speculative activities, the availability and costs of metal substitutes, inflation and political and economic conditions. 

3QFY20 Financial Highlights

Source: Company Filing

• During the third quarter under consideration, the company’s revenue from metal sales increased by 29% to US$ 1,131.3 million in Q3 2020, compared with US$ 877.1 million during the same period in 2019.
• Further, in the third quarter, the group produced 603,312 attributable Au eq. oz., compared with 608,033 Au eq. oz. in Q3 2019. The slight decrease was largely due to lower production at Paracatu, Maricunga and Kupol, largely offset by increases at Fort Knox and Bald Mountain
• Production cost of sales per Au eq. oz. was US$ 737 for Q3 2020 and was in line with US$ 735 recorded in Q3 2019. Production cost of sales per Au oz. on a by-product basis decreased to US$ 707 in Q3 2020, compared with US$ 716 in Q3 2019.
• Kinross’ attributable margin per Au eq. oz. sold increased by 60% to US$ 1,171 for Q3 2020, compared with the Q3 2019 margin of US$ 732, and significantly outpacing the year-over-year 30% increase in average realized gold price.
• All-in sustaining cost per Au eq. oz. sold decreased to US$ 958 in Q3 2020, compared with US$ 1,028 in Q3 2019. All-in sustaining cost per Au oz. sold on a by-product basis decreased to US$ 934 in Q3 2020, compared with US$ 1,016 in Q3 2019. The decrease in all-in sustaining cost was primarily a result of lower capital expenditures.
• Adjusted operating cash flow for Q3 2020 increased by 86% to US$ 549.6 million, compared with US$ 295.4 million for Q3 2019, primarily due to the increase in margins. Net operating cash flow increased by 135% to US$ 544.1 million for Q3 2020, compared with US$ 231.7 million for Q3 2019.
• Further, adjusted net earnings nearly tripled to US$ 310.2 million, or US$ 0.25 per share, for Q3 2020, compared with US$ 104.0 million, or US$ 0.08 per share, for Q3 2019, primarily due to the increase in margins. Reported net earnings nearly quadrupled to US$ 240.7 million, or US$ 0.19 per share, for Q3 2020, compared with US$ 60.9 million, or US$ 0.05 per share, for Q3 2019.
• As of September 30, 2020, Kinross had cash and cash equivalents of US$ 933.5 million, compared with US$ 1,527.1 million at June 30, 2020. The decrease was primarily related to the full repayment of the US$ 750 million drawn from the Company’s US$ 1.5 billion credit facility earlier in the year as a precaution against uncertainties caused by the COVID-19 pandemic and the acquisition of the Peak project. Strong free cash flow generated during Q3 2020 partially offset the cash used for the repayment and acquisition.
• The Company had additional available credit of US$ 1,565.3 million as of September 30, 2020, and total liquidity of approximately US$ 2.5 billion. Kinross had total debt of approximately US$ 1.9 billion, of which US$ 500 million in senior notes are due in September 2021, which the Company intends to repay.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 31.4% of the total shareholding. Van Eck Associates Corporation is the entity holding maximum shares in the company at 10.36%. Renaissance Technologies LLC is the second-largest shareholder, with a holding of 4.2%.

Source: Refinitiv (Thomson Reuters) 

Valuation Methodology (Illustrative): Price to Cash Flow based Valuation Metrics

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation

The company is built upon strong fundamental and improved its margin profile significantly over a period of time, which is reflected in the below chart.

Source: Refinitiv (Thomson Reuters), Kalkine Group

The company is a leading player in its industry and has outperformed the industry median on various financial parameters during Q3 2020.

Source: Refinitiv (Thomson Reuters), Kalkine Group

Kinross had a solid third quarter, as the company generated robust free cash flow, more than doubled earnings year-over-year, and continued to strengthen its investment grade balance sheet. Further, the company’s margin expansion outpaced the increase in average realized gold price. The company announced a solid three-year production profile, with production expected to increase by approximately half a million ounces, or 20%, to 2.9 million Au eq. oz. in 2023.

Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 9.22 on November 25, 2020.

Daily technical chart. Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at November 26, 2020 price as well.

Disclaimer

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