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Why 2014 Is a Turnaround Year for This Gold Miner

By Vladimir Zernov – Feb 18, 2014 at 3:21PM

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Kinross Gold's focus on lower-cost ounces and solid balance sheet may provide upside for its shares in 2014.

Kinross Gold (KGC -4.13%) recently surprised investors when it reported a 33% reduction in its gold reserves due to the adoption of a fully loaded costing methodology for estimating year-end reserves. Ironically, Kinross Gold was one of the rare miners that were not expected to record a reduction in reserves, as the company previously estimated its reserves at $1,200 per ounce, below current gold prices.

Reserve cut shouldn't scare investors
The new methodology applied to the calculation of reserves reflects Kinross Gold's desire to make profitable gold production a focus. The reduction in reserves led to a 14% increase in gold grades, which will positively impact costs. Not surprisingly, Kinross Gold estimates its 2014 all-in sustaining costs at $950-$1,050 per ounce, down from $1,063 per ounce in 2013.

Kinross Gold holds roughly the same market capitalization as Agnico-Eagle Mines (AEM -2.91%), although Kinross Gold is two times bigger in terms of production and revenue. Agnico-Eagle also decided to use $1,200 per ounce as its assumption in calculating year-end reserves, which resulted in a 4% reduction in reserves.

However, the company stated that its reserves were not very sensitive to the drop in gold prices. Thus, a $150 drop in the gold price will result in a 5% decline in reserves. In general, miners with higher costs are more sensitive to downside pricing pressure when they report their reserves estimates.

This could be the case for IAMGOLD (IAG -6.47%), which will report its full year financial results on February 19. The company estimates that its 2014 all-in sustaining costs will be $1,150-$1,250 per ounce. The recent upside in gold prices brought some relief for IAMGOLD's shareholders, although the high end of the cost guidance is still close to current price levels.

Cutting spending while growing production
One of the fastest ways to improve cash flows in the short term is to cut capital spending. Kinross Gold decided to cut its capital expenditures to $675 million in 2014 from $1.26 billion in 2013. Part of the reduction comes from the fact that the Dvoinoye mine started production late last year and won't need major expenditures in the current year.

Both Agnico-Eagle and IAMGOLD went the same way in their attempt to bring more value to shareholders. IAMGOLD targets a 40% cut in capital spending. Agnico-Eagle took a step further and reduced its quarterly dividend from $0.22 per share to $0.08 per share in addition to cutting its capital expenditures by 28%.

It's important to mention that Kinross Gold expects that its production will remain stable in 2014. The positive sign is that no decrease in production is anticipated while the company focuses on its lower-cost ounces.

Bottom line
Kinross Gold was heavily punished by the market last year. However, the company is set to recover in 2014. It retained a solid balance sheet during the prolonged downside of gold prices. The significant cash position at the beginning of 2013 helped fund the necessary capital expenditures without taking additional debt while operational cash flow was pressed by low gold prices.

As a result, the company finished the year with $734 million of cash and $2.1 billion of debt. Given the reduction in capital expenditures and the recent upside in gold prices, the company's free cash flow should improve. Lower all-in sustaining costs will also strengthen Kinross Gold's position. All in all, this year could be a much better year than 2013 for the company.

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

IAMGOLD Stock Quote
$1.88 (-6.47%) $0.13
Kinross Gold Stock Quote
Kinross Gold
$3.95 (-4.13%) $0.17
Agnico-Eagle Mines Stock Quote
Agnico-Eagle Mines
$48.42 (-2.91%) $-1.45

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