Investors Should Keep an Eye on This Miner With Russian Exposure

The entire gold mining industry has been on a roller coaster ride due to fluctuating gold prices, and Kinross Gold Corporation (KGC -4.43%) is no different. Investors have been particularly concerned about Kinross because it has mines located in Russia. Foreign investments in the entire region are in doubt after the annexation of Crimea and the deteriorating ties between the U.S. and Russia.

Investors also feared that the U.S. might put sanctions on companies operating in Russia, which would have greatly hurt Kinross, but so far no such action has been taken. The company is also not giving up on its Russian interests and has increased production from the Kupol mine by almost 54% in the first quarter of 2014.

Financials
Kinross Gold reported a revenue of $817 million in the recently concluded quarter. While revenue dipped slightly compared to the previous quarter, the company managed to post net income of $30 million, a major improvement over a $742 million loss in the last quarter of 2013. The improvement can be attributed to the rising price of gold. During 2013 the company was forced to accept huge losses due to reductions in mine valuations in line with falling gold prices.

Gold miners will not have to revalue their mines if the price of the metal remains near or above the $1,300 level, indicating that Kinross will not be incurring any more write-offs at current price levels.

Fundamentals
According to the recent earnings report Kinross was able to improve on its already stable financials. The current ratio has increased from 3.37x to 3.95x while the quick ratio has increased from 1.40x to 1.59x. Moreover, Kinross has maintained a low debt-to-equity ratio of 0.33, or 33%, which is a sound strategy as high interest expenses can reduce earnings.

Kinross looks to be in a good position when compared with its competitor Yamana Gold (AUY) as can be seen from the table below:

While the company has a better financial position than Yamana, it lags behind in production cost. Kinross had an all-in sustaining cost of $1,001 per GEO, or gold equivalent ounces, while Yamana had an all-in sustaining cost of $820 per GEO. This indicates that Yamana has a better operating margin than Kinross.

Falling reserve level
Another concern for Kinross investors is that the company has been unable to increase its proven and probable reserves, while Yamana Gold was able to do so through its acquisition of Osisko Mining. The company's reserves had decreased from 59.6 million ounces to 42.8 million ounces by the end of 2013. It should be kept in mind that the cost of production increases as mines deplete because the waste to ore ratio goes up. Kinross had hoped to offset its lower reserve level with high-grade ore, reduced capital expenditure, and better NPV.

Bottom line
Kinross Gold recently presented its 2014 production and cost forecast. The company is expecting to produce around 2.5 million to 2.7 million ounces of gold at an all-in sustaining cost of $950 to $1,050 per GEO. This will create very good margins for the company and foster its growth provided that gold prices remain above the current level of $1,300. However, the company's production costs can go up and become a constraint for long term growth if it does not add reserves soon. With ageing mines and no new reserve additions, this doesn't seem a farfetched possibility.

Furthermore, Kinross Gold's Russian mines are expected to provide 27% of its total production for the full year of 2014 at the lowest production cost of between $560 and $590 per ounce. We know that the U.S. is keeping its options open to put pressure on Russia, and this means that the future of the company's Russian mines is still hanging in the balance. This is why investors have avoided the company and prompted some analysts to lower their ratings.