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Canadian gold bug John Ing remains highly bullish on the outlook for gold, saying the yellow metal could reach $3,000 an ounce as fiat currencies continue to lose their value.
But the Maison Placements Canada President is much more cautious about the outlook for Kinross Gold Corp. (TSX: T.K, Stock Forum) (NYSE: KGC, Stock Forum), a Toronto gold mining giant that saw its stock price jump by nearly 9% Thursday on third quarter earnings news.
Trading at $10.27 on Friday, Kinross has a market cap of $11.7 billion, based on 1.13 billion shares outstanding. The 52-week range is $15.02 and $7.15.
Even though Paul Rollinson was named Chief Executive Officer in August, Ing is telling investors not to buy the shares at this time.
“We think it is too soon to buy Kinross here but Rollinson has started well,’’ Ing said in a report, implying that the stock faces too much downside risk.
Canada’s third largest gold producer, Kinross recently launched a sweeping cost-cutting campaign after sacking former CEO Tye Burt, and seeing its production costs leap 27% to US$725 an ounce in the second quarter of 2012 from US$569 a year earlier.
Burt had been under severe pressure since Kinross acquired the Tasiast mine in Mauritania, West Africa two years ago in a US$7.1 billion deal that was meant to transform the company into one of the world’s fastest growing gold miners.
Tasiast has ended up being a millstone, prompting the company to take a $2.49 billion writedown in February 2012.
Ing says he remains cautious even though the company said this week it is on track to produce up to 2.6 million ounces of gold this year from operations in North America, South America, Russia and West Africa at a cost of sales forecast of $690 to $725 per ounce.
Kinross produced 672,173 gold equivalent ounces in the third quarter ended September 30, 2012, compared with 632,432 ounces in the third quarter of 2011.
Net earnings in the quarter were $224.9 million or 20 cents a share, compared with $207.1 million or 18 cents a share a year earlier.
However, Ing says Kinross is like a supertanker that will be difficult to turn around. This cautious view has been reinforced, he said, by news that heap leach testing results at Tasiast returned recovery levels averaging approximately 60%.
“This means that investing in fine crush heap leaching is not economically attractive, either as an alternative or a supplement to CIL (Carbon in Leach) milling,” said Rollinson during a discussion with analysts about the third quarter results.
CIL and heap leaching are methods used to recover gold in mining operations.
Speaking to Stockhouse on Thursday, Ing said he wonders why this information didn’t come out sooner. He now worries that Tasiast will remain a financial sinkhole for Kinross, one that may require further writedowns in the future.
“When you abandon one mine plan and talk about a new mine plan, it looks like you are zig zagging,’’ Ing said. “This is surprising for a group that has invested more than $7 billion in the asset to date.’’
Meanwhile, Ing worries that Kinross is making little progress as it tries to develop another one of its potential money spinners, the Fruta del Norte (FDN) gold project in southeastern Ecuador.
Talks aimed at reaching an investment framework agreement with the Ecuadorian government are expected to extend into 2013, the company has said.
The Ecuadorian government is planning reforms that would mitigate the impact of a windfall profit tax on gold mining, something that remains a key issue to be settled before development at Fruta del Norte can proceed.
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