What happened
Shares of Kinross Gold (KGC 0.15%) fell 16% last month, according to data provided by S&P Global Market Intelligence, following the release of the company's fourth-quarter earnings report.
With $0.01 in earnings per share, the gold miner failed to meet analysts' consensus estimate of $0.04. But was that really enough to sink the stock? Let's dig in deeper to find the sources of investors' disappointment.
Image source: Getty Images.
So what
Investors familiar with the mining industry know that it's important to think twice before rejoicing when a company reports an eye-popping bottom line, for it may not necessarily reflect an improvement in operations. For example, Kinross reported fiscal 2017 net earnings of $454 million -- a noticeable improvement over the $104 million loss it reported fiscal 2016. Management, however, attributed the sharp year-over-year increase, in part, to a $97 million impairment reversal related to the sale of Cerro Casale and proceeds from the sale of several assets during the year: Cerro Casale, Quebrada Seca, and DeLamar. Turn to the company's operational cash flow, which doesn't include non-cash charges, and we find another story. In fiscal 2017, the company reported $952 million in operational cash flow, representing a decrease from the $1.1 billion it reported in fiscal 2016.
Another source of concern for investors was Kinross' guidance for 2018. In fiscal 2017, the company reported gold production of 2.7 million ounces -- a 4% year-over-year decrease. And management expects the slide to continue, forecasting gold production of 2.5 million ounces for fiscal 2018. Additionally, Kinross expects the cost of digging the yellow stuff out of the ground to creep up in the year ahead. Whereas the company reported the production cost of sales per gold equivalent ounce was $670 in fiscal 2017, it expects this to increase to $730 in the coming year. Kinross reported all-in sustaining costs (AISC) of $954 per gold equivalent ounce last year, but in fiscal 2018, the company forecasts AISC will climb to $975 per gold equivalent ounce.
Now what
Although Kinross' bottom line jumped dramatically year over year, investors recognized that impairment reversals and the sale of assets are not sustainable ways to turn a profit. Combined with the drop in operational cash flow and the unfavorable outlook for 2018, and it's easy to see why the stock sold off in February. Moving forward, investors should continue to be skeptical of sharp bottom-line growth, valuing the company's cash from operations instead.
