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Kinross Gold is a Canadian gold mining company

Kinross Gold is a Canadian gold mining company

21 September 2020

The company specializes in gold mining all over the world. 55% of production is located in North and South America, 23% in Africa and 21% in Russia. Extraction from deposits in Africa, Russia and Chile is one of the most profitable in the industry. Due to the rapid rise in prices for the company’s products, its shares have also grown significantly – 182% since the beginning of the pandemic in the United States. The company is also trying to develop existing fields and acquire new ones – now the company has acquired a field in Russia with great potential – Chulbaktan. Research work is currently underway on it. The company is also developing the Taziast project in Mauritania, the goal of the project is to achieve a throughput of 21 thousand tons per day by 2021 and 23 thousand tons per day by 2023. Moreover, at the end of the previous quarter, the company was in talks with the Mauritanian government for tax and other benefits.

The company’s main weakness is its US deposits. They are characterized by extremely high production costs. Probably due to the high salary costs of employees. At three fields, the total production costs per ounce (all-in sustaining costs per oz) are more than $ 1K.

The company’s main comparative advantage lies in its broad geographic diversification of assets. For example, Russian companies Polyus and Petropavlovsk operate only in the Russian Federation. Newmont Gold Corp. has a similar geographic distribution of deposits, however, this company is more than 5 times the size of Kinross.

Facts of growth in share prices

The company is stable in its financial performance – low Net debt / Ebitda shows its future resilience during the crisis.

The company’s results in the second financial quarter delighted investors with sales up nearly 6% quarter-on-quarter. Net profit has almost doubled compared to the same period last year. Also, the company managed to achieve a reduction in the total production cost of one ounce by about 1%, which in terms of profit is one of the key factors.

The company has also completed negotiations with the Mauritanian government and a partnership with it.

Moreover, the fields in Russia, Mauritania and Chile have huge potential due to the development projects that the company conducts. Due to the low cost of production, the company’s costs in the near future may become even lower and it will be able to show positive net profit even at a gold price of $ 900 per oz.

Analysts believe that gold may still rise in price as long as there is some uncertainty in the market, which will positively affect the company’s profits in the future.

Our verdict regarding the company

Despite the fact that gold prices in the near future may already show such an increase (although analysts believe the opposite). The company has the ability to hedge the risk of falling product prices by shorting futures or forwards. Therefore, with a gold price of> $ 2K per ounce, and an average production cost of $ 993, which is constantly decreasing. The company’s business becomes even more profitable.

It is worth noting that the company is a defensive asset as the company’s share price is directly tied to the gold price.

However, investing in a company for the long term is not predictable. Since, despite the development of new deposits and a decrease in production costs, the company’s profit primarily depends on the prices of raw materials. And hedging the risk of price changes 3-5 years in advance is rarely possible. Moreover, even though the company’s products are commodities, prices for which are rising during an economic boom. It is worth remembering that the picture is the opposite with gold prices. Therefore, if we expect the end of the pandemic and the way out of the crisis, buying the company’s shares is clearly not worth it.

Aravana Capital Management provides clients with profitability even during downturns in global equity and bond markets.

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21 September 2020
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