KGC - Kinross Gold Q2: A Great Quarter But Is It A Buy?

2023-08-10 15:35:35 ET

Summary

• Kinross Gold Corporation has had a strong start to the year, outperforming other gold miners in terms of share price.
• The company's Q2 2023 earnings exceeded expectations, with increased production, lower costs, and strong cash flow.
• However, concerns remain about the stagnant production outlook and uncertainties surrounding the Great Bear project, leading to a recommendation to hold the stock.

Kinross Gold: A Great Quarter, But Is It A Buy?

Here's the latest on Kinross Gold Corporation ( KGC ), a senior gold miner that operates a diverse range of mines and projects across the United States, Canada, Brazil, Chile, and Mauritania. Kinross produces more than 2 million gold equivalent ounces annually, with its top-tier assets in Tasiast and Paracatu, along with the massive Great Bear project in Canada.

For 2023, Kinross anticipates producing 2.1 million ounces of gold at all-in-sustaining costs of $1,320 per ounce, positioning it as a higher-cost gold miner relative to its competitors.

Despite these estimated higher costs, Kinross has been a standout performer among gold miners so far this year. Its shares have risen nearly 18%, easily outshining the VanEck Gold Miners Index ( GDX ) which is marginally down, and the VanEck Junior Miners Index ( GDXJ ), which has fallen by 4.64%.

Previously, following a mixed Q4 2022 report marked by rising cash costs due to inflation, a significant impairment charge on the Round Mountain mine, and a somewhat underwhelming initial resource at Great Bear, I designated Kinross shares as a HOLD.

So, what has changed, and has Kinross proven me wrong? Here's my latest update.

Kinross Q2 2023 Earnings

Kinross outperformed expectations operationally with its Q2 2023 results , aided by a $100 increase in average realized gold prices compared to last year. Highlights of its recent quarterly earnings include:

• A 22% year-over-year production boost to 555,036 gold ounces.

• Lower-than-expected all-in sustaining costs of $1,296 per ounce.

• Strong Q2 operating cash flow of $529 million.

• Net earnings of $151 million, or $0.12 per share, and non-GAAP EPS of $0.14, surpassing analyst estimates by $0.05.

With such a robust start to the year, Kinross may surpass its production and cash cost guidance for 2023.

Kinross Gold: Key Mine Updates

• Tasiast Mine: It achieved record quarterly production and sales, driven by higher recoveries and gold grades. In addition, initial commissioning for Tasiast 24k project is now complete, according to the company.

• Paracatu: Continued strong performance with higher production and reduced costs both quarter-over-quarter and year-over-year.

• La Coipa: Delivered increased quarterly and year-over-year production, boasting the lowest costs in the portfolio.

Kinross Gold: Development Updates

• Manh Choh: Kinross received essential operating permits in May and remains on track for initial production in the latter half of 2024. The mine is anticipated to contribute around 640,000 attributable gold equivalent ounces over its roughly 5-year mine life.

• Great Bear Project: The company is transitioning from surface to underground exploration, with plans to initiate a more advanced exploration program. It likely won’t get into production anytime soon (5+ years), but exploration upside remains very strong. The company hit 10.46 g/t gold over 9.6 meters below 1,000 meters from surface, for example.

But is Kinross Gold Stock a Buy Here?

While Kinross Gold has had an impressive start to the year, and its stock appears relatively undervalued, with a forward P/E of 11.95 and an EV/EBITDA of 5.7 , several factors might give investors pause before considering the stock.

First, Kinross's production outlook, looking out to 2025-26, is stagnant. I don’t think the company will see an increase in its gold output until 2028-29, coinciding with the commencement of production at the Great Bear project. Until then, the production forecast remains flat at around 2 million ounces per year through 2025.

Moreover, its all-in sustaining costs are projected to be around $1,300/oz looking forward, which, while sufficient for generating decent cash flow at current gold prices, is still higher than some industry peers.

I also have concerns over Kinross's acquisition of the Great Bear project from Great Bear Resources. The purchase price of $1.8 billion is looking really steep for a project with an initial indicated resource of 2.7 million ounces and an inferred resource of 2.3 million ounces. While that's undoubtedly a substantial resource with potential for further growth (8-10 million ounces may be possible), the mine is likely 5-7 years away from production, considering typical industry construction timeframes for a mine of this scale (500,000 gold ounces per annum).

Furthermore, the cost to transition Great Bear into production is still unknown but likely won't be an inexpensive venture. Costs could easily go into $2-$3 billion range for a mine of this size (perhaps more if inflation continues running hot), but we'll know much more in 2024 when the initial PEA study is released.

In summary, while Kinross Gold Corporation performance in H1 2023 was strong, the flat production outlook in the coming years, and uncertainties surrounding the Great Bear project (both in terms of estimated construction timeline and cost uncertainty), lead me to recommend Kinross Gold Corporation stock as a HOLD here.

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