Kinross steadies operations, cuts costs

Kinross Gold (TSX: K; NYSE: KGC) is meeting the challenge of lower gold prices the old-fashioned way: by driving down costs and producing more gold.

First-quarter results showed attributable production came in at 665,000 equivalent oz. gold at a cost of US$717 per oz., with US$817.4 million in revenue — down from the US$1.1 billion it generated a year ago at this time.

The lower revenue came despite the company upping its production from the 649,00 equivalent oz. gold it produced in last year’s first quarter. The extra gold came from its recently commissioned Dvoinoye mine in Russia. (The gold–silver ratio for calculating gold-equivalent ounces in the first quarter of 2014 was 63.15 to 1, compared with 54.19 to 1 for the first quarter of 2013.

The gap between increased production and falling revenue was caused by softer gold prices.  

The company met consensus earnings projections, with adjusted earnings per share of US3¢. But this number came in just shy of Canaccord Genuity precious-metals analyst Tony Lesiak’s US5¢ estimate, and Scotiabank analyst Tanya Jakusconek’s US4¢ forecast.

Jakusconek attributes the miss to higher taxes compared to the numbers used in her modelling. She rates the stock as a “sector perform,” with a US$5.50 price target.

Lesiak noted that an inventory build-up also contributed to the  miss. The issue isn’t a large concern for Lesiak either — he considers Kinross the most inexpensive gold producer under his coverage umbrella, as it trades at a 57% discount to the peer average on price to cash-flow basis.

The extra inventory was connected to the company’s Kupol gold mine in Russia’s Far East. The mine produced 191,000 oz. gold for the quarter, but sold only 124,000 oz.

The unsold ounces finished the quarter in the inventory pile but were sold in April, and will show up in the second-quarter financials. Even better news for investors is word that Kupol is tracking 8% above the midpoint of guidance for production and 16% below on costs.

Canaccord Lesiak estimates that half of Kupol’s value has been removed from Kinross’s market cap since the Ukraine crisis broke out. This is one explanation for the company’s underperformance by 11% relative to the Gold BUGS Index.

The underperformance isn’t, however, getting in the way of the company’s grand plan: it’s keeping its hefty US$675-million capex guidance and US$125-million exploration and development budget.

The company also reaffirmed its annual production guidance of 2.5 million to 2.7 million equivalent oz. gold at total cash costs of between US$730 and US$780 per oz. It expects all-in sustaining costs will be in the US$950 to US$1,050 per oz. range.

In April Kinross released results from its feasibility study on its controversial Tasiast gold project in Mauritania. The development has drawn much attention over the years for its high acquisition price and inability to generate quick results for investors.

The study projects the mine will produce an average 848,000 oz. gold per year over the first five years of production at an all-in cost of US$792 per oz. The study also increased reserves by 3.1 million oz. to a total of 9.6 million oz., and generated an after-tax net present value of US$1.2 billion using a 5% discount rate.