Kinross Gold (K : TSE : $1.11) Brian Christie, Johann Aler
Canaccord Capital
Recommendation: SPECULATIVE BUY
12-month target price C$2.00
52-week price range: C$5.55-1.00
Shares O/S: basic 298.7M
fully diluted 335.9M
Ind. Dividend Nil
Dividend Yield: 0%
Weekly trading volume: 4.16M
Working capital: US$111.7M
Long-term debt: US$349.7M
Market capitalization: US$242.7M
Adjusted enterprise value: US$480.7M
We have recently returned from a site visit to the Kinross operations
in Timmins, Ontario. The Hoyle Pond operations have been steeped in
controversy since earlier this year when the company announced a
significant decrease in the amount of proven, probable, and possible
reserves (641,000 in 1999 versus 920,000 in 1998). In this comment we
will provide an update on Hoyle Pond, as well as other company
activities.
Prior to the merger with Amax Gold, the Hoyle Pond mine was the
Kinross flagship operation. Over the last few years, production and
reserves have slipped while costs increased. We believe that this
trend has now largely been reversed as a result of:
* A new senior management team
* Cost reduction initiative program
* Emphasis on increasing reserves and resources
* Focusing on increased performance and throughput
For the third quarter ended June 30, 2000, the Hoyle mine produced
31,300 ounces at a total cash cost of US$241/oz. (costs were
significantly higher than in Q1). However, it is important to note
that the production in June was 12,439 ounces at a total cash cost of
US$183/oz. Production for the balance of the year is estimated at
about 71,000 ounces at a cash cost of US$194/oz. (total for the year
will be about 140,000 ounces).
On the cost reduction side, the new management team has identified
in-house savings of C$3.6 million and contractor savings of C$1.9
million. These savings could ultimately lead to cash cost reductions
of up to US$25/oz.
Daily throughput levels have been below capacity (1,500 tpd),
averaging under 1,400 tpd. We expect the mill to perform closer to
capacity for the balance of the year and in the future. This should
lead to higher annual production in excess of 150,000 ounces in future
years.
Last year, reserves at Hoyle Pond declined largely due to a lower gold
price assumption (US$300) and revisions to the cut-off grade. Last
quarter the company successfully increased the reserve base through
the addition of about 145,000 ounces. The new reserve and resource
base is shown in Table 1. In the second half of this year, the
company plans to focus more on development and this should lead to
further increases in reserves (we envision the addition of another
150,000 ounces by year-end). Historically, Kinross has been able to
convert about 50-60% of the resource base to reserves.
Exploration activities are focused in three principle areas: 1060
zone; Fold Nose area; and Hoyle Pond veins. The 1060 contains three
zones: B1, B3, and S2. These zones are generally open in a down dip
direction, and the B1 zone has been expanded along strike to the west.
In the Fold Nose area, there are five new structures that are not in
the resource base. There appears to be excellent potential to add
reserves and resources. The Hoyle Pond veins are generally open below
the 220 metre level, and in Q3 drilling will be carried out from the
720 metre level to add resources. Past production from the Hoyle
veins has exceeded 1.0 million ounces.
There are two possible scenarios on the table for expanding Kinross'
Timmins operations. One is a joint venture with Placer Dome, while
the other involves restarting the 3,800 tpd Pamour mill and mining the
Pamour "60" pit which contains a reserve of 2.5 million ounces (known
as the Pamour Option).
Earlier this year, Kinross carried out a joint study of its properties
in conjunction with Placer Dome. The PARM (Porcupine Area Resource
Maximization) study looked at possible synergies between the two
companies in the Timmins area.
The PARM study indicated that there were 76 million tonnes of ore that
could be treated over a 16-year period (4.9 million ounces recovered).
The ores would be processed in the Dome mill (13,000 tpd) and both
companies would realize significant cost savings and economies of
scale. Placer would also defer its closure costs for the Dome mine.
According to Kinross' management, a deal done today would favour
Placer since the Dome mine has 3-4 years of strong cash flow ahead of
it. However, all of the "blue sky" potential moving ahead is in the
Kinross assets.
Under the Pamour Option, ore from Hoyle Pond would be co-mingled with
ore from the Pamour "60" pit and other deposits such as Owl Creek and
the Hallinor mine. The ore would be processed through the 3,800 tpd
Pamour mill.
The current concept calls for mining the "60" pit, which is estimated
to contain 2.5 million ounces, in three phases. Initial capital
expenditures for the project, including mill refurbishment, are
estimated at C$12 to C$18 million. Potential cost savings are
estimated at US$30-40/oz. Kinross plans to complete a feasibility
study on the Pamour option by year-end.
We believe that either scenario offers potential upside to Kinross.
In Q2, the company produced 228,086 ounces at a total cash cost of
US$212/oz. This compares with 247,176 ounces at a cash cost of
US$192/oz. for the comparable period a year ago. Last quarter Kinross
produced 233,492 ounces at a total cash cost of US$216 per ounce gold
equivalent. The first two quarters were expected to be the weakest
for the company, and we are anticipating a stronger second half with
production of 500,000 ounces at a total cash cost of around US$200/oz.
Full financial results will be released on July 27, 2000.
At the Fort Knox mine, gold production in Q2 was 83,825 ounces at a
cash cost of US$214/oz. This compares with production of 77,551ounces
at US$238/oz. in Q1. Production and costs are expected to return to
more normal levels through the balance of the year. In 2000, we
anticipate production of 352,000 ounces at a cash cost of US$203/oz.
Kinross is currently developing the True North and Ryan Lode deposits
for production next year. At True North, state permits are expected in
late August and federal permits are expected in mid-September.
Production can begin about six weeks after the permits are received.
At Ryan Lode, permitting is taking a little longer than expected. To
compensate for any delays, Kinross plans to permit True North for
10,000 tpd (original plans called for 7,000 tpd), with production
expected to begin in November 2000 (about two months ahead of
schedule). In 2000, capital expenditures for the Fort Knox operation
and the satellite deposits were originally budgeted at US$36 million.
This figure has been revised to US$27 million, with much of the Ryan
Lode CAPEX deferred until early 2001. The Alaskan operations are well
on-track to produce 500,000 ounces of gold in 2001 at a cash cost of
US$180/oz.
Also in the Fairbanks area, Kinross is exploring the Gil property,
which is a joint venture with Teryl Resources. The property is
contiguous with the Fort Knox property and 6 miles from the mill site.
Baseline environmental work is ongoing, and Kinross hopes to move
300,000 ounces of the 433,000 ounce resource base into a proven
probable category by year-end.
We believe that the Hoyle Pond operations have finally turned the
corner. We were very impressed with the new management team, and we
believe that it will be able to cut costs and increase reserves and
production. The future also looks brighter with the possibility of a
joint venture with Placer Dome, or the development of the Pamour '60'
pit.
However, the shares still seem to be under severe selling pressure.
We believe that the pressure is largely coming from shares placed in
the secondary offering of the Cyprus block. In addition, there may be
other potential institutional sellers sitting on the sidelines. In
our view there are probably only two ways to clear this overhang: an
explosive move in the gold price, or a takeover bid. We believe that
there is good potential for a rising gold price, but whether it will
be enough to clear the share overhang is unknown at this point.
At these price levels, we believe that Kinross is a potential takeover
candidate. A takeover bid is probably the only sure-fire way to clean
up the overhang. In this market, we doubt that a deal would be done
in excess of C$2.00/share (basically a 100% premium).
Although we like the technical fundamentals of the Kinross story, and
we feel that the stock has been oversold, we are very concerned about
the ongoing share overhang in the marketplace. As such we have
changed our recommendation from a BUY to a SPECULATIVE BUY and we have
adjusted our target price to C$2.00 to reflect what a potential bidder
may pay in a takeover offer. We will revisit our recommendation
should the market fundamentals change in the near-term. |
