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Gold miner Kinross Gold Corporation (KGC - Analyst Report) reported adjusted earnings of 14 cents per share in the second quarter of 2012, below last year’s earnings of 20 cents per share. The results missed the Zacks Consensus Estimate of 16 cents.

Net earnings, as reported, went down almost 53% to $115.8 million (or 10 cents per share), from $244.3 million or 22 cents a share in the year-ago quarter.

Operational Performance

Revenues increased 4.5% year over year to $1,006.7 million, slightly ahead of the Zacks Consensus Estimate of $1,005 million. The growth was due to a higher average realized gold price, which increased almost 8.3% to $1,568 per ounce in the quarter from the prior-year quarter.

Gold production decreased during the quarter by 4% to 632,772 gold equivalent ounces. The decrease in production was led by an expected decline in grade at Kupol and Kettle River-Buckhorn along with an increased output of lower-grade stockpile ore at La Coipa.

Production cost per gold equivalent ounce was $725 in the quarter versus $569 in the prior-year quarter. Margin per gold equivalent ounce sold was $843 in the quarter, down 4% from the prior-year quarter, mainly due to higher production cost of sales per ounce.

Financial Review

Adjusted operating cash flow was $270.5 million in the second quarter compared with $404.8 million a year ago. Cash and cash equivalents were $1.34 billion as of June 30, 2012, compared with $1.08 billion as of June 30, 2011. 

Capital expenditures were $431.2 million in the quarter compared with $408.8 million reported in the same period last year. The higher capital expenses were driven by project-related expenses incurred at Tasiast, Fort Knox and Round Mountain.

Growth Projects

Kinross is currently engaged in the development of a number of mines, the most important ones being Tasiast and Dvoinoye. At Tasiast, Kinross is currently reviewing a number of alternatives to develop the project in the most feasible manner.

Moreover, the company has also received permission from the Mauritanian government for carrying out the Environmental Impact Assessment (EIA) for the Phase 2 project. This phase will include all intended mining and processing activities which might take place within the boundary of the mine under various circumstances.

At Dvoinoye, construction is progressing well and the mine is on track to deliver the first ore to the upgraded Kupol mill in the second half of next year.

Apart from these projects, Kinross also has a few others in its portfolio. The company is currently continuing negotiations with the Ecuadorean government on an enhanced economic package at Fruta del Norte. In addition, construction work on the fourth Paracatu ball mill is progressing as per schedule and the project is expected to be operational in the ongoing quarter.

Outlook

Kinross has cut its yearly production forecast to approximately 2.5–2.6 million gold equivalent ounces from the erstwhile target of 2.6–2.8 million after divesting 50% of its interest in the Crixas mine.  Excluding Crixas, the guidance has remained unchanged.

Also, Kinross expects cost of sales to be in the range of $690–725 per gold equivalent ounce, up from the earlier range of $670–$715. The forecasted increase is driven by higher expected production cost of sales per ounce in West Africa and South America.

Our Take

Kinross, like other gold producers, Barrick Gold Corporation (ABX - Analyst Report) and Newmont Gold Mining (NEM - Analyst Report), benefits from rising gold prices. However, its results are constrained by rising costs and lower grades like the other players in the industry.

Currently, we have a long-term (more than 6 months) Neutral recommendation on Kinross. The company currently holds a Zacks #3 Rank, reflecting a short-term (1 to 3 months) Hold rating.

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