Up more than 37% year to date, shares of Kinross Gold (KGC 3.99%) have glittered brightly -- due in part to an unexpectedly strong Q1 earnings report -- in 2017. Lately, however, the stock has been losing its luster. Following a mid-September announcement that the company has completed its feasibility studies and will proceed with the Phase Two expansion of the Tasiast mine in Mauritania and the Round Mountain Phase W project in Nevada, shares have fallen more than 6%. Management estimates initial capital costs for the expansion project at Tasiast to be approximately $590 million, while it plans on committing about $445 million to the Round Mountain project.
It's no surprise that investors are circumspect about the planned development at Tasiast considering the company took a $3.1 billion writedown on the project in 2013. But is the market overreacting? And how does Round Mountain factor in to the equation? Let's dig in even deeper to unearth more details of the two projects in order to determine if the market is correctly interpreting this commitment to organic growth as a red flag.
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Take two
The recently announced decision to proceed at Tasiast follows an announcement in 2016 regarding the Phase One expansion at the Mauritanian mine. Management estimates that Phase One will result in average annual gold production of 409,000 ounces and an all-in sustaining cost (AISC) of $760 per gold ounce. Having finished the Phase Two feasibility study, Kinross now believes that Tasiast, following completion of both expansionary projects, will average 812,000 ounces of annual gold production at AISC of $655 per ounce. Considering that in fiscal 2016, Tasiast produced 175,716 gold ounces, and the company reported overall AISC of $984 per gold ounce, the value of the Phase One and Two expansions holds great promise for the company. In fact, Kinross believes that, combined, Phase One and Phase Two will provide $2.2 billion over the life of the mine, which is expected to be through 2029. Phase One and Phase Two are expected to begin production in Q2 2018 and Q3 2020, respectively.
Digging for gold in the Silver State
The company's interest in developing its assets in Nevada should come as no surprise to investors. In January 2016, Kinross acquired 100% of the Bald Mountain and 50% of the Round Mountain gold mine -- both located in Nevada -- from Barrick Gold (GOLD 0.71%) for $610 million. According to Kinross, the Round Mountain Phase W project will extend the life of the mine five years and result in an additional 1.5 million ounces of gold production. A smaller operation than Tasiast, Round Mountain is expected to now achieve average annual gold production of 253,000 ounces according to the feasibility study. And regarding the mine's expenses, Kinross expects AISC to be $655 per gold ounce for the first five years that Phase Two is in operation. Through the entire life of the project, however, AISC are forecast to be higher -- $720 per gold ounce -- due in part to an increasingly lower grade. Nonetheless, Kinross estimates Phase W to result in additional cash flow of $265 million.
Keeping things in balance
The potential of these projects to be lucrative is clear, but skeptical investors are surely interested in how Kinross expects to finance them, questioning if the company is preparing to weigh itself down in debt. Addressing this concern, the company, according to the press release, "expects to finance both projects with its strong balance sheet and existing liquidity, and operating cash flows."
Image source: Kinross Gold.
A closer look at the company's liquidity and cash flow in comparison to peers like Barrick Gold, Goldcorp (GG), and Newmont Mining (NEM 1.22%) should help to mitigate some concerns that development of these projects will compromise the company's financial health.
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Between the company's ability to generate strong free cash flow and a current ratio over 3.6, indicating a strong balance sheet, investors can be confident that Kinross is pursuing the two projects without sacrificing its sound financial position.
Why investors have nothing to fear
For a gold-mining company, replenishing its depleted assets is critical to its long term success. Whereas some companies achieve this through acquisitions, others opt to expand projects that they already have in their portfolios. At this time, Kinross' decision to pursue the latter should be well-received by investors as it indicates the company's recognition of a path toward a lustrous future -- one that should not jeopardize the company's financial well-being.
Additionally, the company's intent to expand operations in West Africa and Nevada should please investors who may be concerned about the risk associated with rising geopolitical tensions between the U.S. and Russia, where Kinross operates two mines. Although Kinross makes its hay from mines located in the Americas, the two Russian mines are expected to account for 22% of Kinross' gold equivalent production in fiscal 2017.
