The Q4 earnings season for the gold miners (GDX) is off to a strong start, outside of the underwhelming guidance from Agnico Eagle (AEM) that sent the stock sharply lower. One of the most recent names to report earnings is Kinross Gold (KGC), a lagging gold major that finally seems to be getting some respect from the market. The company met both cost and production guidance for FY-2019, and Kinross’s Tasiast and Paracatu mines finished the year firing on all cylinders with record production. Kinross Gold also made tremendous progress in the earnings department, with annual EPS vaulting 240% year-over-year to $0.34 per share. While there are certainly gold producers out there mining in better jurisdictions, Kinross’s valuation remains quite reasonable at current levels, even after discounting for inferior operating jurisdictions. Therefore, while I see the stock as attractive on a valuation basis if it dips below $4.50, I continue to prefer gold majors in Tier-1 jurisdictions and I would be more inclined to buy the dips elsewhere.
Kinross Gold reported its FY-2019 results last week, ending the year with annual production of 2.5 million gold-equivalent ounces [GEOs], at costs just slightly above the industry average. All-in sustaining costs came in at $983/oz, 1.5% above the industry average, and up roughly 2% year-over-year from FY-2018’s costs of $965/oz. These solid results allowed the company to grow annual earnings per share [EPS] by 240% from last year’s level, up from $0.10 to $0.34. From an operational standpoint, it was also an exceptional year, with production at the company’s Tasiast mine in Mauritania increasing by 140,000 ounces to a new record. Let’s take a closer look at the company’s flagship mines below:
When it comes to Kinross’s top mines in its portfolio, it’s evident that they aren’t operating out of the most attractive jurisdictions. The company’s Tasiast mine is located in Mauritania, the Paracatu mine is in Brazil, and the Kupol-Dvoinoye mine is based out of Russia. Fortunately, however, what these mines lack in jurisdictional points, they make up for in performance, with a strong finish for all three mines in 2019. Beginning with the Paracatu, the mine saw record production of 619,000 gold-equivalent ounces, up nearly 20% from last year’s 522,000 ounces. Just as impressively, the production cost of sales was down over 15% year-over-year from $791/oz to $666/oz.
Kinross Gold is finally reaping the benefits from the asset optimization program at Paracatu in 2018, with improved mill efficiency and a better understanding of the orebody at the deposit. The company also reported good news in 2019 from a reserve standpoint as Kinross has more than offset the ~700,000 ounces of depletion as they added over 800,000 to the mineral reserve base. The current mineral reserve base at Paracatu stands at 8.06 million ounces, supporting an additional ten plus years of mine life.
If we move over to the company’s Tasiast mine in Mauritania, it was also a year with tremendous progress made, with the Tasiast 24k Project now fully funded. Kinross’s Tasiast mine produced 391,000 gold-equivalent ounces in FY-2019, an increase of 56% from FY-2018. Kinross Gold noted in their year-end report that monthly throughput is on the rise, with Tasiast averaging 17,300 tonnes per day in January. The company expects this figure to increase to 21,000 tonnes per day by the end of 2021, and throughput to hit the 24,000 tonnes per day target by FY-2023. From a cost standpoint, the production cost of sales in FY-2019 came in at $602/oz, down over 25% from last year’s levels.
The one area where there was spectacular progress for Tasiast was in gold recovery rates, with gold recovery jumping 400 basis points year-over-year, from 92.6% to 96.6%. The mine’s higher gold recovery rates, increased throughput, and higher mill grades are what contributed the most to the 56% year-over-year production growth at the mine. Looking ahead for Tasiast, the mine should have even higher production in the first half of 2020 as it will benefit from higher-grade ore.
Finally, at Kinross’s Kupol-Dvoinoye mine, annual gold-equivalent ounce production came in at 527,000 ounces, up 8% from FY-2018’s 490,000 gold-equivalent ounces. This was driven by a significant increase in grades, with mined grades up 80 basis points to 9.41 grams per tonne gold from 8.61 grams per tonne gold the year prior. Kinross also managed to add just over 400,000 gold-equivalent ounces to reserves in FY-2019, increasing the mine life at Kupol-Dvoinoye through to 2024. This was a significant positive development as the company’s Russian mine is the lowest-cost mine in Kinross’ portfolio. Still, its mine life is finally beginning to dwindle after more than a decade of pushing out high-grade ounces.
These three mines alone made up over 61% of Kinross’s total annual gold-equivalent ounce production, and it’s clear they’re all producing above expectations. While there’s no guarantee on Kupol being in production past 2025, the Tasiast 24k Project and the likely mine restart at La Coipa should help to pick up some of the slack if Kupol’s days as a mine come to an end. From 2023 through to 2029, assuming construction remains on schedule, Tasiast should be able to increase annual production to 563,000 ounces, up from 391,000 ounces currently. This would supplement current production by over 160,000 ounces, offsetting at least one-third of Kupol-Dvoinoye’s output. Meanwhile, La Coipa could produce as much as 690,000 gold-equivalent ounces in total from 2022 to 2024, or a run rate of just over 200,000 gold-equivalent ounces per year. The company noted that they plan to go ahead with the restart, with a modest capital investment of $225 million. While both mines won’t entirely replace Kupol assuming a worst-case scenario that it runs out of reserves, they will come close to allowing Kinross to maintain its 2.5 million-ounce annual production run rate.
If we move over to the company’s earnings trend, it’s clear that Kinross Gold made massive progress when it comes to bottom-line growth. As we can see in the chart above, the company increased its annual EPS from $0.10 in FY-2018 to $0.34 in FY-2019. While this 240% annual EPS growth rate should be discounted a little as it’s rebounding off of depressed levels, it is quite impressive regardless as it shows a sharp turnaround in the earnings trend.
If we look ahead to FY-2020, we can see that annual EPS estimates are currently sitting at $0.41, reflecting another year of strong double-digit growth ahead. Assuming Kinross Gold can meet or beat these estimates, this would translate to 21% year-over-year growth, a very respectable figure coming off of a year of triple-digit earnings growth. The good news is that this surge higher in annual EPS has made the company’s valuation much more palatable, as the company came into FY-2019 trading at a forward earnings multiple of 28, and started FY-2020 at a forward earnings multiple of just over 13, despite a much higher share price. Currently, most of the gold majors are trading at forward earnings multiples of 20 or higher, which suggests that Kinross is still trading at a very reasonable valuation here.
Kinross Gold had a solid year both financially and operationally in FY-2019, growing annual EPS substantially, and on track to grow annual EPS even further for FY-2020. However, the company is the only gold major that does not pay a dividend, and Kinross operates out of the least attractive jurisdictions among the gold majors. Therefore, while the stock is relatively cheap below $5.00, I continue to prefer peers in the group operating out of more favorable Tier-1 jurisdictions. Based on this, I believe Kinross is an attractive investment idea below $4.50 valuation wise, but I do not have any plans to buy the stock over the medium-term. This is because I prefer miners where at least 40% of their production is coming out of Tier-1 jurisdictions. For the time being, this is not the case for Kinross Gold.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.