Inflation in the United States has surged to a 40-year high. With higher energy prices, accelerating inflation is a global phenomenon. During inflationary times, it’s a good idea to remain invested in gold. Investment can be made either through exposure to physical gold or ETFs. Another good idea is to consider exposure to gold mining stocks.
Kinross Gold (KGC) is one name that has been an under-performer over the last year and a half. More recently, in the last six-months, KGC stock has declined by 22%. In comparison, Newmont Corporation (NEM) has trended higher by almost 30% during this period.
While there are company specific headwinds that have taken the stock lower, it seems that the selling is overdone. I am bullish on Kinross stock at current levels of $4.9. Over the next few quarters, I believe that the stock can outperform.
Can Gold Trend Higher Amidst Tightening Policies?
It goes without saying that the performance of gold mining stocks is largely linked with the trend in gold price. The precious metal continues to trade around $1,900 an ounce. At these levels, the outlook for gold miners could be considered bullish.
However, investors will point out that the Federal Reserve recently increased interest rates by 50 basis points. Given the inflation scenario, it’s likely that the central bank will aggressively tighten liquidity.
Can gold trend higher amidst contractionary monetary policies?
There are two reasons to be bullish.
First, even with multiple rate hikes, real interest rates are likely to remain negative. Additionally, there are expectations of a recession in the U.S. in 2023. It will not be surprising if rate hikes are less aggressive as probability of recession increases. On the contrary, the central bank can go in reverse gear relatively soon.
Further, gold tends to perform well in times of high geopolitical tensions. The Russia-Ukraine conflict continues to be a concern for many investors and the world at-large. Central banks have diversified their currency holdings with increased exposure to gold.
Amidst the rate hike, gold might not surge above $2,000 an ounce. However, it seems very likely that gold will remain firm around current levels. This would imply strong margin and cash flows for gold mining companies.
Kinross on an Asset Selling Spree
One reason for KGC stock trending lower is the company’s exposure to Russia. However, that risk has been negated with the company selling Russian assets for a consideration of $680 million in cash.
Additionally, Kinross also announced the sale of Chirano mine in Ghana for a consideration of $225 million in cash.
The concern for the markets is that as Kinross sells assets, the production visibility is likely to be impacted. Earlier this year, Kinross guided for 22% growth in production for 2022 to 2.65 million ounces of gold. The company also indicated that production for 2023 will be 2.8 million ounces.
However, with the asset sale, the markets will look for the revised guidance. It seems likely that the stock has already discounted a relatively lower production estimate. Kinross was expecting 13% of 2022 production to come from Russian assets.
On the positive side, Kinross reported a total liquidity buffer of $1.9 billion as of December 2021. The asset sales have further boosted the company’s cash position. Even with relatively lower production, Kinross is expected to deliver positive free cash flows in 2022.
The key point is that the company has robust financial flexibility to pursue organic and inorganic growth. Any attractive acquisition can change the production outlook for 2022 and 2023. Given the balance sheet strength, it makes sense to buy KGC stock when sentiments are bearish.
Talking about the cash flow potential, Kinross gold reported an all-in-sustaining-cost of $1,138 an ounce in 2021. At these levels of AISC, Kinross reported operating cash flow of $1.1 billion. With a similar AISC guidance for 2022, the cash flow visibility is robust. Even if gold production is flat as compared to 2021.
It’s worth adding here that the average realized gold price for 2021 was $1,797 an ounce. Realized price is likely to be higher in 2022. This will, to some extent, offset the lower production possibility.
Wall Street’s Take
Turning to Wall Street, Kinross has a Moderate Buy consensus rating, based on eleven Buys and four Hold ratings assigned in the past three months. The average Kinross price target of $7.64 implies about a 55% upside potential.
Concluding Views
Even with the recent asset sale, Kinross has a strong asset base to sustain production in the coming years. As of December 2021, the company’s gold reserves were 32.6 million gold equivalent ounces. A strong cash buffer also gives Kinross the flexibility to acquire assets.
Kinross stock also offers investors a dividend yield of 2.44% and dividends are sustainable considering the cash flow outlook.
It’s therefore a good opportunity to consider KGC stock on weakness. A potential reversal rally might be in the cards considering the valuation gap as compared to peers.
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