On Monday, Kinross Gold (NYSE:KGC) released the results of its feasibility study, which was undertaken to determine how costly it would be to expand its Tasiast mine in Mauritania. It also determined how expensive it would be to mine for gold at the Tasiast mine.
The response from the market on Tuesday was uninspiring — shares rose by $0.02 to $4.16/share. However, investors shouldn’t read too much into this — the report was fantastic, and it reaffirms my conviction in Kinross Gold shares.
Kinross Gold has been an underperformer in the gold mining sector this year. While investors have shown renewed optimism in gold miners in 2014, Kinross Gold shares are down for the year. The main issue is the fact that the company gets a large amount of its sales and profits from Russia, and Russian investments have performed miserably so far this year. Not only does the company get more than 20 percent of its production from its Russian operations, but these operations are among the company’s lowest cost mines, which means that even more of its profits come from Russia. If the United States were to follow through on its threats to sanction Russia, and if Russia retaliates, this could markedly damage Kinross’s business.
But with the company updating its mine plan for its Tasiast project, there is reason to be optimistic that this negativity in Kinross shares will be short-lived.
The Tasiast mine currently has a capacity to produce just under 300,000 ounces of gold per year. Last year, production costs were relatively high, but they are expected to come down going forward. The company also has the option of expanding the mine so that its average production over the next 15 years tops 600,000 ounces per year, and it would top 800,000 ounces per year for a 5 year chunk of time from 2018 through 2022.
Prior to Monday, investors expected this expansion to cost a whopping $2.7 billion. Considering the weakness in the gold market, it didn’t seem worthwhile for Kinross to make such a massive investment. It also wasn’t practical, as the company doesn’t have that sort of capital. However, the latest feasibility study estimates that the initial capital expense should be just $1.6 billion. While this is still high, it is far more manageable, and it means that the project is far more economical.
If you are a long-term investor, I think that the market’s lackluster reaction provides a great opportunity. The expansion won’t have its effect on production for another four years, and so short-term thinking has investors not caring about this updated feasibility study. But long-term investors should take notice. In the peak period of production from 2018 – 2022, the company will be making $500/ounce at $1,300/ounce gold. At 800,000 ounces of production, that’s $400 million per year before taxes, or $2 billion overall. That’s a lot for a company valued at just $4.75 billion.
More broadly speaking, the project is now worth more than $1 billion even if we consider the company’s capital costs. If we start to assume higher gold prices this valuation skyrockets. For instance, if the gold price rises even modestly to $1,600/ounce Kinross is estimating that the Tasiast project is worth $2.4 billion. If we assume that the long-term bull market in gold continues and that the gold price rises to above $2,000/ounce, then the Tasiast project will be worth more than Kinross’ current valuation. Considering the company’s large portfolio of projects, this means that Kinross shares offer an incredible opportunity for gold bulls at the current valuation.
While investors more or less ignored Kinross’ announcement, they shouldn’t have. We have seen that there is a lot of value at the company’s Tasiast mine, and that this value has increased dramatically due to a reduced estimated capex outlay. Consequently, I think that there is a great opportunity in Kinross shares at the current depressed valuation, and gold bulls should continue to accumulate the stock.
Disclosure: I am long shares of Kinross Gold.