Kinross Gold (Kinross) reported its first quarter results for 2015 (1Q15) earlier this week.
While the results are solid overall, they also point to the fact that an increasing proportion of earnings are being generated from Kinross’ Russian gold mines, which has been a key factor in the downgrade of Kinross’ credit rating to Ba1 from Moody’s. The Russian mines have performed extremely well in the recent quarter following the devaluation of the Russian ruble.
The company’s liquidity position is solid and it continues to hold significant cash levels at around USD1bn, versus total debt levels at around USD2bn. This strong liquidity position relative to debt levels, leads to a conservative net debt to EBITDA position of around two times for the company which, provides mitigation to the large exposure to developing countries- particularly Russia.
The Kinross 2024 bond is currently priced at yields of around 200 basis points above the Newcrest 2022 bond and looks fairly valued at that level. With increased concentration of earnings in Russia, where ongoing geopolitical tensions remain and the prospect of material falls in production by 2020 if the company sits still, a higher credit spread on Kinross is justified. The bond would suit investors who are seeking a higher yielding exposure to gold than the Newcrest 2022 bond, while still having an investment grade rating from Standard and Poor’s (S&P).
Summary of the results
- Production of 629,360 ounces was down 5.3% from 1Q14, and slightly above Newcrest’s quarterly production of 610,186 ounces
- Revenue of USD781.4m and adjusted operating cash flow was USD214.8m were down 4.2% and 11.3% respectively from 1Q14
- The company reported a net loss of USD6.7m for the quarter compared with earnings of USD31.8m in the prior corresponding quarter. The reported net loss included foreign exchange losses of USD18.7m
- All in sustaining costs were down 3.6% to USD964 per ounce. After allowing for an average realised gold price of USD1,218 per ounce during the quarter, the company generated an all in sustaining cost margin of USD254 per ounce during the quarter. This compares less favourably to Newcrest’s all in sustaining cost of USD745 per ounce during the same quarter
- Cash of USD1,010.5m is up USD27.0m since 31 December 2014, and available credit of USD1,509.6 million. The company is seeking acquisition opportunities
- Kinross expects to be within it’s cost of sales guidance range of USD720 to 780 per ounce, and it’s all in sustaining cost guidance range of USD1,000 to 1,100 per ounce sold in 2015. The company also expects to meet it’s 2015 capital expenditure forecast of approximately USD725 million
- Kinross also announced it has agreed to pay CAD12.5m to settle a Canadian class action lawsuit relating to previous company statements about the Tasiast expansion project in Mauritania
The tables below show Kinross’ performance by geographic segment. While production is reasonably well spread, on a segment basis the only region which saw an increase in earnings was Russia.
Source: FIIG Securities, Kinross Gold
The company has investment grade credit ratings from S&P and Fitch, albeit with a negative outlook.
However, on 16 March, Moody’s announced a downgrade of the company’s senior unsecured ratings from Baa3 to Ba1, following Moody’s downgrade of Russia’s sovereign rating to Ba1 and noting the company’s concentration of cash flows generated from its Russian operations.
Following the downgrade by Moody’s to sub-investment grade the bond price on the 2024 senior unsecured bonds fell around $7 to $8 below par. Further falls in the bond price would be triggered if S&P were to downgrade Kinross from investment grade. However, the language in the most recent S&P report on Kinross appears less concerned about Russian-related risks than Moody’s.
Moody’s has indicated that Kinross' sub investment grade Ba1 rating is primarily driven by an estimate that about two-thirds of the company's cash gross profits less sustaining capital expenditure will be generated from Russia. Also noting that just four gold mines, (including the two in Russia) will contribute to over 85% of the company's cash flows over the next couple of years.
These concentration risks are offset by Kinross' low financial leverage, large scale (2.7m of gold equivalent ounces produced from nine mines in 2014) and very good liquidity, which provides flexibility to absorb a period of lower gold prices or event risks associated with it’s exposure to Russia.
While Kinross currently ranks in the world’s top ten gold producers, sitting still could result in production dropping by 50% by 2020. If Kinross does not proceed with the Tasiast expansion within the next several years, we see the potential for the company’s production profile to decline significantly by the end of this decade unless it is either successful in meaningfully extending the mine lives of existing mines or it acquires either a development project or a company with an extended production profile.
Please note pricing is indicative only and subject to change. Please contact your FIIG representative for more information or if you are interested in investing in Kinross.