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Production Upside Visibility Makes Kinross Stock Attractive

For the current year, Kinross Gold (KGC) stock has been an underperformer. However, in the last two quarters, the stock has largely remained sideways.

It seems that KGC stock is in a consolidation zone, and a rally seems likely in the coming quarters. (See KGC stock charts on TipRanks)

I am bullish on the stock, given two factors that still support a bull-market for gold.

First and foremost, the Delta variant of COVID-19 is likely to impact growth. U.S. policymakers may need to delay the timing of their first-rate hike. In all probability, it will be in 2023.

Furthermore, even if the first-rate hike comes in 2022, real interest rates are likely to remain negative in the next few years. This is positive for precious metals.

Gold has again trended near $1,800 an ounce, and it seems very likely that the precious metal will remain firm.

A Strong Credit Profile

Kinross Gold is among the smaller gold mining companies. However, the company has maintained a strong credit profile. This is an important factor as the company pursues production expansion in the next few years.

As of Q2 2021, Kinross reported cash and equivalents of $675.6 million. Additionally, the company reported undrawn credit facility of $1.6 billion. With a total liquidity buffer of $2.2 billion, Kinross is well positioned for funding capital investments.

It’s also worth noting that as of June 2021, the company reported $1.4 billion in debt. This provides Kinross with ample headroom to leverage for growth projects.

Another important point to note is that the company reported free cash flows of $182.8 million in Q2 2021. This would imply an annualized FCF of almost $800 million.

The company already repaid $500 million in debt during Q2 2021. With this financial flexibility, Kinross is positioned to increase dividends, and continue with its share repurchase program.

Visibility for Revenue, Cash Flow Upside

Kinross also seems attractive considering its production upside visibility. For the current year, the company has guided for production of 2.1 million oz.

With investment in brownfield projects, the company expects production to increase to 2.7 million oz in 2022. Additionally, the company has guided for production of 2.9 million oz in 2023.

It seems likely that production growth can sustain even beyond 2023. This view is backed by the fact that Kinross has a robust asset base. As of December 2020, the company reported proved and probable gold reserves of 30 million oz. The company’s portfolio of assets is also well diversified across the Americas, Africa, and Russia.

Kinross has guided for an all-in-sustaining-cost of $1,110 an ounce for 2021. Even if gold trades at around $2,000 an ounce, healthy EBITDA margins and cash flows can be expected.

However, gold at $2,000 an ounce is most likely a baseline scenario. A bull-case scenario would have gold trading well above $2,000 an ounce. Kinross, with its current asset base, might be positioned for free cash flows of around $1.5 billion in the next few years.

Wall Street’s Take

According to TipRanks’ analyst consensus rating, KGC stock comes in as a Strong Buy, with seven Buys and one Hold assigned in the past three months.

The average Kinross price target is $9.39 per share, implying 56.9% upside potential from current levels.

The Final Verdict

Kinross stock has underperformed in 2021, with the company guiding for lower gold production as compared to 2020. However, a reversal in production is in the cards for 2022, and beyond.

Further, gold has been relatively depressed in the recent past, on prospects of a rate-hike. With ample liquidity in the financial system, it seems likely that asset classes will continue to benefit. Even if interest rates trend higher in baby-steps.

Therefore, with a positive outlook for gold, coupled with production growth visibility for Kinross, the stock seems attractive.

Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article

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