Kinross Gold Corporation

Kinross Gold Corporation (TSX: K) is a gold mining company, which is engaged in 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.

Key highlights

• Boosting Production Outlook: The management is bullish on the gold outlook and announced a growing three-year production profile, which is expected to increase by approximately half a million ounces, or 20%, to 2.9 million Au eq. Oz. in 2023.

Source: Company

• Robust Free Cash Flow Yield: The group generated robust free cash flow and a significant increase in earnings. It delivered a record free cash flow of USD 1.04 billion in FY2020, which was significantly higher than USD 164.7 million the previous year. The company’s mines continued to perform well as the management effectively controlled the operational challenges caused by the COVID-19 pandemic. Furthermore, the expected enhanced production along controlled cost would also derive strong free cash flow performance. The group is expected to deliver a robust free cash flow yield compared to its peers in coming years.

Source: Company

• Strong Liquidity and Financial Flexibility: The Company maintains a high-grade balance sheet with a manageable debt profile. As of December 31, 2020, the Company reported cash and cash equivalents of USD 1,210.9 million and available credit of 1,563.6 million. As per the management, its liquidity and expected operating cash flows would be sufficient to fund operations.

Source: Company

• Industry Beating Margins: The Company's resilient business helped them leaping the industry median margins on many fronts. The matrix below gives a glimpse of this.

Source: Refinitiv (Thomson Reuters)

• Event Update: The group announced that it would disclose its Q1FY21 result on May 11, 2021.

Financial overview of FY2020 (In millions of USD)

Source: Company

• In FY 2020, the Company sold 2.37 million ounces of gold at an average realized price of USD 1,774 per ounce and generated revenue of USD 4.2 billion, an increase of 23.5% against USD 3.4 billion in FY 2019. The rise in revenue was primarily based on higher realized gold prices.
• The cost of sales decreased to USD 1.9 billion in 2020, against USD 2.1 billion in 2019.
• Operating earnings stood at USD 1.8 billion, compared to USD 991.1 million in pcp. The increase was primarily due to the rise in margins and higher impairment reversals, partially offset by the increase in depreciation, depletion and amortization.
• The reported period's net earnings increased to USD 1.3 billion, against USD 717.1 million in the previous corresponding period. 

Risks associated with investment

The company’s financial performance is mostly dependent on the price of gold. Volatility in gold price would affect its profitability, margins and cash flows. 

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock recommendation

We believe that despite a pullback, gold, as an asset class, would continue to remain in the limelight as uncertainty over the global economic growth is still prevailing. We believe that average realized gold prices per ounce to remain elevated, which would lead to margin expansions. The year 2020 has been a transformational year for the company as it came out with robust performance, generating strong free cash flow and a significant increase in earnings. Furthermore, the expected enhanced production along controlled cost would also derive strong free cash flow performance. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 9.27 on April 9, 2021. We have considered B2Gold Corp, Barrick Gold Corp, Gold Fields Ltd etc. as the peer group for comparison.

One-year Price Chart (as on April 09, 2021). Source: Refinitiv (Thomson Reuters)

Wesdome Gold Mines Ltd.

Wesdome Gold Mines Ltd (TSX: WDO) is a gold producer engaged in mining related activities which includes exploration, processing, and reclamation.

Key Updates:

• Debt-free balance sheet with improved cash flows: The group is a debt-free entity, despite it operates in the metal and mining segment, which usually requires huge capital investments due to higher costs related to exploration and mining activities. Notably, the group had a borrowing of CAD 3.636 million in FY19, which has been repaid in FY20, backed by robust growth in cash flows. The absence of debt is a healthy sign and gives higher financial flexibility. Moreover, in FY20, the company showcased strong cash from operations of CAD 102.292 million, significantly higher than CAD 71.163 million in FY19, supported by higher net income and prudent working capital management.

Source: Company Report

• Drilling Activities: The company reported an underground exploration drilling results from a new high-grade gold discovery in the footwall of the Kiena Deep A Zone from Kiena Mine Complex in Val d'Or, Quebec. In order to expand its mining reserves, the company is shifting to exploration drilling strategy from definition drilling strategy and witnessed positive results in its recent expansion across the A and VC zones. Moreover, the company has promising exploration targets in FY21 and would focus on drilling activities across VC and B Zones also. 

• Better than Industry Margins: In FY20, the company reported strong operational efficiency, which led to robust operational margins, which is encouraging. EBITDA margin and operating margin stood healthy at 50.6% and 35.9%, in FY20, surpassed the industry median of 38.6% and 14.9%, respectively. The company’s net margin in FY20 remained high at 23.5%, v/s the industry median of 5.5%. 

• Elevated Financials: The group reported strong growth in its revenue and operating income during the past few years, which indicates strong operational growth backed up by impressive mining and drilling activities. Revenue in FY 20 stood at CAD 215.5 million, significantly higher than CAD 164.0 million and CAD 116.0 million in FY19 and FY18, respectively.

FY20 Financial Highlights:

• WDO announced its full-year result, wherein the company posted revenues of CAD 215.466 million, significantly higher than CAD 163.974 million in FY19.
• Gross profit soared to CAD 90.080 million v/s CAD 69.168 million in the previous corresponding period (pcp), thanks to the elevated revenue, partially offset by a higher cost of sales (CAD 125.386 million v/s CAD 94.806 million in FY19).
• Operating income stood at CAD 77.455 million, increased from CAD 59.266 million in pcp, supported by lower Stock-based compensation (CAD 2.786 million v/s CAD 2.987 million in FY19). The period was marked by higher Corporate and general costs (CAD 7.378 million v/s CAD 6.668 million in pcp) and inclusion of write-down of exploration properties expense amounting to CAD 2.034 million.
• The group reported a net income of CAD 50.715 million v/s CAD 40.945 million in FY19.
• Cash and cash equivalents stood at CAD 63.480 million, while total assets were recorded at CAD 358.583 million.

FY20 Income Statement Highlights (Source: Company Report)

Risks: The major income is being derived from gold, and a correction in the gold price would negatively impact the company’s realization and sales and might lead to lower margins.

Valuation Methodology (Illustrative): Price to Cash Flow

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

Stock Recommendation:

The group reported tremendous growth in the past few years, driven by impressive operational performance, which further resulted in a strong cash flow generation. The company has successfully discovered high-grade deposits and is continuing to find high-grade mineralization, which is a key positive. 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 peers like Silvercorp Metals Inc, Wesdome Gold Mines Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of WDO at the closing market price of CAD 9.55 on April 09, 2021.

One-Year Price Chart (as on April 09, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.