Kinross Gold Corporation

Kinross Gold Corporation (TSX: K) is a Canadian-based gold mining company, whose projects are located in the United States, Brazil, Russia, Mauritania, Chile and Ghana. 

Key Updates:

• Strong Production Profile: The company expects a growth of ~20% in its production from FY21 to FY23, which is encouraging. The growth is supported by recent capital addition, which would enable the company to leverage its existing infrastructure coupled with a continuous focus on improving the mining life of its profitable projects. Moreover, the company has successfully added three years of mine life at Chirano and one year at both Kupol and Paracatu, which would allow the company to produce excess production of roughly 500koz. 

Source: Company Presentation

• First Drilling program at Sunrise Gold Prospect: On April 14, 2021, Kinross reported first drilling program from the Sunrise Gold Prospect, located at 64North Project in Alaska. The above location is one of the most prosperous mining areas, and the particular mine was identified in 2020. Tests samples have been submitted to the lab in Fairbanks, and the result is expected after four weeks.

• Growing Reserves in Russia: Almost 22% of the company’s production is driven by Kupol and Dvoinoye mines located in Russia. The company’s existing mines in Russia has a higher mine life, while the company is planning to extend its production profile beyond 2030. Moreover, the additional reserves through exploration at Kupol supports the company’s reserve base.

Historic production profile in Russia (Source: Company Presentation)

• Redemption of Senior Notes: On 29 April 2021, Kinross Gold Corporation announced redemption of all the outstanding 5.125% Senior Notes due September 1, 2021, which have an aggregate principal amount of USD 500 million. After this redemption, USD 1,250 million in aggregate principal amount of Kinross Senior Notes will remain outstanding, with the next maturity date on March 15, 2024 for USD 500 million in aggregate principal amount.

FY20 Financial Highlights:

• Kinross impresses with its FY20 results, wherein the company posted revenue of USD 4,213.4 million, up 20% over FY19. The increase was driven by a 27% surge in average gold price at USD 1,774 million, partially offset by lower production of 2,366,648 Au eq. oz v/s 2,507,659 Au eq. oz in FY19.
• Operating earnings soared to USD 1,899.4 million, significantly higher than USD 991.1 million in pcp. The period was marked by lower production cost (USD 1,725.7 million v/s USD 1,778.9 million in FY19) and lower general and administrative costs (USD 117.9 million v/s USD 135.8 million in FY19), partially offset by a surge in other operating expense (USD 186.5 million v/s USD 108.5 million in pcp).
• Net earnings stood higher at USD 1,358.7 million, as compared to USD 717.1 million in the previous year, thanks to the higher operating earnings, partially offset by higher finance expense and income tax expense.

FY20 Income Statement Highlights (Source: Company Report)

Risks: Volatility in the gold prices are likely to take a toll on the company’s performance. Moreover, inability to add new mineral exploration would lower the company’s reserves.

Valuation Methodology (Illustrative): Price to CF based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The group’s long-term production outlook remains extremely positive, and the group expects a minimum average production of ~2.5 million ounces of gold/ year over the next decade, coupled with additional exploration opportunities which would further support the company production profile.

Source: Company Presentation

For FY21, the company expects 2.4 million Au eq. oz of gold production and 4.0 million Au eq oz of silver, while average production cost of sales per ounce is expected at ~USD 790/ounce and all-in sustaining cost is expected at USD 1,025 per ounce. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered industry (Basic Material) median on NTM basis. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing market price of CAD 9.24 on May 06, 2021.

One-Year Price Chart (as on May 06, 2021). Source: Refinitiv (Thomson Reuters)

Pretium Resources Inc.

Pretium Resources Inc. (TSX: PVG) is an exploration and development company engaged in the acquisition, exploration, and development of precious metal resource properties in the Americas. 

Key Highlights:

• Declining Debt profile: Over the years, the company showcased prudent capital management and lowered its total debt and has increased its cash balances, which has led to improved financial flexibility. At the end of Q1FY21, the company reported total debt of USD 247.710 million, significantly lower than USD 463.920 million in Q1FY20.

Source: Company Presentation

• Increase in Free cash flow: The company showcased a prudent cost-center management, which has supported the company’s cash flow. During Q1FY21, the group reported free cash flow of USD 50.969 million, higher than USD 41.803 million in Q1FY20, supported by higher operating cash flow. Increase in cash flow levels indicates higher financial flexibility and is a key positive.

Source: Company Report

• Impressive Drilling and Exploration activities: The company reported an impressive drilling activity in the first quarter of FY21, wherein the company completed resource expansion of 24,261 meters within the North Zone and 1080 Level. Notably, FY21 drilling target is 82,000 meters. During the rest of 2021, the group would focus on several exploration program related to the new discovery at Hanging Glacier, which would be accessible in summer from the Brucejack Mine. In additional to it, the company has targeted 10,000-meter surface drill program to discover the high-grade gold corridors, which looks impressive.

Source: Company Report

Q1FY21 Financial Highlight:

• PVG announced its quarterly result, wherein the company posted USD 142.428 million, higher than USD 126.560 million in the previous corresponding period (pcp). The increase was driven by 12.5% increase in gold prices from the previous corresponding period (pcp) coupled with higher gold production on y-o-y basis.

Source: Company Report

• Operating earnings stood at USD 43.916 million, higher than USD 35.749 million in Q1FY20. The company reported higher cost of sales (USD 93.796 million v/s USD 84.141 million in pcp), while witnessed a slide in corporate administrative costs (USD 4.445 million v/s USD 5.576 million in pcp) and exploration and evaluation costs (USD 0.271 million v/s USD 1.094 million in pcp).
• Net earnings were reported at USD 26.595 million, significantly higher than USD 8.770 million in pcp. The surge was supported by lower interest and finance expense coupled with lower deferred income tax.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Volatility in the gold prices are likely to affect the company’s income and cash flows. Furthermore, any restrictions imposed on account of COVID outbreaks would lead to lower production.

Valuation Methodology (Illustrative): Price to Earnings based

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

For FY21, the company expects its gold production in between 325,000 to 365,000 oz, while AISC/oz is expected in between USD 1,060 to 1,190 /oz. The company reported EBITDA and operating margin at 47.7% and 30.8%, respectively, which was higher than the industry median of 38.7% and 25.6%, respectively. Net margin also stood higher at 18.7%, as compared to 14.8% of the industry median.

Snapshot of Profitability margins (Source: Refinitiv Thomson Reuters)

We have valued the stock using the Price to Earnings-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like B2Gold Corp, Lundin Mining Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of PVG at the last closing market price of CAD 13.95 on May 06, 2021.

One-Year Price Chart (as on May 06, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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