Kinross Gold (TSX: K) is a Canada-based senior gold producer, producing roughly 2.4 million gold equivalent ounces in 2020. The company had 30 million ounces of proven and probable gold reserves and 59 million ounces of silver reserves at the end of 2020. It operates mines and focuses its greenfield and brownfield exploration in the Americas, West Africa, and Russia. Moreover, the company has historically used acquisitions to fuel expansion into new regions and production growth.

Investment Rationale

• Robust Q1 2021 performance: The company reported decent performance in Q1 2021, with revenue surged by 12% to USD 986.5 million, against USD 879.8 million on a YoY basis, gross profit elevated to USD 359.6 million, up 35% against USD 265.4 million and net profit rose by 21% to USD 149.2 million compared to USD 123.3 million in the previous corresponding period.

• Healthy operating matrix: Despite the turmoiled period in 2020, the Company maintained its pace and witnessed spirited performance across its gross margin, operating margin and net margin. We believe the momentum to continue in the foreseeable future, as the Company had big capital investment plans to support future growth. Higher average realized prices of the commodities also played a crucial role in achieving healthy revenues and margins.

• Boosting production outlook: The management is bullish on the gold outlook and announced a growing three-year production profile, which is expected to increase by approximately half a million ounces, or 20%, to 2.9 million Au eq. Oz. in 2023. On the back of elevated gold prices, increasing gold production is really a key positive statement.

Source: Company

• Nine consecutive years of meeting guidance: The company has met or exceeded guidance for production, costs, and capital expenditures for the past nine years, which is noteworthy and gives confidence that the guidance recently shared by the company would also be achieved by flying numbers. For FY2021, it shared production guidance of 2.4 million Au eq. Oz, along with production cost of sales at USD 790 and All-in sustaining cost at USD 1,025.
  

Source: Company

• Robust Free Cash Flow Yield: The company is continuously generating free cash flows, which is a key positive. Its mines perform well as the management effectively controlled the operational challenges caused by the COVID-19 pandemic. Furthermore, the expected enhanced production along with controlled cost will also derive strong free cash flow performance.

Source: Company

• Elevated commodity prices to support future earnings: The recent rally in the commodity prices is moving well for the company, and we can see a significant impact of this movement in the precious and industrial metal mining company’s balance sheet. As the prices go up, it increases averages realization prices for the miners, which lead to a higher margin profile, higher free cash flow generation and deleveraging of the balance sheet. We believe that the company is well placed to capitalize on the increasing prices of the underlying commodity and exit FY2021 on strong financial health. During Q1 2021, the company realized an average gold price of USD 1,787 per ounce compared to USD 1,581 per ounce in Q1 2020.  
  

• Ample Liquidity and prudent capital management: At the end of March 2021, the company reported handsome liquidity of USD 2.6 billion, which includes a cash and cash equivalents balance of USD 1.05 billion, available credit of USD 1.56 billion. Moreover, the company is planning to reduce its total debt level by USD 500 million, which would further improve the company’s financial flexibility.

• Trading in a horizontal channel pattern: On the daily chart, the stock prices are moving in a horizontal channel pattern and sustaining above the lower band of the pattern. The leading indicator, RSI (14-Period) is trading at ~37.75 level, further supporting a positive stance for the stock.

Source: REFINITIV, Analysis by Kalkine Group

• Risks associated with investment: The company’s performance depends on the gold prices. A correction in gold prices is likely to dampen the company’s performance. Further inherent risks associated with mining and mineral processing such as the company's mines may not perform as planned; uncertainty with the company's ability to secure additional capital to execute its business plans; the speculative nature of mineral exploration and development, including the risks of obtaining and maintaining necessary licenses and permits, authorizations and/or approvals from the appropriate regulatory authorities.

Financial overview of Q1 2021 (In millions of USD)

Source: Company

• The company produced 558,777 Au eq. oz. in Q1 2021, compared with 567,327 Au eq. oz. in Q1 2020. This slight decrease was primarily due to lower production at Tasiast and at Round Mountain, partially offset by higher production at Bald Mountain.
• In Q1 2021, the company posted revenue of USD 986.5 million, higher than USD 879.8 million in Q1FY20. The increase was driven by a higher realized price of gold (USD 1,787/ ounce v/s USD 1,581/ounce in pcp).
• The total cost of sales in the reported period increased slightly to USD 626.9 million compared to USD 614.4 million in pcp. The increase was mainly due to higher depreciation cost which stood at USD 207.0 million V/s USD 193.1 million in pcp.
• Gross profit surged to USD 359.6 million against USD 265.4 million in pcp, thanks to the elevated revenues, partially offset by a higher cost of sales.
• Operating earnings increased to USD 242.3 million in the first quarter of 2021 from USD 192.6 million in the same period in 2020. This increase was primarily due to an increase in margins (metal sales less production cost of sales), partially offset by the increase in depreciation, depletion and amortization.
• Earnings before tax in Q1 2021, stood at USD 227.1 million compared to USD 168.3 million in pcp.
• The company witnessed lower finance expense in the reported period, which stood at USD 19.3 million against USD 25.7 million in pcp.
• The company recorded higher tax expense of USD 77.9 million, compared to USD 45.0 million in the previous corresponding period. The tax expense recognized in the first quarter of 2021 included USD 7.4 million of deferred tax expense, compared to USD 26.3 million in Q1 2020, resulting from the net foreign currency translation of tax deductions related to the Company’s operations in Brazil and Russia.
• The group reported Net income at USD 149.2 million against USD 123.3 million in pcp. The increase was primarily a result of the increase in operating earnings as described above, partially offset by the increase in income tax expense in the first quarter of 2021.
• In Q1 2021, adjusted operating cash flow decreased to USD 399.6 million from USD 418.6 million in the same period of 2020, while the free cash flow decreased to USD 75.6 million, compared to USD 108.2 million in pcp, primarily due to an increase in income taxes paid and capital expenditures, partially offset by increased margins.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 27.58% of the total shareholding. BlackRock Investment Management (UK) Ltd. and Van Eck Associates Corporation hold the company's maximum interests at 6.65% and 6.25%, respectively. The company's institutional ownership stood at 65.30%, and ownership of the strategic entities stood at 0.36%.

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

To begin the year, the company's diverse portfolio of mines functioned well, as it worked to mitigate the effects of COVID-19 across all operations and projects. The company's adjusted net earnings increased by 51% year over year, with margins growing by 25% to USD 1,031 per ounce sold, surpassing the increase in the average realized gold price once again. We believe that despite a bit of pullback, gold, as an asset class, would continue to remain in the limelight as uncertainty over the global economic growth is still prevailing.

We believe that average realized gold prices per ounce would continue to expand, which would lead to margin expansions. For FY21, the group estimates its gold equivalent production at 2.4 million ounces, while the production is expected to increase by approximately half a million ounces, or 20%, to 2.9 million Au eq. Oz. in 2023, which is a key positive. Furthermore, the expected enhanced production along with controlled cost would also derive strong free cash flow performance.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of USD 7.74 on July 21, 2021. We have considered B2Gold Corp, Barrick Gold Corp, Alamos Gold Inc etc., as the comparison's peer group.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on July 21, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid at July 22, 2021 price as well.

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Disclaimer

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