INVESTMENT COMMENTARY — Kinross takes a breather

By purchasing underdeveloped assets and realizing their full potential, Kinross Gold (TSE) has become one of the fastest-growing North American gold producers. Indeed, the company seems poised to join the ranks of the big-league producers.

Nevertheless, Matt Sutcliffe, a mining analyst with T. Hoare & Co., is unsure as to how long the phenomenal performance of the stock price can be maintained. Accordingly, he rates the issue a hold.

Since its inception in 1993, Kinross, with its tough, practical and opportunistic management, has acquired eight operating gold mines and maximized the potential of the underdeveloped assets. Sutcliffe cites the performance of the Hoyle Pond mine in Timmins, Ont., as example of how this strategy has paid off. The mine had 126,000 oz. gold in reserves at the end of 1993. In the following year, the figure increased dramatically to 137,000 oz., with about 440,000 oz. in the possible category and another 1.1 million oz. rated as drill-indicated. Cash costs also improved, falling from US$199 per oz. in 1994 to an anticipated US$150 per oz. in 1996. Gold production has risen from 69,000 oz. in 1994 to 89,000 oz. in 1995, and should hit 130,000 oz. in 1996.

Hoyle Pond has been the company’s biggest success story, although growth has been achieved at the Macassa, Zimbabwe and QR mines. Future growth, however, will depend on the discovery of new sources of ore mineralization.

Kinross’s exploration strategy has involved forming relationships with small but competent junior companies. Of particular note are recent deals in Nevada, Russia and El Salvador, as well as joint ventures with subsidiaries East African Mines and Pentland Firth Ventures (TSE).

Together, Kinross and 47%-owned Pentland Firth have acquired a large land position in the Timmins, Ont., camp, second only to that of Royal Oak Mines (TSE). The holding includes several old mines and highly prospective territory north of the Destor-Porcupine fault. Exploration by Kinross and Pentland Firth has identified a new mineralized trend that is largely untested.

On the earnings side, Kinross has continued to strengthen since its inception. For 1995, Sutcliffe forecasts earnings per share will continue to increase, varying between US15 cents and US19 cents based on a gold price ranging from US$385 to US$405 per oz. And he expects next year’s earnings to range between US27 cents and US38 cents, with the gold price varying from US$380 to US$420 per oz. This continued growth will, however, be dependent on the company’s cost-cutting initiatives, as well as an increase in the price of gold.

Sutcliffe points out that the prospective price-to-earnings ratio for 1996 is equivalent to 29 times and that the gross market capitalization per ounce of reserves is US$183. He concludes these ratios suggest the company is fully valued relative to other companies in its sector, especially when considering the predicted production for 1995 and current gold reserves. However, he points out that the numbers do not take into account the potential for growth over the the next three years as new projects are brought into production and into the reserve category.