What's bugging the Kinross Gold stock price?

Relatively heavy cash flow commitments on expansions and new projects may be an explanation, with investors possibly anticipating a fresh capital call.

JOHANNESBURG - 

Earlier this year, there were patches of weeks here and there when Kinross ranked as the world's most in-demand global Tier I gold stock. But from around mid-October, the stock price has been underperforming relative to the global Tier I group, second only to Harmony, which faces a specific set of headwinds in South Africa, where all its current operations are located.

A detailed read of Kinross's third quarter results for 2009 showed once again that the group is having something of a tough time generating free cash flow (operating cash flow after the deduction of cash capital expenditure). On the one side of the coin, the dollar gold price has been rising since early 2002, and has especially more recently moved from one new record to another.

Investors may anticipate that a company like Kinross, which has changed significantly in recent years from a high cost mature gold digger to a low cost, expansionary story, would be making good money in this kind of bullion price environment. On the other side of the coin, Kinross remains committed to fairly heavy capital expenditure going well into the future.

Furthest out is Cerro Casale in Chile in which Kinross holds 49% and Barrick, the world's biggest gold miner by ounces and value, 51%. Capital expenditure at Cerro Casale is anticipated at around USD 3.6bn, with production starting to build up during 2013. This is a big capital call.

In the shorter-term, Kinross has revised its production guidance for 2009 downwards mainly on lower-than-expected production from Paracatu in Brazil. Kinross now expects 2009 production of about 2.2m gold equivalent ounces at an average cost of sales per ounce of USD 435-450. Looking over a longer-term period, analysts anticipate generally that Kinross's output will move from 1.8m ounces of gold in 2008 to 2.7m ounces in 2012, an increase of nearly 1m ounces 

Ever astute in capital and cash management, Kinross recently announced an agreement with Export Development Canada to have EDC guarantee a Letter of Credit Facility for up to USD 125m, in connection with reclamation liabilities at its Fort Knox, Round Mountain, and Kettle River-Buckhorn mine sites.

The guarantee facility is in addition to Kinross's recently amended USD 450m revolving credit facility, on an unsecured basis, up from USD 404m. Despite low quoted cash costs, free cash flow in Kinross's latest quarterly was just a million dollars. This is a slim return, given that the group generated revenue of USD 582m for the quarter. In the year to date, however, Kinross has generated a total of USD 135m in free cash flow, substantially more encouraging than the negative USD 327m for the comparable 2008 period.

Referencing the third quarter 2009, Kinross stated that its cost of sales per gold equivalent ounce was USD 464, an increase of 14% compared with the third quarter of 2008. Cost of sales per gold ounce on a by-product basis was USD 421, compared with USD 362 the previous year.

The evolution of cash flows has been clogging up Kinross's financing for some time now. Since the beginning of 2007, the group has raised more than USD 600m from investors by way of rights issues. During 2008, USD 450m in cash was raised by way of the issuance of a convertible note. This hybrid paper will eventually be dilutive of common shareholders' interests, as are rights issues. Over the period, Kinross has also raised several hundreds dollars selling off various investments, property, and plant; there have also been various acquisitions.

Group net debt (after crediting cash) was negative USD 205m on 30 September 2009, down from USD 460m at the end of 2008. Like its peer group, Kinross has had a compulsion to continue dividend payments to shareholders even when cash flows are under pressure; from the start of 2007, USD 119m has been released in this way.

It remains to be seen whether Kinross will again come to the market to issue fresh shares or another convertible note. For now it seems that investors are prepared to maintain a relatively negative stance on the stock price, indicating that an issue may be announced sooner rather than later.

It can be noted that Kinross's cash generation challenges are far from isolated in the global Tier I gold sector. Since the start of 2007, eight of the world's gold majors have issued USD 10.1bn in fresh equity. Despite that, aggregated net debt for the eight majors increased from a negative USD 6bn at the end of 2007 to negative USD 8.7bn on 30 September 2009. 

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gold investment VHGI Gold is next OTCBB Gold play www.vhgigold.com by John G. on December 10 2009, 18:32 Find this comment inappropriate? Report it

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