A rising tide can tend to carry all ships, but the Foolish investor never stops checking for leaks.
Although I am firmly bullish about the long-term prospects for further price appreciation in gold and silver -- which of course would imply a solid performance by the precious-metals miners as a group -- the process of carefully separating the relative outperformers from the likely laggards remains a critical skill to successfully navigate this complex sector.
Observing a troubling gap in the miner's development pipeline one year ago, Kinross Gold (NYSE: KGC) found its way off my list of likely outperformers. Kinross shares have added little more than 5% from a year ago, despite a roughly 30% increase in the gold price. The Market Vectors Gold Miners ETF (NYSE: GDX), which provides an effective gauge of share performance from the world's major producers, has enjoyed a 35% surge over the corresponding period.
Shortly thereafter, I singled out John Paulson's pet pick, AngloGold Ashanti (NYSE: AU), as a lukewarm prospect in a smoking-hot sector. Those shares have likewise underperformed the sector by a wide gap. Fools who may have heeded my calls to approach Kinross and AngloGold Ashanti with caution are likely to have encountered significantly more favorable returns from just about any of their competitors.
After I voiced my initial concern about Kinross, operational snags with the commissioning of a key expansion project at the company's Paracatu mine in Brazil contributed to a downward revision of 2009 production targets, while raising production costs. Bottoming out a growing list of concerns, which includes relatively high exposure to less ideal mining jurisdictions like Ecuador and Russia, Kinross joined laggards like Yamana Gold (NYSE: AUY) in failing to translate improving gold prices into bottom-line profitability. It has been a tough year for Kinross.
Although I am relieved to see that the company achieved improved results from Paracatu during the first quarter of 2010 -- including a cost reduction at that mine of more than $200 per ounce over the third quarter of 2009 -- the miner's consolidated production cost of $417 per ounce on a by-product basis remains entirely too elevated to permit the company back onto my list of likely outperformers at this juncture.
Rival Goldcorp (NYSE: GG) undercut Kinross' costs by $92 per ounce in the first quarter, while Newmont Mining (NYSE: NEM) padded its margins with costs $176 lower than those of Kinross.
Kinross' path forward appears to brighten somewhat. The company has picked up a very attractive asset in the Yukon, and will gain equity exposure to African assets boasting 7.35 million ounces of proven and probable reserves through a 9.4% stake in Red Back Mining. Finally, with more than $1 billion in cash and equivalents following the partial sale of its Cerro Casale stake to Barrick Gold (NYSE: ABX), Kinross holds the resources necessary to fill in that gap in the development pipeline through additional acquisitions. Better choices still abound, but in a sector this promising even the relative laggards could turn in some surprising returns.
