Gordon Pape, The Canada Report
One of Canada’s most respected financial authors and the nation’s leading expert on mutual funds,
Gordon Pape is the editor and publisher of the Internet Wealth Builder (IWB), The Income Investor, and Mutual Funds Update. His best-selling books include 6 Steps to $1 Million, Get Control of Your Money, Retiring Wealthy in the 21st Century, and his most recent book, Quizmas: Christmas Trivia Family Fun. He is a columnist for Fifty-Plus magazine, The Fund Library, and GlobeinvestorGOLD.com and is a frequent guest on radio and television programs across Canada.
Kinross Gold Corp. (NYSE: KGC)
The business: Kinross Gold Corp. (KGC) is the thirdlargest primary gold producer in North America in terms of reserves. Based in Toronto, the company has been in business since 1993 and operates nine mines in several countries including the United States, Brazil, Chile, and Russia. Kinross has more than 5,000 employees.
Why we like it: The rapid rise in the price of bullion in recent months has focused attention on major gold producers. We especially like the prospects for Kinross at this time for these reasons:
New projects.The company has three new projects in the works which are scheduled to come on stream over the next two years. They are the Buckhorn Mountain Project in Washington state which is scheduled to start up in the second half of this year; the Kupol Project in Siberia, a rich high-grade gold-silver deposit which is expected to produce 413,000 ounces of gold equivalent annually (Kinross’s share) once production begins later this year; and the Cerro Casale Project in Chile, a jointly-owned venture with Barrick Gold, which the company says is one of the largest undeveloped gold/copper deposits in the world, with reserves of 23 million ounces of gold and six billion pounds of copper. Overall, management estimates that production will increase more than 60% in the next two years, from 1.6 million ounce of gold in 2007 to 2.6 - 2.7 million ounces in 2009.
Declining cost profile. Kinross expects its production cost per ounce to drop as the new projects come on stream, making it unique among senior gold producers.
No-hedging policy. The company has not hedged any of its production through forward sales. This means it is enjoying the full benefit of the recent surge in the price of bullion.
Undervalued. Kinross shares have made a big move in recent months. However, the stock still appears to be undervalued in relation to such peers as Barrick (NYSE: ABX) and Goldcorp (NYSE: GG) and in a recent research report RBC Capital Markets speculated that this could result in the company becoming a takeover target.
Financial highlights: RBC analyst Stephen Walker and associate Ryan Dolan estimate that the company’s earnings per share will almost triple this year, from an estimated 34c in fiscal 2007 to 94c a share in 2008. They look for another big move in 2009, with earnings per share reaching $1.39. They have a target price of $24.50 on the stock but say that a successful ramp-up of the Kupol Project and the $470 million expansion at the Paracatu mine in Brazil would suggest a target of $31 or higher.
Risks: As with any gold producer, the share price will be directly influenced by the price of bullion, so investors should expect volatility, which is why we give the shares a “higher risk” rating. Also, the price is currently at an alltime high. Some investors may prefer to wait for a pullback, although there is no guarantee that will happen any time soon.
Cash flow: Kinross does not pay any dividends. This is strictly a capital gains play.
How to buy: The shares trade on both Toronto and the New York Stock Exchange. The stock is highly liquid – trading volume on the NYSE is usually in excess of three million shares daily.
Summing up: Despite its recent price run-up, Kinross Gold is still an undervalued stock that offers good capital gains potential if bullion prices continue to rise.