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 liquidity position: The company is having USD 2.8 billion of liquidity, which well-positioned the company for growth projects. Out of available liquidity, Kinross had cash and cash equivalents of USD 1,210.9 million, which was significantly higher compared to USD 575.1 million on December 31, 2019. The increase was primarily due to strong cash flow and the USD 200 million drawdown on the Tasiast project financing. The increase in Kinross’ cash position was partially offset by the first 50% payment for the Chulbatkan acquisition, payment for the 70% interest in the Peak development project, along with the USD 100 million in debt repayments on the revolving credit facility, and total interest and dividend payments. Further, the company had additional available credit of USD 1,563.6 million as of December 31, 2020. Kinross had total debt of approximately USD 1.9 billion at year-end 2020, of which USD 500 million in senior notes are due in September 2021, which the company intends to repay.

Source: Company Presentation

• Investment Grade Balance Sheet: During the year just gone by, the gold miner has continued to strengthen its investment grade balance sheet. Also, higher liquidity position has further improved its debt metrics, including its net debt to EBITDA ratio. Also, Kinross’ senior notes are rated investment grade with the next repayment planned for September of this year.

Source: Company Presentation

• Generated Over USD 1 billion of Free Cash Flow in 2020: Kinross delivered an excellent performance in 2020, with a record free cash flow of more than USD 1 billion from its diversified portfolio of mines. The company’s free cash flow of USD 1,041.5 million for full-year 2020 was significantly higher compared with USD 164.7 million in the previous year. Moreover, Free cash flow more than tripled to USD 382.8 million in Q4 2020, a quarterly record, compared with USD 110.7 million for Q4 2019. Also, the company maintained its original guidance for the ninth consecutive year despite the impacts of the global pandemic.

• Solid Attributable Margin: During FY20, the company’s attributable margin expansion outpaced the increase in average realized gold price. The company’s attributable margin per Au eq. oz. sold increased 53% to USD 1,051 per Au eq. oz. compared with 2019, significantly outpacing the year-over-year 27% increase in the average realized gold price.

• Supportive Environment for Gold Price: History tells that low real rates and significant increases in money supply provide long-term support for gold price. According to the Forbes report, as many as 285 stimulus measures have been announced around the world in the past eight months. All this excess liquidity has to go somewhere, and historically it’s acted as miracle growth for gold prices. With the Fed maintaining interest rates to zero for the foreseeable future, we believe that gold could do well as it tends to outperform during easing cycles.

Source: Company Presentation

• Invigorating Future: The group is targeting a production growth of 20% from 2021 to 2023. The drivers which are underpinning and extending current production are:
  • Recent capital reinvestment phase enables leveraging of existing infrastructure.
  • Continuous improvement programs enabling profitable mine life extensions.
  • Exploration strategy around existing operations, successfully adding three years of mine life at Chirano, and one year at both Kupol and Paracatu.

Source: Company Presentation

• Risk Associated to Investment: The Company's performance is subject to fluctuations in the market prices for gold. Gold prices are affected by many factors that are outside the Company's control, including global or regional consumption patterns, the supply of and demand for metals, speculative activities, the availability and costs of metal substitutes, inflation and political and economic conditions. 

Financial Highlights: Q4FY20

Source: Company Filing 

• Kinross produced 624,032 attributable Au eq. oz. in Q4 2020, compared with 645,344 Au eq. oz. in Q4 2019. The slight decrease was largely due to lower production at Bald Mountain, Round Mountain and Chirano, largely offset by increases at Tasiast and Paracatu.
• The average realized gold price in Q4 2020 increased 26% to USD 1,875 per ounce, compared with USD 1,485 per ounce in Q4 2019.
• During the fourth quarter, revenue increased 20% to USD 1,195.1 million, compared with USD 996.2 million during the same period in 2019.
• Production cost of sales per Au eq. oz. decreased to USD 682 for Q4 2020 compared with USD 744 for the same period in 2019, mainly as a result of lower costs at Paracatu, Fort Knox and Round Mountain, partially offset by higher costs at Tasiast and Chirano.
• Kinross’ attributable margin per Au eq. oz. sold increased by 61% to USD 1,193 for Q4 2020, compared with the Q4 2019 margin of USD 741, which is significantly higher than the 26% quarterly year-over-year increase in average realized gold price.
• All-in sustaining cost per Au eq. oz. sold decreased to USD 1,013 in Q4 2020, compared with USD 1,050 in Q4 2019.
• Adjusted operating cash flow 2 for Q4 2020 increased by 36% to USD 527.6 million, compared with USD 387.6 million for Q4 2019.
• Free cash flow more than tripled to USD 382.8 million in Q4 2020, a quarterly record, compared with USD 110.7 million for Q4 2019.
• Adjusted net earnings more than doubled to USD 335.1 million, or USD 0.27 per share, for Q4 2020, compared with USD 156.0 million, or USD 0.13 per share, for Q4 2019.
• Capital expenditures were USD 298.3 million for Q4 2020, compared with USD 297.9 million for Q4 2019.
• As of December 31, 2020, Kinross had cash and cash equivalents of USD 1,210.9 million, compared with USD 575.1 million at December 31, 2019. The increase was primarily due to strong cash flow and the USD 200 million drawdown on the Tasiast project financing. The increase in Kinross’ cash position was partially offset by the first 50% payment for the Chulbatkan acquisition, payment for the 70% interest in the Peak development project, along with the USD 100 million in debt repayments on the revolving credit facility, and total interest and dividend payments.

Guidance 2021 

• The 2021 forecast for exploration is approximately USD 120 million, all of which is expected to be expensed. The increase compared with full-year 2020 would facilitate an enhanced program to follow-up on 2020’s exploration success and exploration projects acquired in 2020, such as the Kayenmyvaam and Kavralyanskaya projects near Kupol, Chulbatkan, and the Peak development project in Alaska.
• The 2021 forecast for overhead (general and administrative and business development expenses) is approximately USD 155 million, which is largely in line with last year’s guidance. The Company has made cost improvements over recent years, with 2021 annual overhead guidance down USD 50 million over the past five years.
• Based on an assumed gold price of USD 1,500 per ounce and other budget assumptions, tax expense is expected to be USD 140 million and taxes paid is expected to be USD 200 million. Tax expense is expected to increase by 26% of any profit resulting from higher gold prices. Taxes paid is expected to increase by a range of USD 20 million to USD 26 million for every USD 100 increase in the realized gold price.

2021 regional production and cost guidance. Source: Company Filing

Top-10 Shareholders:

The top 10 shareholders have been highlighted in the table, which together forms around 27.33% of the total shareholding. Van Eck Associates Corporation and BlackRock Investment Management (UK) Ltd. holds the maximum interests in the company at 7.32% and 5.87%, respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: Kinross delivered an excellent performance in 2020, with a record free cash flow of more than USD 1 billion from the diversified portfolio of mines and adhered to the original guidance for the ninth consecutive year despite the impacts of the global pandemic. Further, the group's adjusted net earnings more than doubled to approximately USD 970 million, and attributable margin increased by 53% to USD 1,051 per ounce, which outpaced the increase in the average realized gold price. The group also instituted a sustainable quarterly dividend to return capital to shareholders, which underscores the strength of the group's financial position.

Operationally, the group's three largest mines – Paracatu, Kupol and Tasiast – produced 62% of the group's total ounces and were the lowest-cost mines in the group's portfolio in 2020. Tasiast was a standout performer and achieved record annual production and low costs for the second consecutive year. Kinross also added 5.7 million ounces to the group's mineral reserve estimates after depletion as a result of successful exploration and mine optimization programs. Kinross made good progress on the projects, including Tasiast 24k and La Coipa, and added Chulbatkan and Peak projects.

The group delivered on their ESG commitments in 2020, with the group's ESG performance ranked in the top quartile of their peer group, as measured by an independent third-party organization.

Further, the management expects production to grow by 20% to 2.9 million ounces in 2023 and expects to produce an average of 2.5 million ounces annually to 2029, putting Kinross in an excellent position to continue generating value.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 8.39 on March 10, 2021. We have considered Kirkland Lake Gold Ltd, B2Gold Corp and Alamos Gold Inc etc., as a peer group for comparison purpose.

1-Year Price Chart (as on March 10, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at March 11, 2021 price as well.

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