With gold prices burning straight through the roof of, what I believe to be, a fiat currency house of cards, investors hold understandably high expectations for the performance of gold mining equities.
Much to their chagrin, several well-respected miners have not delivered bottom line results that reflect any measure of the dramatic 47% surge in the gold price from year-ago levels. The fact that Kinross Gold (NYSE: KGC ) can mine more than one-half million gold equivalent ounces in the third quarter at these lofty prices, and still yield a bottom-line loss, is enough to boil the blood of patient investors still weary from last year's painful correction. Kinross reported a loss of $0.03 per share for the period and even after making adjustments earned only $1.7 million for its bottom line.
While Agnico-Eagle Mines' (NYSE: AEM ) growing pains associated with the Kittila mine ramp-up process appear entirely surmountable, and Newmont Mining's (NYSE: NEM ) Boddington mine delay is no cause for concern, Kinross is facing a potentially severe setback with its ramp-up of the Paracatu mine expansion in Brazil. In order to reach full production, analysts believe Kinross will need to add another grinding circuit, which would of course require unforeseen expenditures and several quarters to complete. The setbacks resulted in a high $764-per-ounce production cost at Paracatu, which caused Kinross to buck the trend of falling costs and record a $58 increase to $464 per GEO (gold equivalent ounce).
Given the gap I identified in Kinross' development pipeline several months ago, this detour from previously forecast 2009 production of 2.4 million ounces to a revised 2.2 million ounces comes at a particularly difficult time. From the Lobo-Marte project purchased from Teck Resources (NYSE: TCK ) and Anglo American earlier this year, to the Cerro Casale joint venture with Barrick Gold (NYSE: ABX ) , all identifiable drivers of future production growth for Kinross remain in pre-construction phases of development. Kinross and analysts alike expect zero production growth out of Kinross for 2010, rendering rivals like Goldcorp (NYSE: GG ) considerably more attractive for growth-seekers at this juncture.
As mining investors have learned all too well in recent quarters, operational snags are not the only danger to a miner's bottom line. Kinross recorded a $35 million foreign exchange loss in the third quarter, compared to a $30.6 million gain a year earlier. One not-so-special item that may have a silver lining, however, is the $58.6 million future income tax expense resulting from the debt-lowering impact of the U.S. dollar's decline. Long-term debt has shrunk by $171.4 million through the first three quarters, and Kinross holds some $530 million in cash with which to fill-in that near-term pipeline through acquisitions.
Kinross Gold may be down, but I don't believe it's out. I have reduced my own exposure to Kinross in recent months to reflect a more cautionary stance, but continue to view the company as an attractive vehicle for riding the gold bull. Granting the company just three stars out of five, Motley Fool CAPS members appear less convinced, but please share your own views by taking our Motley Poll.