In the last 12 months, Kinross Gold Corporation (NYSE:KGC) stock has surged by more than 80%. The upside in KGC stock has been backed by strong fundamental developments. Comparatively, the VanEck Vectors Junior Gold Miners ETF (NYSEArca:GDXJ) is up 52% in the same period. Even after the sharp rally, I believe that the uptrend has just started for KGC.
At this point, I am recommending investors accumulate positions in Kinross Gold with an initial investment horizon of 12-24 months.
My recommendation on KGC stock is predicated on both industry and company specific factors that back my bullish view. Kinross stock, at a 6.34% weighting, is the largest of 67 holdings in the GDXJ mining stocks portfolio.
Bullish on Gold
It is important to understand that movement in gold mining stocks is closely linked to trend in gold prices. It is therefore important to discuss the likely trend for the precious metal before talking about company specific factors.
Gold is currently trading at $1,536 and is higher by 20% for year-to-date 2019. The break-out in gold prices has come after nearly five years of sideways-to-lower movement. I believe this was a consolidation zone for gold. Levels of $1,200 to $1,300 an ounce can be considered as a region of strong technical support.
I am of the opinion that gold will sustain at higher levels and can potentially break all-time highs in the next 12-24 months.
The most important reason for this view is global economic weakness. For August 2019, the manufacturing sector in the United States contracted for the first time in three years. China has also reported lowest GDP growth in almost three decades. Concerns of weak growth and potential recession loom at large even for Europe. Amidst these economic concerns and the ongoing trade war, the precious metal is likely to outperform.
Consider the following three factors:
The U.S. is already pursuing expansionary monetary policy and as money supply increases, the dollar is likely to trend lower. This is positive for gold.
With economic concerns, there is increasing risk-off trade and investors seek to go overweight on Treasuries and gold. The precious metal is likely to see higher investment demand.
Central banks of Russia and China have been aggressively buying gold to diversify reserves. With weak economic growth, expansionary monetary policies and geo-political tensions, demand for gold from central banks will sustain.
In sum, the global economic scenario is perfect for gold to trend higher after prolonged consolidation. Kinross Gold stock will move in-sync with gold prices.
EBITDA Margin Expansion and Cash Flow Growth
For the second quarter of 2019, KGC reported average realized gold price of $1,307 an ounce. For the same period, the all-in-sustaining-cost (AISC) was $918 an ounce. This translated into an adjusted operating cash flow of $287.7 million for the quarter.
With gold already at $1,530 an ounce, the realized price will significantly increase in the coming quarters with the AISC remaining largely the same. The positive implication is EBITDA margin expansion and growth in operating cash flows.
If gold sustains above $1,500 an ounce (very likely), annualized operating cash flow can be in the region of $1.5 to $1.8 billion. As Kinross Gold Corporation generates positive free cash flows, the stock is likely to trend higher.
From the perspective of AISC, Kinross has agreed to acquire Chulbatkan, a development project. The asset has an indicated resource of approximately 3.9 million ounces of gold. Importantly, the company expects AISC for the project at $550 an ounce.
Therefore, as the project commences production in the coming years, the company-wide AISC will decline and EBITDA margin expand.
As a matter of fact, Kinross has a relatively attractive AISC for American and Russian assets. The AISC for West Africa is higher. I expect inorganic growth to be focused on assets in Russia and the U.S.
Strong Fundamentals for Aggressive Growth
As gold trends higher, it makes more sense to ramp-up production for higher realized gold price. KGC has the advantage of a strong balance sheet to pursue organic and inorganic growth.
As of June 2019, the company had total liquidity buffer of $1.9 billion. With likely expansion in free cash flow in the coming quarters, I expect the liquidity to swell and net debt to decline.
In addition, I expect stock re-rating if gold continues to trade above $1,500 an ounce. This re-rating expectation is based on potential dividends as free cash flow swells.
Final Words on KGC Stock
Kinross Gold Corporation stock has surged in 2019 with gold trending higher, event in the 17.1% gain for the largest physical gold exchange-traded fund, SPDR Gold Trust (NYSEArca:GLD). The company is also on track to meet 2019 guidance on production and that has kept the KGC stock momentum bullish.
The key trigger for sustained stock upside is EBITDA margin expansion and cash flow growth in the coming quarters. In addition, I expect relatively aggressive investments to prop-up production growth in 2020 and 2021.
The factors discussed make KGC stock an attractive buy even after the sharp rally. A 5% to 10% correction on profit booking is entirely likely and I see that as an opportunity to accumulate the stock.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
