Rating Update: Stock Rating B-Positive (9/9/19)-Kinross Gold Corp (KGC).

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BUSINESS

Kinross Gold Corporation, together with its subsidiaries, engages in the acquisition, exploration, extraction, and processing of gold-containing ore. It also engages in the reclamation of gold mining properties; and production and sale of silver. The company’s gold production and exploration activities are carried out principally in Canada, the United States, Russia, Brazil, Chile, Ghana, and Mauritania. The company was founded in 1972 and is headquartered in Toronto, Canada.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to exceed the cost of capital, KGC is expected to be a modest Value Builder.

Kinross Gold has a current Value Trend Rating of B (Positive).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing very contradictory signals. Kinross Gold has a slightly negative Appreciation Score of 39 but a very high Power Rating of 95, and the Positive Value Trend Rating results.

Kinross Gold’s stock is selling at targeted value. The current stock price of $4.81 compares to targeted value 12 months forward of $5.
This moderately low appreciation potential results in an appreciation score of 39 (61% of the universe has greater appreciation potential.)
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Kinross Gold has a Power Rating of 95. (KGC’s very high Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 5% of companies in the universe.)
Factors contributing to this very high Power Rating include: the recent trend in KGC’s earnings estimates has been extremely favorable; recent price action has been extremely favorable; and is currently in a modestly favorable positi.

INVESTMENT PROFILE

KGC’s financial strength is low. Financial strength rating is 14.
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Relative to the S&P 500 Composite, Kinross Gold Corp has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that KGC is normal risk. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, low expected growth, and high earnings variability. KGC’s valuation is moderate: low dividend yield, moderate P/E ratio, and low price/book ratio. KGC has unusually low market capitalization.

CURRENT SIGNALS

Kinross Gold’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; falling tax keep rate; and falling leverage.

Kinross Gold’s current technical position is very strong. The stock price is in a 8.9 month up move. The stock has appreciated 97.3% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Significant negative changes in fundamentals have recently occurred for Kinross Gold Corp (NYSE: KGC): significant quarterly sales deceleration occurred, and significant quarterly earnings deceleration occurred.
The stock is currently rated B.
Kinross Gold Corp (NYSE: KGC) stock closed at $72.57 on 9/9/19 after a major decline of -10.5%. NORMAL trading volume accompanied the decline. The stock has declined -3.6% during the last week but has been exceptionally strong relative to the market over the last nine months.

CASH FLOW

In 2018, Kinross Gold experienced a very significant reduction in cash of -$676.2 million (-65%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$976.4 million. Non-operating sources contributed +$53.9 million (+6% of EBITDA). Cash taxes consumed -$129.2 million (-13% of EBITDA). Re-investment in the business amounted to -$1,412.8 million (-145% of EBITDA). On a net basis, debt investors removed -$111.2 million (-11% of EBITDA) while equity investors received -$53.3 million (-5% of EBITDA).
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Kinross Gold’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Kinross Gold Corp Peer Group. In most years, Kinross Gold was in the top quartile. Currently, Kinross Gold is upper quartile at +6% of EBITDA (+$53.9 million).

Kinross Gold’s Cash Taxes, %EBITDA enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Kinross Gold Corp Peer Group. In most years, Kinross Gold was in the top quartile and lower quartile. Currently, Kinross Gold is at the lower quartile at -13% of EBITDA (-$129.2 million).

Kinross Gold’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Kinross Gold Corp Peer Group. (Since 2015 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Kinross Gold was in the third quartile and top quartile. Currently, Kinross Gold is below median at -145% of EBITDA (-$1,412.8 million).

Kinross Gold’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Kinross Gold Corp Peer Group. In most years, Kinross Gold was in the second quartile and top quartile. Currently, Kinross Gold is slightly above median at -11% of EBITDA (-$111.2 million).

Kinross Gold’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Kinross Gold Corp Peer Group. (Since 2016 Equity Investors, %EBITDA has decelerated very sharply.) In most years, Kinross Gold was in the second quartile and top quartile. Currently, Kinross Gold is slightly below median at -5% of EBITDA (-$53.3 million).

Kinross Gold’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Kinross Gold Corp Peer Group. In most years, Kinross Gold was in the second quartile and top quartile. Currently, Kinross Gold is lower quartile at -69% of EBITDA (-$676.2 million).
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Kinross Gold’s Cash, %Revenue has suffered a strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Kinross Gold Corp Peer Group. In most years, Kinross Gold was in the second quartile and third quartile. Currently, Kinross Gold is at the lower quartile at +11%.

PROFITABILITY

Kinross Gold’s return on equity has eroded very significantly since 2009.
Kinross Gold’s very strong positive trend in pretax operating return significantly offset by a very strong negative trend in non-operating factors is a significant analytical factor.
The productivity of Kinross Gold’s assets rose over the full period 2009-2019: asset turnover has enjoyed a very strong overall uptrend.
Reinforcing this trend, pretax margin enjoyed a volatile overall uptrend but it experienced a very sharp decline after the 2017 high.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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Kinross Gold’s return on equity is unavailable for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is at the lower quartile (1.6%) reflecting asset turnover that is below median (0.38X) and substantially below median pretax margin (4.3%).
Tax “keep” rate (income tax management) is lower quartile (3.0%) resulting in after tax return on assets that is unavailable.
Financial leverage (leverage) is below median (1.79X).

GROWTH RATES

There are no significant differences between Kinross Gold’s longer term growth and growth in recent years.
Kinross Gold’s historical income statement growth and balance sheet growth have diverged. Revenue growth has exceeded asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been -3.0% per year.

Total asset growth has been -8.7% per year. (More recently it has been 0.0%.)

Annual E.P.S. growth has been -8.2% per year.

Equity growth has been -12.1% per year. (More recently it has been 2.9%.)
No consensus growth rate forecast is available for Kinross Gold.
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Relative to the Kinross Gold Corp Peer Group, Kinross Gold’s historical growth measures are consistently lower quartile. Revenue growth (-3.0%) has been lower quartile. Total asset growth (-8.7%) has been lower quartile. E.P.S. growth (-8.2%) has been lower quartile. Equity growth (-12.1%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Kinross Gold’s stock price performance has been variable and significantly below market. Between November, 2008 and September, 2019, Kinross Gold’s stock price fell -67%; relative to the market, this was a -90% loss. Significant price moves during the period: 1) January, 2016 – April, 2016: +248%; 2) January, 2015 – January, 2016: -52%; 3) September, 2012 – October, 2014: -79%; and 4) September, 2009 – May, 2012: -63%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 11.7% is above median relative to the S&P 500 Composite.
In addition to being above median relative to S&P 500 Composite, current annual total return performance through July, 2019 of 11.7% is slightly below median relative to Kinross Gold Corp Peer Group.

Current 5-year total return performance of 0.1% is lower quartile relative to the S&P 500 Composite.
Through July, 2019, with lower quartile current 5-year total return of 0.1% relative to S&P 500 Composite, Kinross Gold’s total return performance is lower quartile relative to Kinross Gold Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, KGC’s overall valuation is normal. The highest factor, the price/earnings ratio, is upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Ratio of enterprise value/revenue is below median. Ratio of enterprise value/assets is at the lower quartile. The lowest factor, the price/equity ratio, is lower quartile.
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Kinross Gold has a very large value gap compared to the median. For KGC to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 2.36X to 1.85X. If KGC’s ratio of enterprise value/revenue were to fall to 1.85X, its stock price would be lower by $-1 to $4.
For KGC to achieve upper quartile valuation relative to the Kinross Gold Corp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 2.36X to 4.33X. If KGC’s ratio of enterprise value/revenue were to rise to 4.33X, its stock price would increase by $5 from the current level of $4.81.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to exceed the cost of capital, KGC is expected to be a modest Value Builder.
Kinross Gold’s current Price Target of $5 represents a +5% change from the current price of $4.81.
This moderately low appreciation potential results in an appreciation score of 39 (61% of the universe has greater appreciation potential.)
Notwithstanding this moderately low Appreciation Score of 39, the high Power Rating of 95 results in an Value Trend Rating of B.
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Kinross Gold’s current Price Target is $5 (+60% from the 2018 Target of $3 and +5% from the 09/09/19 price of $4.81). This dramatic rise in the Target is the result of a -4% decrease in the equity base and a +67% increase in the price/equity multiple. The forecasted decline in growth has a slight negative impact on the price/equity multiple and the forecasted increase in cost of equity has a slight negative impact as well. More than offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
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PTR’s return on equity forecast is 8.4% — slightly above our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is above the 2015 low of 4%.

PTR’s growth forecast is 4.0% — above our recent forecasts. Forecasted growth suffered a dramatic, steady decline between 2010 and 2018. The current forecast is significantly below the 2010 peak of 20%.

PTR’s cost of equity forecast is 6.7% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, steady decline between 2010 and 2018. The current forecast is steady at the 2011 peak of 8.5%.
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At Kinross Gold’s current price of $4.81, investors are placing a positive value of $2 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of -2.0% per year, and a return on equity of 4.0% versus a cost of equity of 5.1%.
PTR’s 2020 Price Target of $5 is based on these forecasts and reflects an estimated value of existing assets of $4 and a value of future investments of $1.

About John Lafferty 52821 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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