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Kinross Gold in heavy demand

For now, the stock is leading the global Tier 1 global gold mining group, on signs that heavyweight investors are active in the background.

Author: Barry Sergeant
Posted: Friday , 24 Jul 2009

JOHANNESBURG -

Kinross Gold has recently assumed stock price leadership of the loosely-defined Tier 1 global gold stocks sector, which includes 12 names with an aggregate market value of just under $200bn. Kinross's NYSE stock price displays 12-month lows and highs of $6.85 and $20.98 a share, with current trades around the $20.28 mark, and with indications of a higher opening on Friday.

Barrick, the world's biggest gold miner by value and production, is trading nearly a quarter below its 12-month high. Kinross was one gold stock chosen for investment this year by US hedge fund Paulson & Co Inc., which famously scored gains of $3.7bn betting against (mainly US) banks in 2007 and 2008. On the latest available information, Paulson & Co. holds around 10% of the SPDR Gold Shares ETF, equal to about 109 tonnes of the physical metal. At the latest count also, Paulson & Co. held 2.6% of Gold Fields, 4.4% of Kinross, 11.2% of just-in-production Centamin Egypt, and 11% of AngloGold Ashanti.

Anglo American, AngloGold Ashanti's erstwhile parent company, sold down $434m in AngloGold Ashanti earlier this year, followed by a final exit sale on 17 March in which $1.28bn was realised for Anglo American; the stock in that deal was bought by Paulson & Co., and from that time, AngloGold Ashanti pretty much since stayed at the top of the global Tier 1 gold stocks price-demand roost.

This is by no means the first time that Kinross, which mines across the Americas and also in Russia, has reassumed its leadership. In the past number of years, Kinross has transformed itself from a stodgy, higher cost gold producer to one that increasingly reports lower costs, along with a highly convincing longer term growth profile.

For first quarter 2009, Kinross reported gold equivalent production (which includes silver, but no other metals) of 526,888 gold equivalent ounces, 59% above the year-ago period's 331,784 ounces. Cost of sales per gold equivalent ounce was $419 in the first quarter, a decrease of 11% compared with the number for the year-ago period. The attributable margin per ounce sold was a record $478 in the first quarter of 2009, an increase of 5% over the year-ago quarter.

The cost of sales margin for Kinross increased from $105 an ounce in 2002 to $279 in 2006, and continued further rapid expansion to $436 an ounce in 2009, and $478 during the first quarter of 2009. During 2008, Kinross moved into the bottom quartile of the global gold industry cost curve, against the trend of rising costs and declining production.

Looking at assets acquired during the Kinross transformation, the Paracatu open pit mine in Brazil moved partially into the Kinross stable in January 2003, on completion of the combination with TVX; in December 2004, Kinross completed the purchase of the remaining 51% of Paracatu from Rio Tinto. Paracatu, a huge deposit and now mine, started up production this year; phase III is scheduled to start up in 2011.

In Chile, Kinross acquired its original 50% interest and became operator of the Maricunga mine through the Kinam merger in June 1998. In February 2007, the balance of 50% for Kinross to become 100% owner arose through the acquisition of Bema Gold. Production is scheduled to start up during 2011.

The TVX transaction in January 2003 saw Kinross acquire 50% of the La Coipa open pit mine; in December 2007, the remaining 50% was acquired from Goldcorp. Kinross acquired 49% in Cerro Casale in the Atacama region, Chile in February 2007, through acquisition of Bema Gold; Barrick holds the remaining 51% interest. Production at the huge project is scheduled to start up in 2012 through 2013.

Fruta del Norte, in Ecuador, and known as the Condor project, was 100% acquired in September 2008 through acquisition of Aurelian Resources. Production is scheduled to start up during 2012. In February 2007, the Bema Gold acquisition saw Kinross acquire a 75% interest the Kupol project in Far Eastern Russia; the remaining 25% interest is held by the Chukotka government.

Kinross acquired 100% of Kettle River - Buckhorn through acquisition of Echo Bay, Washington State, in January 2003. Kinross recommenced operations in December 2003 on the Emanuel Creek deposit which was completed in November 2005.

Further growth projects include the expansion at Fort Knox, near Fairbanks, Alaska, and the potential start up in 2012 of Lobo-Marte, of which 60% is under acquisition from Teck.

Kinross group proven and probable resources total 45.6m ounces, with a further 19.1m in the measured and indicated classification, plus a further 21.3m ounces in the inferred category. According to Kinross, the group remains on track to produce 2.4 to 2.5m gold equivalent ounces in 2009.