Kinross Gold Corporation (TSX: K) is a Canada-based senior gold producer, also produces and sells a quantity of silver. The company had 30 million ounces of proven and probable gold reserves and 59 million ounces of silver reserves at the end of 2020. It operates mines and focuses its greenfield and brownfield exploration in the Americas, West Africa, and Russia. Moreover, the company has historically used acquisitions to fuel expansion into new regions and production growth.

Investment Rationales 

• Robust production guidance: The company intends to produce 2.65 million attributable Au eq. oz. (+/- 5%) from its operations in 2022, which is a 28% increase above production in 2021. In 2023, it has planned to expand its annual production to 2.8 million attributable Au eq. oz. (+/- 5%). Furthermore, it anticipates producing 2.6 million attributable Au eq. oz. in 2024 and has maintained a solid production profile of at least 2.5 million Au eq. oz. per year for the balance of the decade.

• Robust Free Cash Flow Yield: The company is continuously generating the free cash flows, higher than the average of its peers, which is a key positive. Its mines perform well as the management effectively controlled the operational challenges caused by the COVID-19 pandemic. Furthermore, the expected enhanced production along controlled cost will also derive strong free cash flow performance.

• Minimizing average collection period: The company is having lower average accounts receivable day of 8.7 days, against the industry median of 32.4 days in FY 2021. Also, the group is minimizing these days on the sequential basis, which is a key positive. A lower average collection period indicates that the organization is collecting its payments at a faster pace. This helps in having enough cash on hand to meet their financial obligations.

• Curtailing long term debt: The company is reducing its debt burden sequentially as a result of strong business and excellent cash flows, which is a critical plus. Debt reduction improves the firm's financial flexibility. Additionally, the company's debt to equity ratio at the end of FY 2021 was 0.26x, which was the lowest in the prior three years.

• Ample Liquidity and prudent capital management: At the end FY 2021, the company reported strong liquidity of USD 1.9 billion, which includes a cash and cash equivalents balance of USD 532 million along available credit of USD 1.4 billion. Moreover, the company repaid USD 500 million in Senior Notes in the reported period, which improved the company’s financial flexibility.

• Elevated commodity prices to support future earnings: The recent rally in the commodity prices is moving well for the company, and we can see a significant impact of this movement in the precious and industrial metal mining company’s balance sheet. As the prices go up, it increases averages realization prices for the miners, which lead to a higher margin profile, higher free cash flow generation and deleveraging of the balance sheet. We believe that the company is well placed to capitalize on the increasing prices of the underlying commodity and exit FY2021 on strong financial health. In FY 2021, the company realized an average price of USD 1,797 per ounce compared to USD 1,774 per ounce in FY 2020.  
  

• Acquisition of Great Bear Resources: Recently, the company acquired Great Bear Resources Ltd. ("Great Bear") at the price of USD 1.1 billion, which owns the flagship Dixie project in Ontario, Canada's prolific Red Lake mining area. The Dixie project has the potential to become a top-tier deposit that may sustain a large, long-life mine complex, boosting Kinross' long-term production prospects.

Risks associated with investment

The company depends on the gold prices, a correction in gold prices is likely to dampen the company’s performance. Further inherent risks associated with mining and mineral processing such as the company's mines may not perform as planned; uncertainty with the company's ability to secure additional capital to execute its business plans; the speculative nature of mineral exploration and development, including the risks of obtaining and maintaining necessary licenses and permits, including the necessary licenses, permits, authorizations and/or approvals from the appropriate regulatory authorities. 

Financial overview of FY 2021 (Expressed in millions of USD)

Source: Company Filing 

• Lower Revenues: The company announced its FY 2021 result, wherein it posted revenue of USD 3,729.4 million, compared to USD 4,213.4 million in FY2020. The decline in the revenue was mainly due to lower attributable gold equivalent ounces produced and sold compared to previous corresponding period. Partially supported by higher average realized price of gold, which stood at (USD 1,797/ounce v/s USD 1,774/ounce in pcp).

• Decline in gross profit: The company’s gross profit stood lower at USD 1,017.9 million in FY 2021, compared to USD 2,296.3 million in pcp mainly due to higher total cost of sales as a percentage to revenue.

• Higher operating expenses: The period was marked by a surge in other operating expense (USD 294.6million v/s USD 186.5 million in pcp), an increase in exploration and business development costs along higher general and administrative cost, dragged operating earnings at USD 463.6 million compared to USD 1,899.4 million in pcp.

• Fall in net earnings: Primarily on the back of above discussed rationales the net earnings in the reported period fell to USD 218.7 million, against USD 1,358.7 million in pcp.
  

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 25.65% of the total shareholding. Van Eck Associates Corporation and BlackRock Investment Management (UK) Ltd. hold the company's maximum interests at 5.62% and 4.72%, respectively. The company's institutional ownership stood at 61.24%. Higher institutional holding boosts the confidence in the mind of retail investors.

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics 

Stock recommendation

Despite significant hurdles in 2021, the company produced around 2.1 million ounces, with plans to boost output to 2.65 million and 2.8 million ounces in 2022 and 2023, respectively. We believe that because its long-term production profile is solid, which would help in generating strong free cash flows. Furthermore, the business's development projects are progressing well, with commissioning beginning at La Coipa, where the company upped life-of-mine output expectations to around 1 million ounces.

Recently, it acquired Great Bear Resources, which will help in boosting the company's long-term growth prospects, also higher average realized gold prices per ounce would continue to expand, which would lead to margin expansions. Hence, considering the aforesaid facts, we recommend a “Buy” rating on the stock at the closing price of CAD 6.46 on April 27, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on April 27, 2022). Source: REFINITIV, Analysis by Kalkine Group 

 Technical Analysis Summary

Disclaimer

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