Much to their chagrin, several well-respected miners have not
delivered bottom line results that reflect any measure of the dramatic
47% surge in the gold price from year-ago levels. The fact that Kinross Gold (NYSE: KGC)
can mine more than one-half million gold equivalent ounces in the third
quarter at these lofty prices, and still yield a bottom-line loss, is
enough to boil the blood of patient investors still weary from last
year's painful correction. Kinross reported a loss of $0.03 per share
for the period and even after making adjustments earned only $1.7
million for its bottom line.
While Agnico-Eagle Mines' (NYSE: AEM) growing pains associated with the Kittila mine ramp-up process appear entirely surmountable, and Newmont Mining's (NYSE: NEM) Boddington mine delay is no cause for concern,
Kinross is facing a potentially severe setback with its ramp-up of the
Paracatu mine expansion in Brazil. In order to reach full production,
analysts believe Kinross will need to add another grinding circuit,
which would of course require unforeseen expenditures and several
quarters to complete. The setbacks resulted in a high $764-per-ounce
production cost at Paracatu, which caused Kinross to buck the trend of falling costs and record a $58 increase to $464 per GEO (gold equivalent ounce).
Given the gap I identified
in Kinross' development pipeline several months ago, this detour from
previously forecast 2009 production of 2.4 million ounces to a revised
2.2 million ounces comes at a particularly difficult time. From the Lobo-Marte project purchased from Teck Resources (NYSE: TCK) and Anglo American earlier this year, to the Cerro Casale joint venture with Barrick Gold (NYSE: ABX),
all identifiable drivers of future production growth for Kinross remain
in pre-construction phases of development. Kinross and analysts alike
expect zero production growth out of Kinross for 2010, rendering rivals
like Goldcorp (NYSE: GG) considerably more attractive for growth-seekers at this juncture.
As mining investors have learned all too well in recent quarters, operational snags are not the only danger
to a miner's bottom line. Kinross recorded a $35 million foreign
exchange loss in the third quarter, compared to a $30.6 million gain a
year earlier. One not-so-special item that may have a silver lining,
however, is the $58.6 million future income tax expense resulting from
the debt-lowering impact of the U.S. dollar's decline. Long-term debt
has shrunk by $171.4 million through the first three quarters, and
Kinross holds some $530 million in cash with which to fill-in that near-term pipeline through acquisitions.
Kinross Gold may be down, but I don't believe it's out. I have
reduced my own exposure to Kinross in recent months to reflect a more
cautionary stance, but continue to view the company as an attractive
vehicle for riding the gold bull. Granting the company just three stars out of five, Motley Fool CAPS members appear less convinced, but please share your own views by taking our Motley Poll.
© 2009 UCLICK, L.L.C.
Gold investing.
Kinross has been taking interest in some junior mines and one in particular has been tied with Linux gold corp. Kinross properties are in the same vacinity as Linux and would be a valid partener with a 10x on investment, a small infusion of their cash could also increase the investment return after the mines are in full production.
Most of the larger over developed mines are costly to produce precious metals, the beginning stages of new digs have a higher concentration of PM's. In my opinion this would be very advantageous to both companies.
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