My ideal gold mining investment would be a company that was expanding gold production and that was keeping costs low.
Kinross Gold (KGC) only fits half that description, which is why I sold it out of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on Friday, January 13. See my post http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/on January 13 for all the changes to the portfolio. (Today, January 17, shares of Kinross Gold fell 18.8% after the company announced that it would record a goodwill writedown on its Tasiast mine in Africa. Kinross acquired the mine as part of a 2010 acquisition of Red Back Mining. As of September 2011 the project had a book value of $7.1 billion of which $4.6 billion was goodwill.)
For the third quarter Kinross gold reported production of 648,000 gold-equivalent ounces, a 13% increase from the third quarter of 2010. That’s exactly what you’d like to see at a time of rising gold prices.
But production costs soared. Cash costs per gold equivalent ounce went to $634 in the quarter from $517 in the third quarter of 2010. Just about all gold mining companies have seen cost pressures from high fuel, labors, and royalty payments, but Kinross, which used to be a low-cost producer, is seeing costs rise as well as its efforts to expand production have resulted in adding or expanding operations in West Africa with relatively higher costs. Rising costs come at a critical time for investors since Kinross Gold has also upped its capital budget to develop new mines or expand production at existing mines. To fund that capital budget Kinross sold $1 billion in new debt in the third quarter. The company has spent the last few years paying down long-term debt from a high of $707 million in June 2006 to just $410 million in March 2011, but that debt position has mushroomed again to $1.4 billion at the end of the third quarter of 2011. Capital spending and debt costs have reduced free cash from a positive $405 million in the fourth quarter of 2010 to a negative $68 million in the third quarter of 2011.
I think I can find a gold stock or two that’s closer to my ideal at this time than Kinross Gold.
This pick lost 39.3% in 2011.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Kinross Gold as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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