Balanced View on Kinross

We are retaining our Neutral recommendation on Kinross Gold Corporation (KGC - Analyst Report) following our assessment of its mixed second quarter results. Adjusted earnings (excluding one time items) of 14 cents a share missed the Zacks Consensus Estimate by a couple of cents.

Revenues rose 4.5% year over year to $1,006.7 million, beating the Zacks Consensus Estimate of $1,005 million. Higher average realized gold price led to a growth in the top line.

However, gold production decreased 4% year over year to 632,772 gold equivalent ounces in the quarter. The company’s production cost of sales per gold equivalent ounce jumped 27% to $725.

Kinross has trimmed its yearly production forecast to approximately 2.5–2.6 million gold equivalent ounces from the earlier target of 2.6–2.8 million. The revision reflects the sale of its 50% interest in Brazil's Crixas gold mine to AngloGold Ashanti Ltd. (AU - Snapshot Report).

Kinross is expected to continue to reap the benefits of rising gold prices moving forward. 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. Construction of the Dvoinoye mine in Russia, the company’s second most important project, is progressing well and ore processing is expected to begin in the second half of 2013.

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.

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 may give rise to integration risk.

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.