From Kinross management....
September 11, 2000
The In the last six months Kinross’ share price has
experienced its worst performance ever. With our shares
setting successive new lows, we have had our hands full
dealing with inquiries from concerned shareholders. A
typical question: “Kinross has set yet another 52 week
low suggesting that the company is going bankrupt?” We
respond by citing Kinross’ most recent financial
statements (June 30, 2000) showing that the company
has US$78 million in cash and that the current (next 12
months) portion of long term debt is US$23 million. When
these facts are coupled with expected strong operating
performance from our mines, where total cash costs of
production per gold-equivalent ounce are expected to
decline back under US$200, bankruptcy is not an issue.
Obviously, these are difficult times for all gold producers;
still, the reality is that when Kinross merged with Amax
Gold in 1998, the company paid down debt of over
US$360 million to eliminate all near term debt maturities
of substance. This action gave Kinross the ability to wait
out a protracted down turn in gold prices.
Most shareholders want to know: “Why has Kinross’
share price performed so poorly?” The following is a
chronology of factors that sheds light on this question:
In the fall of 1999 the gold price rose very sharply as
a result of the so-called “Washington Agreement” of
central banks which clarified their gold sales and
leasing intents for a five-year period. As the gold
price ran to US$338 per ounce Kinross’ share price
peaked at C$5.55 (US$3.75) on very large volumes.
As the gold price retreated through US$320 per
ounce, a syndicate of stockbrokers bought 89 million
shares (or almost 30% of Kinross’ shares
outstanding) for C$4.00 per share from Cyprus Amax
(subsequently merged into Phelps Dodge).
Unfortunately, the gold price continued to fall and the
syndicate was unable to sell all of this stock to
clients. This was immediately viewed as an
“overhang” by the market with negative implications
for Kinross’ share price (i.e. supply exceeds
demand).
As the gold price continued to erode, Kinross was
more exposed to the downside than most other large
gold producers due to our relatively modest gold
hedge position.
Kinross share price really began to under-perform
other gold stocks in March, about the time our 1999
annual report was issued. At the time, some analysts
were concerned about the reduction in reserves at
Hoyle Pond. However, this issue should be resolved
by year-end by the expected advancement of ounces
of gold from resources to reserves in 2000 at our
Timmins assets. Furthermore, the analysts are
focussed on the expected improvement in
performance of Hoyle Pond operations in the second
half of 2000.
When the 2000 budget was prepared, we expected
the first quarter to be our weakest and the fourth
quarter our strongest. When first-quarter results
were released in late April they were in fact
somewhat weaker than expected, which put more
pressure on the share price.
Political tensions in Zimbabwe grabbed the
headlines in the run-up to the parliamentary
elections in late June. Although Kinross’ gold
production from Zimbabwe is only about 4% of our
total and our assets in Zimbabwe have a book value
of less than US$9 million, the political and resultant
economic turmoil was another negative. The Blanket
mine has actually performed very well in the face of
such difficulties.
As Kinross’ share price declined, speculation
became rampant that Kinross would consolidate
(reverse split) its stock in order to maintain its NYSE
listing. As much as it is desirable to maintain our
NYSE listing, Kinross’ senior management and
board of directors has no intention of consolidating
the stock to do such. Kinross’ primary market is the
Toronto Stock Exchange with about 85% of our 1999
volume.
In late July, Kinross released its second-quarter
results and announced the suspension of preferred
dividends. Although our operations reduced total
cash costs by US$4 per ounce between the first and
second quarters, the market expected a larger
reduction. With gold prices continuing to languish at
around US$275 per ounce, the decision was made
to suspend preferred dividends as a cash
conservation measure. Kinross estimates that at an
assumed average spot gold price of US$280 per
ounce for the second half of 2000, the company
should end the year with a cash balance comparable
to its US$78 million mid-year cash position.
Furthermore, at an assumed average gold price of
US$300 per ounce in 2001, Kinross estimates this
cash position will grow to approximately US$100
million by year-end 2001.
It is also worth noting that weak gold prices have
caused a flight of investment capital away from the
gold sector with very little new money coming into
the sector. As this process has unfolded investors
have tended to gravitate to the most senior gold
producers at the expense of companies like Kinross.
In conclusion, the weak gold price and resultant lack of
investor interest in the sector means that any news for a
gold company better be good news or the share price will
likely fall. Kinross operations are poised for a strong
second half in 2000 and the full year 2001. As we meet
our operating objectives in the coming months, the
pressure on our share price should abate. |
