Company Profile

Kinross Gold Corporation (TSX: K) is a Toronto, Canada-based gold mining company. The company's operational interest lies in gold mining and other related activities, comprising exploration and acquisition of gold-bearing properties, extraction and processing of gold-containing ore, and reclamation of gold mining properties. In FY19, the group earned ~29% of its revenue from the United States, ~25% from Brazil, ~21% from Russia, ~15% from Mauritania, ~8% from Ghana and remaining from Chile. The company's operational segments comprise Fort Knox, Round Mountain, Bald Mountain, Paracatu, Kupol, Maricunga, Tasiast and Chirano. The company has mines in the United States, Canada, Russia, Brazil, Chile, Ghana, and Mauritania.

Investment Rationale

• Higher gold prices are likely to drive the group’s performance in the near term: In a year-over period, the gold prices have surged by ~27.15% and hovering near 8-years high level. In the Q1FY20, attributable gold margin per oz of the company increased by 33% to US$ 827 per AU eq. Oz. Further, during Q2FY20, gold prices have surged approximately 10% from the Q1FY20 closing price of US$ 1,592.10/oz. The higher gold prices are likely to enhance the company's performance in Q2FY20. Moreover, the gold prices are likely to remain elevated throughout 2020, given the overall volatility in the broader markets.

• Strong balance sheet: The company has a strong balance sheet, with long-term debt to equity ratio of 32% at the end of Q1FY20, which shows that the company’s assets are majorly funded by equity capital. Also, Net/Debt to EBITDA ratio of the company stood at 0.88x, which implies that the company can easily service its obligations. The strong balance sheet is likely to provide the cushion in case of any near-term challenges arise in the wake of COVID-19 pandemic.

• Investment grade credit profile: As on March 02, 2020, Moody’s has upgraded Kinross credit profile to investment grade. Now the company’s debt is rated investment grade by S&P 500, Moody’s and Fitch, which is a key positive.

• Solid free cash flow yield provides higher margin of safety to shareholders: The group is offering a free cash flow yield of 7.3%. A higher free cash flow yield is exemplary because it shows that a company has sufficient cash flow to service its obligations efficiently and would be able to fund its growth and capital expenditure programmes through free cash flow generated from operation. Further, the company’s free cash flow yield of 7.3% is significantly higher than the Canada 10 Year Benchmark Bond Yield is at 0.64%.

• A consistent performer: The group has generated an EBITDA margin in excess of 30% in the past few years, which shows the operational excellency of the company. During Q1FY20, the company's EBITDA margin stood at 47.6%, which was significantly above the industry median of 28.6%. 

Recent Development

As on June 09, 2020, the company announced that it had sold 10,925,000 shares of Pinecrest Resources Ltd. at a price of CAD 0.36 per share for expected gross proceeds of approximately CAD 3.9 million. The transaction was exercised through private placement with various buyers and represented approximately 17% of the total outstanding shares of Pinecrest.

Suspension of the strike at Tasiast mine: On May 22, 2020, the company reported that strike by unionized employees at its Tasiast mine had been suspended at the request of the Government of Mauritania. Further, it stated that the strike will not have any material impact on the group's production for 2020 and the development of 24K expansion. The company has adhered to the three-year collective labour agreement finalized in Q4 2019, all applicable labour codes, and rigorously complied with all government mandates related to COVID-19 prior to the strike and will continue to do so going forward.

Financial Highlights: Q1FY20

During the Q1FY20, the company's production stood at 567,327 attributable gold equivalent ounces (Au. eq. Oz) as compared to 606,031 Au. eq. oz in the previous corresponding period. The group sold 552,742 Au. eq. Oz of gold during the quarter compared to 597,649 Au. eq. oz in pcp. The group's reported net earnings increased almost two-fold to US$ 122.7 million and adjusted net earnings surged by ~53% to US$ 127.4 million during the quarter. The robust increase was driven by a 21% increase in the average realized price of gold. Average realized gold price came in at US$ 1,581 compared to US$ 1,304 recorded in Q1 2019.

Adjusted operating cash flow of the company in the first quarter of FY20 surged by 81% to US$ 418.6 million and operating cash flow increased by 19% to US$ 299.6 million on a YoY basis. The cost of production came in at US$ 754 per Au eq. oz, while all-in sustaining cost (AISC) stood at US$ 993 per Au eq. oz. Both production cost and AISC were within the annual guidance range of the company. Attributable margin per Au eq. oz. sold increased by 33% annually to US$ 827 during the quarter. At the end of the Q1FY20, the group had decent liquidity of US$ 1.9 billion with cash and cash equivalents position at $1,138.6 million. Further, the company has no debt maturities until September 2021.

The company's three largest producing mines Paracatu, Kupol and Tasiast – delivered 62% of total production and achieved an average cost of sales of $642 per Au eq. oz., with average costs lower than the previous quarter.

Tasiast, for the second consecutive quarter, achieved record quarterly production and a record average throughput rate of 16,100 tonnes per day (t/d), as the mine continues to benefit from the Phase One expansion.

Q1FY20 Income Statement, Source: Company Filings

Impact of COVID-19

In the first quarter of 2020, the company stated that all of its mines remained in operation and were not materially impacted by the novel coronavirus. The company has withdrawn its FY20 guidance as a precautionary measure given the pandemic's significant global impacts, despite no material impacts on operations to date.

Stock Performance

At the time of writing (as on June 12, 2020, before the market close), Kinross’ shares traded ~2.3% higher at CAD 8.66 from the previous close. In a year-over period, its shares have registered a 52W high of CAD 10.64 (as on May 20, 2020) and a 52W Low of CAD 4.0 (as on March 16, 2020). At the last traded price, shares of Kinross traded approximately 111% above its 52W low price level and approximately 20% below its 52W high price level, which reflect that shares of Kinross are more tilted towards the 52W high price level, a positive price trend.

1-year price return (as on June 12, 2020, before the market close). Source: Thomson Reuters

Further, shares of Kinross featuring a positive price return in the past 3-month, YTD and YoY basis and up by 27%, 38% and 85%, respectively. Though, in a month over the period, its shares traded approximately 12.4% lower. 

However, Price/200-day SMA ratio of the stock stood at 1.21x, which implies that the shares of the company traded significantly above the long-term crucial support level of 200-day SMA, which typically considered as a long-term positive trend in any underlying.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 30.43% of the total shareholding. Van Eck Associates Corporation and Renaissance Technologies LLC hold the maximum interests in the company at 9.34% and 5.02%, respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): Price to Cash Flow Based Valuation

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

Stock Recommendation

The bullish trend in the gold price is likely to enhance the average realization price and profitability margin of the company in FY20. Further, a lower debt contribution in the group's total capital and investment-grade credit rating reflects a robust balance sheet of the company. Also, a significantly higher free cash flow yield of the company positioned it well to sail through the near-term challenges, if any. The group has no material impact of the COVID-19 and all of its mines are fully operational. The group's performance in the Q1FY20 was resilient given the current market situation, with adjusted operating cash flow surged by 81% to US$ 418.6 million. Further, the group had a decent liquidity position, and there are no debt maturities until September 2021. Moreover, its shares are hovering in a long-term bullish trend and currently trading well above the 200-day SMA, which is typically considered as a long-term support level. Therefore, based on the above rationale and valuation done using the above methodology, we have given a "Buy" recommendation at the closing price of CAD 8.66 (as on June 12, 2020), based on NTM Peer's Price to Cash Flow multiple of 6.1x. We have considered Yamana Gold Inc (TSX: YRI), Kirkland Lake Gold Ltd (TSX: KL), and B2Gold Corp (TSX: BTO) etc., as a peer group for the comparison purpose.

Disclaimer

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