Valuation: Undervalued

Investment Thesis:

Kinross is a gold acquisition, exploration and processing company that operates in the USA, Brazil, Russia, Chile, Ghana, and Mauritania.
Kinross has a TTM revenue of 4.32B, a TTM EBITDA of 2.73B, a 2020 EBIT of 1.89B, and market cap of 9.81B.
Kinross is undervalued and their fair value is estimated to be between $12.71-14.09, which implies an upside of between 63.33-81.04%.
Their recent re-implementation of their dividend is bullish and means that they are of good financial health.
Kinross helps to balance Sixth Street Specialty Lending (another holding in my portfolio) and pays a dividend. This helps to reduce risk while maintaining consistent, and positive returns.

Company Overview:

Kinross Gold Corp. operates in the acquisition, exploration, and development of gold properties in the USA, Brazil, Russia, Chile, Ghana, and Mauritania. Kinross is also involved in the extraction/processing of gold-ore, reclamation of mining properties, and production/sale of silver.

Kinross has 30 million ounces of gold and 59.2 million ounces of silver in their proven/probable mineral reserves. Furthermore, Kinross has met or exceeded their production, cost, and capital expenditure forecasts over the past 9 years. In 2021 they expect to produce 2.4M ounces of gold and expects to increase this to 2.9M ounces by 2023 through a 3-year capital re-investment plan.

Over the past 4 years, Kinross has acquired land and expanded their services to Nevada, Brazil, Russia, and Alaska.

Kinross is very capital intensive, and therefore have accrued a large amount of debt since their inception in 1993. As a result of this, both Standard and Poor’s (S&P), and Fitch have both rated Kinross’s ability to pay of debt as BBB. This rating means that these firms recognize that Kinross has an adequate capacity to meet their financial commitments, however adverse economic conditions can have a large effect on their ability to meet their financial requirements.

Although this rating may seem inadequate at first, many gold mining companies are rated at or below this BBB rating. In terms of their industry Kinross’s credit rating would be considered good and is not of much concern.

Investment Information:

Financial Information:

Kinross has a TTM revenue of 4.32B, a TTM EBITDA of 2.73B, a 2020 EBIT of 1.89B, and market cap of 9.81B.

Kinross is also forecasting a reduction in their capital expenditure of $100M YoY, while still being able to maintain their 3-year expansion plan to generate 2.9M ounces of gold.

Kinross has the ability to liquidate $2.8B, and out of this $1.2B is in cash and cash equivalents (rest is their available credit. This can help Kinross meet short term obligations and have a reserve of cash in case of an emergency. Furthermore, Kinross has a long-term goal to drastically reduce their debt, to the point where their debt will be approaching zero.

Kinross has low P/E and EV/EBITDA ratios in comparison to similar gold mining companies, which signify that they are undervalued. This will be expanded upon in the “Comparable Analysis” sections of this report later.

Company Information:

Kinross has diversified their operations, and has had success in many jurisdictions, by utilizing 8 mines in 3 different regions.
Global Mining leader in ESG (Environment, Social, Governance)
- Consistently ranks in the top quartile of their peer group.
  - 88 RobecoSAM score (their peers average is 77)
  - 86 on the Sustainalytics score (peer average is 78)
  - 1 (1 being the best) on ISS Governance (peer average of 3.75)
- Environment
  - Meet or exceeded all of their regulatory requirements
  - Has a record of 0 reportable incidents
  - Has made serious efforts to decrease their water and GHG consumption per ore mined.
- Social
  - 5% of employees are hired within the host countries.
  - $2.1B spent on goods and services in host country (benefitting their economies)
  - Has a very low injury rate and strives for safe working environments.
  - Received the sustainability and social investment award in Ghana.
- Governance
  - Kinross has a gender diverse board (33% diversity ratio)
  - 8 of Kinross’ 9 board members are independent.
  - Globe and Mail gave Kinross the highest-rated mining company for corporate governance in 2020.
- Kinross has 8 mines internationally and is looking to expand dramatically within the next decade. (Kinross’s expansion plan can be found as an image at the end of the article.)
  - Paracatu, Brazil (23% of total production)
  - Fort Knox, Alaska (10%)
  - Bald Mountain, Nevada (8%)
  - Round Mountain, Nevada (14%)
  - Chirano, Ghana (6%)
  - Tasiast, Mauritania (17%)
  - Kupol-Dvoinoye, Russia (22%)
- In 2020, Kinross declared their first dividend since late 2013
  - This is good for investors as it signifies that Kinross is now of good enough financial health to be consistently distributing dividends to their shareholders.

Valuation Information:

WACC:

The WACC figure in the DCF model was found via Tracktak. Tracktak is a tool that build out DCF models and provides valuation information about companies.

CAGR:

I arrived at the CAGR figure for Kinross through Tractak.

Tax Rate:

I was able to find Kinross’s corporate tax rate in their SEC filings.

Interest Expense:

Kinross’s interest expense was variable and very volatile, as a result of this I decided to use their average interest expense to obtain the most unbiased result possible.

Investment Valuation and Plan:

Valuation:

DCF:

The figures that I used in order to conduct this model, and the reasoning behind why I used them can be found in the “valuation information” section above.

The DCF model that I conducted estimated that the fair value of Kinross should be $12.71/share, which implies a share price increase of 63.33%. This seemed relatively high for such a large gold mining company, so I decided to also undergo a comparable analysis to see if this valuation maintains the same price target.

Comparable – EV/EBITDA

I decided to use this comparable (EV/EBITDA) because it values the whole company vs the common stock and is frequently used in investment banking. When comparing Kinross’s EV/EBITDA multiple to their competition, it is quickly noticed that they are undervalued and their estimated fair value is $13.15/share, implying a share price increase of 69.04%. This is very similar to the result in my DCF model; however, EV/EBITDA ignores a company’s debt and depreciation, which are both large figures on Kinross’s statements. Because of this discrepancy in the comparable I decided to compare Kinross’s P/E to their competitors to see how much of a difference there would be.

Comparable – P/S Ratio:

When comparing Kinross’s P/E ratio to that of their competitors, we can see that Kinross is in fact undervalued. Based on my model, Kinross’s fair value is $14.09/share, which implies a share price increase of 81.04%. Since this number is relatively consistent with the figures derived from the other comparable, and the DCF it is fair to say that Kinross is undervalued.

Plan:

Picking up shares of Kinross between the price range of $7.78-9.62, would be considered good buys. Buying at these prices would help to maximize the upside potential of such an investment, which is favourable for all investors.

According to my models, there is no downward support levels, so even if the share price dips, holding on to your shares through a dip would likely be the best plan.

I would consider selling shares between $12.71-13.15 to lock in profits and ensure a massive gain. I think holding past these levels may be rewarding, however you would be taking on significant risk.

Catalysts:

The share price is heavily related to the price of gold.
- This could serve as a catalyst if there is news from the FED about a potential rise in inflation.
- The market is already worried about inflation, so even without such news we may see gold prices rise.
Future expansion success
- If Kinross can meet all of their expansion plans, it would help their bottom line and provide a catalyst through increased earnings on their earnings reports.
If Kinross’s credit rating increases.
- If this happens investors (both equity and debt) will see investments into Kinross as less risky, thus it is likely to see more demand for their shares, driving prices up.

Risks:

If Kinross does not meet their future expansion plans.
- These plans may be already priced into their stock, and failure to meet these plans can have a negative effect on their price and investor sentiment.
If Kinross gets a credit score decrease
- If their credit rating decreases from BBB to BB, the investment will seem increasingly riskier for investors, and some investors will not want this increased risk.
If inflation does not increase.
- Some investors have already bought gold and other commodities to hedge against inflation, however if this inflation never comes, these investors will likely dump their shares in gold/commodities.

Portfolio Reasoning:

I decided to make this my second holding in my portfolio in order to mitigate risk.

Gold is very stable and helps to reduce the overall risk of this portfolio.
This stock is inversely correlated to Sixth Street lending (my 1^st addition to the portfolio)
- Sixth Street performs the best when the financial markets are outperforming.
- Kinross and Sixth Street will counterbalance each other, no matter how the market moves, this help to greatly manage the risk of these holdings.
- Both stocks also give dividends, so if they were to counterbalance perfectly, their dividends would help to generate positive returns.