Kinross Is No Longer Golden

11/12/2009 1:09 pm EST


Jim Jubak

Founder and Editor,

A rising tide lifts all ships, true. But not all to the same extent.

The huge rally in gold to new historic highs day after day has largely left Kinross Gold (NYSE: KGC) behind.

True, the stock is up 9% as of the close on November 11 from its recent low at $18. But in that same period, shares of Goldcorp (NYSE: GG), a Jubak’s Pick on November 5, is up 22%. (For my Buy on Goldcorp, see this recent post.)

Unfortunately, I don’t think the problems at Kinross Gold that have led to this underperformance can be easily fixed. So, I’m going to take the gain from the rising tide, sell Kinross at an overall loss with this column, and look for a ship that’s better able to float with the tide.

What’s the problem at Kinross Gold? Simply, lower production and higher costs.

Last quarter, the problems seemed limited to the company’s Paracatu mine in Brazil. But with the November 2 report, Kinross said it is having problems at Paracatu and Fort Knox.

The problems at Paracatu, however, are costing the company the most and look hardest to fix. Throughput was running at just 70% of plant design levels in October, and gold recovery is stuck at 74%, rather than the target of 80%.

Increasing throughput with the existing plant results in a coarser grind of the ore that, in turn, reduces gold recovery. Adding a third ball mill would increase throughput, but that will take until 2010 or 2011.

And while gold miners like Goldcorp are seeing rising production and falling costs, Kinross is experiencing exactly the opposite.

The company has lowered production guidance to 2.2 million ounces from an earlier, already lowered target of 2.3 million to 2.4 million ounces.

Costs at Paracatu climbed to $764 an ounce in the third quarter, and the company’s overall cost rose to $464 an ounce. In contrast, total cash costs at Goldcorp this quarter were either $295 or $384 an ounce, depending on whether you use by-product or co-product accounting.

As of November 12, 2009, I’m selling Kinross Gold out of Jubak’s Picks with a loss of 16% since I added it to the portfolio on April 4, 2008.

Full disclosure: I will sell Kinross Gold out of my personal portfolio three days after this is posted.

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