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Here's Why Kinross Gold Corporation Is Slumping Today

By Maxx Chatsko – May 9, 2018 at 1:37PM

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The gold miner reported first-quarter 2018 operating results.

What happened

Shares of Kinross Gold Corporation (KGC -6.76%) fell 14.3% today after the company announced first-quarter 2018 results. While the company delivered top-line growth compared to the year-ago period thanks to higher sales volumes and selling prices, it didn't trickle down to the bottom line. Instead, net income actually decreased 21% compared to the performance in the first quarter of 2017. It's the same sticking point Wall Street had with full-year 2017 results.

Turns out, nearly all of the decrease could be explained away by a higher income tax burden. All other important financial metrics -- including all-in sustaining cost (AISC) per gold equivalent ounce, operating income, and operating cash flow -- improved in the year-over-year comparison.

As of 1:01 p.m. EDT, the stock had settled to a 12.1% loss.

A gold nugget sitting on a surface with gold nuggets lined up behind it in a circle.

Image source: Getty Images.

So what

As with most major gold producers, Kinross Gold Corporation has seen output slide in recent years. That's led to an industrywide focus on lowering production costs and investing in new growth projects to offset, at the very least, falling production elsewhere in the portfolio.

The company saw total output slip 2.7%, to just under 674,000 gold-equivalent ounces, in the first quarter of 2018. However, that was offset by a 3.4% uptick in volumes sold and a 9% increase in realized selling price compared to the year-ago period.

More importantly, the company made significant progress to lower production expenses, reporting a record low AISC of $846 per gold-equivalent ounce in the most recent period. That's down 11% from the first quarter of 2017.

Rising selling prices and falling production costs combined to deliver year-over-year gains of 117% in gross profit and 266% in operating income. A large gain in "other income" during last year's first quarter helped to smooth out earnings before income tax comparison, which rose 17% year over year. However, a sizable increase in income tax expense eroded that gain, as net income amounted to just $106 million in the first quarter of 2018 compared to nearly $135 million last year.

Now what

Despite a few accounting line items, Kinross Gold Corporation reported a strong start to 2018. The company was able to ramp up sales volumes to take advantage of higher average selling prices, while lower AISC will continue to allow each ounce of production to go further -- which is no minor detail, as management looks to offset the impact of falling production volumes. If expansion projects deliver as promised in the coming years and gold prices remain at healthy levels, the business should be in a position to create value for shareholders.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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