Will Kinross turn into a gold mine for investors?
Larry MacDonald
RTGAM






One attraction to owning gold stocks is leverage to the metal. Those with the highest sensitivity can outperform the price of gold by as much as two to three times, claims an RBC Dominion Securities Inc. report. Also, the stocks often pay dividends and don't have storage costs or security concerns like the bars and coins do.

Shares in junior gold-mining companies are indeed flying high as gold breaks above $1,400 (U.S.) per ounce. The market expects senior producers to launch a round of takeover bids now that soaring gold prices are swelling coffers and providing the means to boost reserves.

Senior gold mining companies are trailing bullion. Over the past 52 weeks, the price of gold has climbed by nearly 30 per cent, noticeably more than shares in Barrick Gold Corp. (12 per cent), Goldcorp Inc. (unchanged) and Kinross Gold Corp. (-10 per cent).

Tanya Jakusconek, a National Bank Financial analyst highly rated in Thomson Reuters' StarMine rankings, has noticed the difference in valuations for the juniors and seniors. "High valuation in the junior space due to M&A speculation has investors looking back at the senior- and mid-tier producers where valuations are still quite reasonable," she wrote in a September report.

Should Kinross shares be lagging?

Kinross stock, which trades on U.S. and Canadian exchanges, is trailing the pack even though its production mix has relatively low levels of non-gold metals, making it the purest of gold producers among the Canadian seniors. And RBC says that Kinross has better leverage to gold prices than its peers.

Adds Barry Cooper, a CIBC World Markets Inc. analyst also well ranked in Thomson Reuters' StarMine survey: "Of all the senior producers, Kinross is the most likely to be acquired." Barrick Gold, for one, "has long been rumoured to be interested in Kinross," notes Cormark Securities Inc.'s Richard Gray.

Pivotal issue: Red Back acquisition

The problem is a huge question hangs over Toronto-based Kinross: will its bet-the-company $7.1-billion (U.S.) acquisition of Red Back Mining Inc. pan out? At this stage, there is enough uncertainty to make it a risky bet. But with greater risk comes the opportunity for greater reward (or loss).

Kinross stock had been sluggish before the takeover bid. There were concerns about the company's growth prospects, costs of production and operations in risky regions, notably Russia. The acquisition, which was approved by shareholders in September, has so far failed to nudge Kinross shares into alignment with its peers or the price of gold.

The purchase of Red Back added the Tasiast mine in Mauritania and the Chirano mine in Ghana to the company's eight existing mines. There is a 36-month plan to put a new mill into operation at Tasiast, which along with existing Red Back output, is expected to raise the company's annual production from 2.2-million ounces to 3.9-million ounces by 2015.

As of mid-November, inferred resources at Tasiast stood at 14.4-million ounces. Kinross believes there is a resource potential of 16.9 to 24.7 million ounces, and will be drilling the property aggressively to prove those estimates. The market is expecting about 20-million ounces, according to Mr. Cooper of CIBC World Markets.

RBC Dominion Securities Inc. analyst Stephen Walker reports that a scoping study of the expansion project is due in December. As well, seven more drills should be added by late November to the 16 currently operating on the site.

If Tasiast's resource potential comes up to expectations, Kinross will have a world-class deposit on its hands. In fact, say informed observers, it would be one of the biggest discoveries since the massive Yanacocha gold deposit found in Peru two decades ago. Not to be overlooked is a reduction in average costs for Kinross, due to higher grade ore.

Analyst sees potential for stock to double

Nick Majendie, a portfolio manger with Majendie Wealth Management at ScotiaMcLeod, is bullish. He believes Kinross is one of the best growth stories in the gold sector, and sees potential for the stock to double.

A significant risk is that Kinross comes up short on execution. Setbacks in expanding production capacity or proving reserves, along with execution risk at four other development projects, could torpedo share prices - especially considering the huge dilution resulting from increasing outstanding shares 60 per cent to acquire Red Back.

For Greg Barnes at TD Newcrest, "the real story at Kinross remains all about Tasiast and how quickly the company can add ounces … and how aggressively it can advance its (new) mill." As of Nov. 4, he has a 12-month price target of $24 (U.S.) for the company's U.S. listing, about 25 per cent above the current price.

In his Nov. 5 update, Mr. Cooper had a 12- to 18-month price target of $23 (U.S.) - and some words of caution. "In the absence of rising gold prices, Kinross would be expected to post only modest changes to its share price and (its share price) could possibly decline," he warns.

The anticipated ramp up in production has a "hockey stick profile," he continues. Growth for the combined entity in the first four years will be "relatively flat," with most of the take-off coming in the fifth year. "We see the best prospects for recognition of this growth after feasibility figures are released for Tasiast in about nine months' time."

Lastly, with development costs for Tasiast and Chirano being a drag on earnings and "the challenge of meeting a 20-million ounce expectation," the company has an uphill battle for meeting expectations. "Longer-term investors should be well rewarded but we think there could be short-term impatience with the stock."