Reaffirming Kinross at Neutral - Analyst Blog

We have retained our Neutral recommendation on gold miner Kinross Gold Corporation (KGC). Higher production costs lead us to tread with caution.

Why Retained?

Kinross, on Feb 13, posted bigger loss on a reported basis in fourth-quarter 2012, hit by higher impairment charges. However, revenues and adjusted earnings beat the Zacks Consensus Estimates. Revenues jumped 29% year over year, aided by higher production and gold pricing.

Kinross is expected to continue to reap the benefits of higher gold prices moving forward. In addition, the company possesses the Tasiast gold deposit which has 20 million ounces of mineral resource base under its jurisdiction.

Kinross expects the Tasiast mine to provide more value to shareholders. Construction of the Dvoinoye mine in Russia, the company’s second most important project, is progressing well and ore processing is expected to begin in the second half of 2013.

Also, Kinross has streamlined its capital expenditure program, focusing on its priorities and not going overboard in its expansionary moves.

However, Kinross may see some difficult times in the near-term due to increasing cash costs. The company’s production cost of sales per gold equivalent ounce rose 8% to $686 in the fourth quarter (up 20% year over year in 2012) due to higher energy, labor and consumables costs.

Production cost of sales per gold equivalent ounce for 2013 is expected to be in the range of $740–$790, higher than $706 recorded in 2012. Lower grades across most of the company’s mines are expected to contribute to higher costs.

Moreover, Kinross’ current below-average reserve base is a concern, as it will compel the company to make acquisitions or scout for exploration projects in a bid to replace reserves. These measures may give rise to integration risk. In addition, macroeconomic issues could weaken the demand for gold.

Kinross currently carries a short-term (1 to 3 months) Zacks Rank #3 (Hold).

Other Stocks to Consider

Other companies in the gold mining industry having a favorable Zacks Rank are Sandstorm Gold Ltd. (SAND), Seabridge Gold, Inc. (SA) and Paramount Gold and Silver Corp. (PZG). All of them carry a Zacks Rank #2 (Buy).

KINROSS GOLD (KGC): Free Stock Analysis Report

PARAMOUNT GOLD (PZG): Get Free Report

SEABRIDGE GOLD (SA): Free Stock Analysis Report

SANDSTORM GOLD (SAND): Get Free Report

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