Kinross Braces for the Perfect Storm

Your position relative to a storm's track can mean the difference between safety and susceptibility. Gold miner Kinross Gold (NYSE: KGC  ) is predicting a storm, and providing advance warning so you can position yourself accordingly.

Forecasts for gold abound, and most of them hinge upon analysis of the macroeconomic landscape like the prospects for inflation or challenges facing the U.S. dollar. If you've followed my own Foolish coverage of the sector, then those considerations will be quite familiar. With the world's attention focused upon factors driving the demand for gold, it seems that few are discussing the supply side of the equation.

At a gold conference in Denver earlier this month, Kinross CEO Tye Burt presented his own forecast based upon a dwindling supply of physical gold in the industry's long-term pipeline, avowing:

We may be in the midst of a perfect storm in terms of price and industry dynamics ... Globally production has been in decline since the peak of 81 million ounces in 2001 to 77 million ounces last year, and we see that decline continuing long term.

I know this will come as a surprise to many. I have encountered widespread assumptions that the nine-year bull market for gold must be driving significantly higher production volumes worldwide. This is not the case. Although increasing demand for gold is plainly visible in China's clandestine accumulation and the explosive growth of holdings reported by the SPDR Gold Shares (NYSE: GLD  ) ETF, there has been no corresponding increase in supply to offset the enormous demand. To the contrary, a noteworthy secular decline in South African production and the increasing scarcity of large-scale deposits worldwide is driving a supply shortage that can only be described as a storm.

The trend of massive South African deposits nearing the mature stage of their productive cycle is illustrated by miners like AngloGold Ashanti (NYSE: AU  ) and Gold Fields (NYSE: GFI  ) increasingly building up their production pipelines on other continents.

To prepare for the perfect storm, Kinross and major competitors like Barrick Gold (NYSE: ABX  ) and Newmont Mining (NYSE: NEM  ) are gearing up for a major consolidation phase by raising capital for impending acquisitions. For its part, Kinross is assessing some 50 potential investments in regions where it already has interests. Meanwhile, the company indicated this week that six development projects currently awaiting decisions could contribute another 1.3 million ounces to annual production.

That's not enough to change the global supply shortfall, but it might be enough to make Kinross a reasonable choice to weather the storm.

Although second-quarter earnings were ravaged by currency fluctuations -- which affected rival Goldcorp (NYSE: GG  ) to an even greater degree -- the company continues to deliver impressive operational results. Investors are reminded to keep geopolitical risk in perspective, and encouraged to share their views on gold miners with the insightful investors of Motley Fool CAPS.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Kinross Gold. The Motley Fool has a gilded disclosure policy.


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  • Report this Comment On October 02, 2009, at 5:00 PM, lizrd wrote:

    Nice overview, but what about KGC's hedges? They

    would be expected to be a drag on KGC's ability to

    take advantage of higher gold prices.

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