Kinross Retained at Neutral

We are maintaining our Neutral recommendation on Kinross Gold Corporation ( KGC - Analyst Report ) . The company’s first-quarter 2012 adjusted earnings (excluding one time items) of 18 cents a share missed the Zacks Consensus Estimate of 21 cents. Revenues jumped 11% year over year to $1.04 billion, missing the Zacks Consensus Estimate of $1.12 billion.

Gold production decreased during the quarter by 6% to 604,247 gold equivalent ounces. The decrease was due to an expected decline in grades at Kupol along with an increased output of lower-grade stockpile ore at La Coipa, and low production at Tasiast.

Also, production cost per gold equivalent ounce was $742 in the quarter versus $545 in the prior-year quarter. However, a 24% jump in selling price of gold helped revenues climb upwards despite lower production.

The company is on track to meet its production targets for 2012. It expects to produce 2.6 – 2.8 million attributable gold equivalent ounces at an average cost of sales of $670 – $715 per gold equivalent ounce.

Kinross is expected to reap the benefits of rising gold prices moving forward as it did in the first quarter since it has cleared its hedge book and enjoys full leverage to gold prices. In addition, the company possesses the Tasiast gold deposit which has 20 million ounces of mineral resource base under its jurisdiction. Kinross expects this mine to become productive from 2015 and provide more value to shareholders.

Also, Kinross has streamlined its capital expenditure program, focusing on its priorities and not going overboard in its expansionary moves. The company has decided to incur capital expenditure out of the capital available with it, enabling it to maintain its investment grade rating and also return cash to shareholders.

However, Kinross may see some difficult times in the near-term due to increasing cash costs and falling production levels at some of its existing operations. In addition, macroeconomic issues could weaken the demand for gold. For instance, India, a major consumer of the world’s gold production, recently saw a slowdown in gold consumption due to a sluggish economy.

Moreover, Kinross’ current below-average reserve base is a concern, as it will compel the company to make acquisitions or scout for exploration projects in a bid to replace reserves. These measures might give rise to integration risk. Also, the company is still unsure whether it will proceed with the Fruta del Norte project as it is still negotiating with the Ecuadorian government. In case Kinross is unable to strike a favorable deal with the government, its growth prospects might take a hit.

Kinross, which competes with Barrick Gold Corporation ( ABX - Analyst Report ) and Newmont Mining Corp. ( NEM - Analyst Report ) , retains a Zacks #3 Rank, indicating a short-term Hold rating.