Kinross Gold? Buy, Sell, Hold?

Kinross Gold Corp., KGC, has underperformed for this past year.  The question now is: where does it go from here?  Before we get into this report, I want to let you know that I have owned this stock for a long time and I currently own it.

There are a lot of questions in my mind regarding Kinross’ less than stellar performance during gold’s run up in the past year.  Is it simply a reflection of the Redback Mining acquisition that was completed in September of 2010, or is the problem somewhere else in the fundamentals of the company.  I’ll delve into this and more as I look at Kinross Gold Corp. and try to figure out why the stock has underperformed and where it is headed in 2011.  Kinross Gold?  Let’s take a look.

From the Kinross home page, www.kinross.com we get a simple version of the Kinross mission statement which, if it was successfully implemented, would indicate a better performance in the shares than we saw this year.

There are  some  nice catch phrases in this profile that are designed to make you feel warm and fuzzy, like this one that really jumps  out at me.

“Kinross’ strategic focus is to maximize net asset value and cash flow per share…” Unfortunately we did not see that in 2010 as this next chart points out.

Anyway you look at it, Kinross has been trading sideways throughout 2010 with the exception of July through the beginning of September when it traded down before returning to the sideways trading range.  The question now is , will that be changing as we go into 2011?

Has The Red Back Acquisition Helped or Hurt Kinross?

The Red Back buy out was completed on Sept. 17th, 2010 and the company put out this press release regarding the acquisition.

09.17.10 – Kinross and Red Back complete business combination

Toronto, Canada, September 17, 2010 – Kinross Gold Corporation (TSX: K, NYSE: KGC) and Red Back Mining Inc. (TSX: RBI) are pleased to announce the completion of their previously announced plan of arrangement (the “Arrangement”).

“Kinross will be a growth leader among senior gold producers,” said Kinross President and CEO Tye Burt. “We expect production to grow from the current combined forecast of 2.6 – 2.7 million gold equivalent ounces in 2010 to 4.5 – 4.9 million gold equivalent ounces in 2015, based on the new production expected from Kinross’ existing suite of growth projects, combined with the significantly expanded production expected from the Tasiast mine.”

Pursuant to the Arrangement, Kinross has acquired all of the issued and outstanding common shares of Red Back that it did not previously own in a transaction valued at approximately US$7.1 billion. In accordance with the Arrangement, former Red Back shareholders are entitled to receive 1.778 Kinross common shares plus 0.11 of a Kinross common share purchase warrant for each common share of Red Back. Each whole warrant is exercisable for a period of four years at an exercise price of US$21.30 per Kinross common share. Outstanding options to acquire Red Back shares have been converted into options to acquire Kinross common shares, adjusted in accordance with the same ratio. The Red Back common shares are expected to be delisted from the TSX on or about September 22, 2010. The Kinross common shares and common share purchase warrants issued under the Arrangement are expected to be listed and trading on the TSX on the same date.

The key to this acquisition is how much gold it will bring to Kinross and at what cost.  Tye Burt, CEO of Kinross Gold  discusses the Red Back acquisition and the amount of gold that he expects it to bring to KGC in the next video.  Currently Kinross has a per ounce gold cost of near $500 per ounce and time will tell how the Red Back acquisition will effect that.

The $7 billion price tag of the Red Back acquisition has certainly had a hand in keeping Kinross in the sideways pattern.  The fact that 12 more months of drilling are required before the true size of the deposit is defined is also a drag on the stock.  On the other hand, as the Red Back gold comes online, the shares of Kinross should move up with the added income brought by the 1.6 million additional ounces of gold produced annually.   Another negative might be raised by this Bloomberg article published yesterday.

Russian Gold Output Falls 2.2% in 11 Months to 185.5 Metric Tons

December 27, 2010, 7:14 AM EST

By Ilya Khrennikov

Dec. 27 (Bloomberg) — Russia’s gold production slid 2.2 percent in the first 11 months from the same period last year to 185.5 metric tons, led by a drop in output at mines belonging to Kinross Gold Corp. and Petropavlovsk Plc.

November production increased by 2.5 tons from the same month a year earlier, the Russian Gold Producers’ Union said in a statement today, without being more specific.

It’s a small story that will likely go unnoticed due the to large size of the Kinross’ holdings around the world, but it is a negative and should be recognized as such.

Kinross Gold?

Here is where the rubber hits the road! With the acquisition of Red Back and the Tasiast gold deposit in Mauritania, Kinross would become one of the largest gold producers in the world.  That is a major achievement in and of itself when you consider how small the company was when it started.  So what we have is a company that has acquired, potentially, 1.6 additional ounces of gold annually by 2015 and said company is trading sideways.  Why is this?

On the negative side, Kinross holds a lot of properties in unstable areas.  Mauritania and Russia to name the most obvious.  The additional drilling required and the time that it will take to define the Tasiast deposit is another negative.

On the positive side, Kinross continues to acquire more gold in the ground during a time of high demand, high gold prices and limited new ounces that are being discovered.  (Refer to peak gold arguments.)  Kinross is growing at the right time and has a good vision for the future of the company.  That alone keeps me interested in holding KGC shares.

Goldbug’s Take

I have owned Kinross, in various amounts for a long time.  Having said that, I will admit that I have been disappointed in the share’s performance in this past year.  Disappointed, yes, totally discouraged, no. Having been in the company’s stock for so long, I am willing to give Tye Burt 12 tho 16 months to see if the Red Back story plays out as he has described it.  If it does, shareholders will be richly rewarded.

If the story goes south, there will be ample opportunity to get out of the shares at a profit in the next year as gold’s 2011 gains will “lift all boats”.   I am putting Kinross Gold on HOLD until we see how this tale develops.  So as to be perfectly clear, I do not recommend selling KGC at this time, I just won’t be buying until I see better results in the share price. Gold is in an ongoing bull market and Kinross should rise higher as gold goes up.

Remember, as you review this post, I am giving you my opinion of the stock and I am only telling you what I think and what I am doing.  You are responsible for your own investments, so do your own homework, and if you are incapable, or unwilling to do that, hire a broker to make your decisions for you.  I am kind of like a TV, if you don’t like what you are seeing or reading, change the channel!

Hopefully, I have shed a little light on the question, Kinross Gold?

Till next time, HAPPY NEW YEAR!, good luck and good trading!

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