Since the beginning of October shares of Kinross Gold (K-T, KGC-N) have fallen by about 15%, but strong third quarter results portend a turnaround is in store, some analysts say.
Steven Butler of Canaccord Genuity upgraded his rating on Kinross from a hold to a buy after the gold producer reported adjusted earnings in the three months ended Sept. 30 of US$250.4 million or US$0.22 per share, compared with US$269.4 million or US$0.24 per share in the third quarter of 2011. (Adjustments included a one-time severance expense of US$16.4 million related to the departure of the company’s former chief executive, Tye Burt.)
Attributable production from continuing operations reached 672,173 gold equivalent ounces, up 6% from the 632,432 ounces produced in the same quarter a year ago, at cash costs of US$677 per gold-equivalent oz, up from US$626 in the year-earlier period. The rise in production was largely due to production gains at its Fort Knox mine in Alaska and its Kupol mine in Russia, while the rise in cost was attributed to higher prices for energy, labour and consumables.
The strong performance at Fort Knox was the result of an increase in tonnes of ore mined and processed, as well as higher mill grades, while record mill throughput, higher grades and process improvements resulting in higher silver recoveries, drove performance at Kupol.
On the flip side, production at the Tasiast mine on the Reguibat Shield in Mauritania was negatively impacted by variability in the gold grade encountered in the banded iron formation-type ore that is currently being mined in the Piment pits. The company is also trying to improve the availability of water with repairs to existing pipelines. Lower production at the Paracatu mine in Brazil was due to lower recoveries. (The company has set up a task force to look at the issue.) In the meantime, commissioning of Paracatu’s fourth ball mill got underway during the third quarter and is expected to be completed during the fourth quarter.
Looking ahead, a prefeasibility study on the Tasiast mine is on schedule and will be completed in the first quarter of next year while development at Dvoinoye near Kinross' Kupol mine is advancing and the project remains on schedule to deliver its first ore to the Kupol mill in the second half of 2013.
The prefeasibility study at Tasiast will compare a mid-sized expandable CIL mill in the 30,000 tonne-per-day range with the original 60,000 tonne-per-day mill option.
Kinross says it is on track to meet its 2012 production forecast of about 2.5-2.6 million gold equivalent ounces from continuing operations and predicts its cost of sales will fall in a range of US$690-725 per gold equivalent ounce. David Haughton of BMO Capital Markets forecasts 2012 production of 2.6 million gold-equivalent oz. at a cost of US$719 per oz.
Like other companies trying to keep costs under control, Kinross has lowered its capital expenditure forecast from US$2.2 billion to US$2 billion for the 2012 calendar year after launching a cost reduction initiative in the second quarter. Chief executive J. Paul Rollinson emphasized that the company is “seeking every available opportunity to control costs with a focus on margins and free cash flow" across the company’s operations.
Canaccord Genuity’s Butler has a 12-month target price on the stock of $13 per share; Adam Graf of Dahlman Rose & Co. has a $13.66 per share target price; and Haughton of BMO Capital Markets has a target price of $14 per share.
“Kinross is rated Outperform on value and growth while execution needs time to unfold,” Haughton wrote in a research note to clients. “The shares remain attractive based on valuation, but continued uncertainty may prevent a meaningful share price rally in the near term.”
At presstime in Toronto, Kinross was trading at $10.19 per share within a 52-week range of $7.15-15.02.
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