Kinross Gold (KGC) is one of the 10 biggest gold mining companies. Just like the rest of the sector it recorded a poor share price performance over the recent weeks, as the gold price declined. However, due to a fire at its Tasiast mine, Kinross underperformed its peers notably. The impacts of the fire will be felt for some time, however, the longer-term prospects of the company remain positive. At the current share price, Kinross represents an attractive buying opportunity.
On June 16, Kinross announced that on June 15, the mill at its Tasiast mine was suspended due to a fire. On June 21, some more information was provided. The fire began at the trommel screen of the SAG mill, during scheduled maintenance. The source of the fire was probably welding. The good news is that there were no injuries and that the mining activities at Tasiast, as well as the work on the mine expansion, were restarted. The bad news is that the mill will be probably restarted only in late 2021. The costs to repair and restart the mill are estimated at $50 million.
As the Tasiast gold production should resume only in late 2021, Kinross was forced to revise the 2021 production guidance. The original plan was to produce around 2.4 million ounces of gold equivalent, however, the actual number will be probably around 2.1 million ounces of gold equivalent. Also the Tasiast mine expansion will be postponed, as the mill throughput capacity of 21,000 tonnes per day should be reached in Q1 2022 instead of late Q4 2021. However, the next expansion stage to 24,000 tpd is still expected to be completed by the middle of 2023. Kinross has also reiterated its 2022 and 2023 production guidance of 2.7 million ounces of gold equivalent and 2.9 million ounces of gold equivalent, respectively.
The Mauritanian Tasiast mine is an important operation for Kinross. It has reserves of 6.33 million ounces of gold. In addition there are also measured, indicated, and inferred resources of slightly more than 3 million ounces of gold. The mine produced 406,509 ounces of gold in 2020, with expansion that should increase the annual production rate to 563,000 ounces at an All-In-Sustaining-Cost of only $560/ounce.
The first phase of the expansion should be slightly delayed, but the overall expansion should be completed on time, by the middle of 2023. The current mine life is 2033, however there are sizeable resources that haven't been converted into reserves yet, and Kinross identified numerous satellite deposits on the property. Therefore, there is a high probability that the mine life will be expanded.
The recent gold price weakness in combination with the Tasiast mine fire sent Kinross's shares down by more than 20% in only two weeks. Right now, the shares trade at $6.36. The market capitalization of the company equals $7.89 billion. As of the end of Q1, the company held cash and cash equivalents of $1.085 billion and the total debt amounted to $1.998 billion. It means that Kinross's enterprise value is around $8.8 billion.
This is not much for a company that generated an operating cash flow of nearly $2 billion and free cash flow above $1 billion in 2020. And given the projected production growth from 2.37 million ounces of gold equivalent in 2020 to 2.9 million in 2023, the financial results have the potential to improve further. Moreover, Kinross has numerous growth projects that should help to boost production after 2023.
It is also important to note that Kinross has reserves of 30 million ounces gold and 59 million ounces silver. Moreover, the measured, indicated, and inferred resources contain further 41 million ounces gold. It means that an enterprise value of approximately $293 is attributable to each ounce of gold in reserves, and $124 to each ounce of gold in reserves and resources combined. This is a low valuation for an established senior gold miner.
It may be partially attributable to the fact that some of Kinross's operations are in Mauritania, Brazil, Russia, and the United States which may scare some of the investors. But Kinross has been able to operate in these countries successfully for years. The majority of Kinross's production comes from North and South America.
Another important point is that Kinross's financial condition has improved notably over the recent quarters. The cash flows increased, and the debt levels are reasonable with net debt of $913 million, and the majority of debt maturities are equally spread over the next 5 years.
Conclusion
The recent events sent Kinross Gold's share price steeply down. It started the month of June above the $8 level and ended in the $6.20 area at technical support levels. For now, it looks like support could hold. The RSI is at oversold levels, but it seems to be primed to return back over 30 soon.
Moreover, it seems like a local double-bottom formation is in the making. On the other hand, the 10-day moving average crossed the 50-day to the downside only several days ago which is a bearish sign. The coming days should show whether Kinross Gold's share price starts to recover or whether new lows will be reached. The gold price should be the main determinant here.
The gold market weakness combined with the Tasiast mine fire pushed Kinross Gold's share price notably lower. However, the damage should be only relatively short-lived. While the 2021 production guidance was revised, Kinross expects that things should get back on track by the end of this year, and the 2022 and 2023 production guidance remains unchanged.
Kinross is in good financial condition and based on expected cash flows and the volume of gold reserves and resources, it is cheap compared to its peers. Kinross offers an attractive buying opportunity right now.
by Dr Peter Arendas, associate professor at the University of Economics in Bratislava, Department of Banking and International Finance.