Kinross Gold Corporation (TSX: K) is a Canada-based gold mining company. Its areas of operations include gold mining and related activities, including exploration and acquisition of gold-bearing properties, the extraction and processing of gold-containing ore, and reclamation of gold mining properties.

Investment Rationale

• Strong Q2 performance, earnings doubled on a YoY basis: For the second quarter of 2020 ended on June 30, Kinross reported more than two-fold increase in net earnings and adjusted net earnings. Net earnings grew to US$195.7 million against US$71.5 million a year ago, and adjusted earnings increased to US$194.0 million against US$79.6 million reported in the same period of the previous financial year. The unprecedented upsurge in the reported and adjusted earnings was primarily driven by higher operating earnings because of solid growth in the underlying asset prices “Gold” on the international commodity exchanges and a non-cash impairment reversal of $48.3 million at Lobo-Marte as a result of the addition of mineral reserves at the project in conjunction with the recently completed pre-feasibility study.

 

• Balance Sheet remained strong: After another strong quarterly performance, Kinross continued to strengthen its investment grade balance sheet, with Cash and cash equivalents improved from US$1,138.6 million at the end of the March 31st, 2020 to US$1,521.1 million at the end of June quarter. The increase in cash position was primarily due to free cash flow generated during Q2 2020 and the US$200 million drawdown from the Tasiast project financing. The company had additional available credit of US$811.2 million as of June 30, 2020, and total liquidity of approximately US$2.3 billion, with no scheduled debt repayments until September 2021.

 

• Increasing Average Gold Realization Prices Expanding Margin Profile: During the second quarter of 2020, Kinross average gold realized prices leapt up by more than 31% annually to US$1,712 per Au oz. The increase in the realized price has significantly bolstered the group’s attributable margin by 53% to US$987 per Au oz on a YoY basis. Further, Gold prices have increased ~8% since 2QCY20; consequently, attributable margin is likely to increase in the near to medium term.

 

• Hedge Fund Holdings around 5.9% stake in the Company: Typically, hedge fund managers have the tendency to unearth alpha stocks, and they are able to exploit mispricing to create alpha in their portfolio and for underlying clients in short to mid-term period. Two Sigma Investments, LP, Citadel Advisors LLC and Millennium Management LLC are having a stake in the company. Also, institutional shareholding in Kinross is significantly higher at 67.72%, with Van Eck Associates Corporation, Renaissance Technologies LLC and BlackRock Investment Management (UK) Ltd. are among the top institutional shareholders in the company and holding 10.36%, 4.20% and 4.02% stake respectively. Also, Van Eck Associates Corporation, which operates globally tracked gold ETF funds have increased their stake by 12.85 million shares in the June quarter.

 

• Kinross Shares Are Hovering in a Bullish Zone: 200-day Simple Moving Average is considered as the long-term crucial support level for a stock, as it reflects a support base in a stock created over 200-days of trading sessions. The Price/200-day SMA ratio of Kinross’s shares stood at 1.41x, which implies that shares of Kinross are trading approximately 41% above the 200-day or long-term support level, which indicates a bullish trend in the stock given the stock is trading far above its psychological support level. Also, the long-term moving average is moving up, which is another bullish trend in the stock.

Price vs 200-day and 50-day SMAs. Source: Refinitiv (Thomson Reuters)

• Risk Associated to Investment: Safe heaven yellow metal amid challenging times has a long history of being a volatile commodity prone to swift and dramatic price swings. Also, COVID-19 crisis is unique, because it is rare that both equity assets classes and gold hovering at an all-time high. Therefore, if the recent reversal in the equity market despite COVID-19 led damages to turn out to be a secular one, then gold prices may come down, and the fall in the gold stocks could be severe.

Industry Overview

The COVID-19 pandemic and a flurry of measures taken by the Federal Reserve and the government have put the dollar under pressure and pushed gold prices to record high. Investors of all types are piling into safe-haven assets in unprecedented numbers, and when even the most gold sceptic investors are starting to bet big on bullion, one may conclude that things have fundamentally changed.

Further, a record Inflows into gold ETFs accelerated in Q2, taking H1 inflows to a record-breaking 734 tonne. First half inflows surpassed the 2009 annual record of 646 tonne and lifted global holdings to 3,621 tonne. The gold price (in USD) gained 17% in H1, following a 10% increase during Q2. The gold price reached record highs in numerous currencies, including euros, sterling, rupee and renminbi among others.

Source: World Gold Council.

Gold Outlook

The COVID-19 pandemic is upending asset allocation, with central banks across the globe have aggressively slashed rates and enhanced asset purchasing programmes to stabilize and stimulate their economies. However, these actions are leading to several negative consequences on asset performance. Further, widespread fiscal stimuli and ballooning government debt levels are raising concerns about a long term run-up of inflation, or significant erosion of the value of fiat currencies. Also, we believe that inflow in Gold-backed ETFs will continue to increase, given the heightened uncertainty in the other asset classes.

In coming days, it is expected that major consumer of physical gold such as India and China which together account for around 50% of consumer gold demand, will sustain demand for the safe-haven yellow metals. The expanding middle class in India and China and broader economic growth is likely to have a significant impact on gold demand in future. Further, the application of gold in the varied number of industries including energy, healthcare and technology is likely to increase. All of these bodes well for the demand of the yellow metal.

Kinross - 2QFY20 Financial Highlights

Source: Company Presentation

During the second quarter of FY20, Kinross produced approximately 571,978 Au eq oz gold at an average cost of sales of US$725/oz and an all-in sustaining cost of US$984/oz, tracking original guidance ranges. Revenue from metal sales increased by 20% to US$1,007.2 million in Q2 2020, compared with US$837.8 million during the same quarter of the previous financial year.

The average realized gold price increased by 31% to US$1,712 per ounce in the second quarter of FY20 as compared to US$1,307 per ounce reported in the year over period. The group’s adjusted earnings per share leapt up by 150% on a YoY basis. During the Q2FY20, the group’s Reported net earnings increased more than two-fold to US$195.7 million, or US$0.16/share, as compared with net earnings of US$71.5 million, or US$0.06/share in the Q2FY19. The increase was mainly due to higher operating earnings and a non-cash impairment reversal of US$48.3 million at Lobo-Marte as a result of the addition of mineral reserves at the project in conjunction with the recently completed pre-feasibility study.

The group reported an attributable margin growth of 53% on a YoY basis to US$987/oz and surpassed 31% increase in average realized gold price to US$1,712/oz on year-on-year basis. Adjusted operating cash flow surged by 45% on a YoY basis to US$416.9 million against US$287.7 million reported in the corresponding previous financial quarter. Net operating cash flow came in at US$432.8 million, reflecting an increase of 30% compared to US$333.0 million reported in Q2FY19.

At the end of the quarter, cash and cash equivalents stood at US$1,527.1 million compared to US$1,138.6 million at March 31, 2020. The quarter-over-over increase was due to free cash flow generated during Q2 2020 and the US$200 million drawdown from the Tasiast project financing.

Source: Company Presentation

Capital expenditures were US$214.3 million for the second quarter, compared with US$275.8 million for the same period last year, primarily due to a decrease in spending at Tasiast as a result of impacts of the pandemic on stripping rates, and decreases at Bald Mountain and Round Mountain.

Key Development in 2QFY20

Source: Company Presentation

Stock Performance

Kinross shared traded 1.78% higher and settled at CAD 11.45 (on August 26^, after the market close). Over the past 52 Weeks, its shares have tested a peak of CAD 13.50 (on August 05, 2020) and recorded a 52W Low of CAD 4.0 (on March 16^th, 2020). At the last closing price, Kinross shares traded approximately 15% below its 52W High price point and up around 186% against the 52W Low price level.

1-Year Price Chart (as on August 26^th, 2020, after the market close). Source: Refinitiv (Thomson Reuters).

The stock has generated a return on ~74% in last one year and soared ~86% on a YTD basis. Further, the stock increased approximately 24.5% in the last three months. Moreover, its shares have outperformed the benchmark index and the sector competitors in all the periods mentioned above. On a YTD basis, Kinross shares are outperforming the benchmark TSX Composite Index by 88.9% and sector peers by 25%, which depicts a significantly higher relative strength in the company.

Top Ten Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 31.39% of the total shareholding. Van Eck Associates Corporation and Renaissance Technologies LLC holds the maximum interests in the company at 10.36% and 4.20%, respectively.  Further, it reflects that 4 out of top-10 shareholders have increased their stake in the company over the last three months, with Fidelity Investments Canada ULC and Van Eck Associates Corporation  are among the top investors in the company which have increased their stakes by 16.25 million and 12.85 million, respectively. The institutional ownership in “Kinross” stood at 67.72%, and ownership of the strategic entities stood at 0.34%, respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): Price to Cash Flow Based Valuation Metrics

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Stock Recommendation

Kinross had a strong second quarter, as the company generated robust free cash flow, more than doubled its earnings year-over-year, and continued to strengthen its investment grade balance sheet. The group’s attributable margin increased 53% year-over-year, well above the 31% increase in the average realized gold price.

Gold as an asset class has also benefited from the ongoing rifts between the world’s two largest economies, the United States and China. Moreover, a lower interest rate environment after a series of interest rate cut announcement makes gold an attractive alternative for investors holding other currencies. We expect the gold prices to remain firm as we believe that inflow in Gold-backed ETFs will continue to increase, given the heightened uncertainty in the other asset classes. Higher gold prices are likely to result in improved revenue and cash flow for the gold miners. Further, low oil prices are expected to assist gold producers, in the form of reduced energy costs. With improved margins and cash flows, gold producers are likely to invest in growth projects and/or extend the life of existing mines.

Further, The Price/ 200-day SMA ratio of Kinross’s shares stood at 1.41x, which implies that shares of Kinross trading approximately 41% above its 200-day or long-term support level, which indicates a long-term bullish trend in the stock given the stock is trading far above its psychological support level.

Therefore, based on the above rationale and valuation done using the above methodology, we have given a “Buy” recommendation at the closing price of CAD 11.45 (as on August 26, 2020, after the market close), with lower double digit upside potential, based on the NTM Price-to-Cash Flow Per Share multiple of 8.02x, on the FY20E Cash Flow Per Share. We have considered Yamana Gold Inc, B2Gold Corp and Agnico Eagle Mines Ltd as a peer group for the comparison purpose.

*Recommendation is valid at August 27, 2020 price as well.

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