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TABLE OF CONTENTS Dec 3 - 9, 2012 Volume 98 Number 42 - 0 comments

Kinross reports strong Q3 results

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Kinross Gold (K-T, KGC-N) shares have fallen by 15% since the beginning of October, but strong third-quarter results portend a turnaround is in store, 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 US22¢ per share, compared with US$269.4 million, or US24¢ 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 CEO, Tye Burt.)

Attributable production from continuing operations reached 672,173 equivalent oz. gold, up 6% from the 632,432 oz. produced in the same quarter a year ago, at cash costs of US$677 per equivalent oz. gold, up from US$626 in the year-earlier period. 

The rise in production largely owed to 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 came from 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 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 began during the third quarter, and is expected to be completed in the fourth quarter. 

A prefeasibility study on the Tasiast mine is on schedule for the first quarter of next year, while development at Dvoinoye near Kinross’ Kupol mine advances 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 carbon-in-leach mill in the 30,000-tonne-per-day range with the original 60,000-tonne-per-day mill option. Alex Kodatsky, an analyst at CIBC World Markets, believes that Kinross will likely go with the higher rate. “Kinross elected to scrap the sulphide heap-leach option at Tasiast, citing more favourable economics from milling,” he comments in a research note. “We think this increases the odds of a larger, 60-kilotonne-per-annum mill eventually getting built, and have adjusted our expectations for Tasiast accordingly.”

Kinross says it is on track to meet its 2012 production forecast of 2.5 million to 2.6 million equivalent oz. gold from continuing operations, and predicts its cost of sales will fall to a range of US$690 to 725 per equivalent oz. gold.

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. CEO 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.

“A solid third quarter creates some breathing room for Kinross in advance of 2013 deliverables,” Kodatsky of CIBC World Markets notes. “The extent to which clarity on the development pipeline and benefits from the operational optimization can be delivered will determine the extent to which Kinross shares can re-rate, versus its peers.”

Kodatsky has a 12- to 18-month target price on the stock of $13 per share, while Canaccord Genuity’s Butler has a 12-month target price of $13. Adam Graf of Dahlman Rose has a US$13.66 per share target price on the company’s New York-listed shares, while David Haughton of BMO Capital Markets is forecasting $14 per share.

“Kinross is rated ‘outperform’ on value and growth while execution needs time to unfold,” Haughton writes in a research note. “The shares remain attractive based on valuation, but continued uncertainty may prevent a meaningful share price rally in the near-term.”

At press time, Kinross was trading at $10.19 per share within a 52-week range of $7.15 to $15.02.

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