Upgrade to Outperform: We upgrade Kinross from Neutral to Outperform on valuation, as we see the recent sell-off as overdone. Our target price increases from $7.50 to $8.00. While we appreciate that YTD the company has faced two major operational hurdles – the Round Mountain pit wall instability and Tasiast fire – we think the impact is mainly limited to 2021, with 2022/23 still looking like strong production years. There could also be upside from a potentially earlier restart of the Tasiast mill vs. the current (somewhat conservative) year-end timeline. In 2022, we expect the company to offset Round Mountain’s lost Phase W ounces with other ore sources, and expect higher grade ounces to be pulled forward at Tasiast. In the past week, KGC’s market cap has declined ~$1.47B, while we estimate the Round Mountain and Tasiast combined EBITDA impact is ~$400M. We also see the stock being supported by buybacks, which could be accelerated in the near-term.
Tasiast situation could have been worse: We came away from KGC’s latest conference call thinking the Tasiast fire damage and operational/financial impact could have been much worse and that the market continues to price in a worse scenario. We think management is being somewhat conservative with the year-end timeline to restart the Tasiast mill (they cited 90% confidence in the year-end timeline), with the mill potentially restarting in 3-4 months. The critical path item is fabricating and installing a new trommel screen. The $50M repair estimate and lost profits may also be partially recovered through insurance (claims process is underway). Overall, we think the production impact (~230koz) will be limited to 2021, with the potential to have a strong start to 2022 with higher grade stockpiles, and no change to the 24k expansion timeline (still mid-2023).
Round Mountain impact also largely limited to 2021: KGC highlighted that it expects a ~70koz negative impact on 2021 production from the Round Mountain pit wall instability, with limited impact in 2022 with ore sourced elsewhere (i.e. not Phase W).
Valuation: Our $8.00 TP is based on a 50/50 weighting of NAV and CFO (adj.) valuation. Our CFO valuation is $9.09 based on 2021/22 CFO of $1.14 using a 9.0x multiple. Our NAV valuation is $7.36 based on $6.76 DCF using a 1.2x multiple, with adjustments at par. On our estimates, Kinross currently trades at ~1.0x P/NAV and ~4.4x P/CF vs. the senior gold peer group at ~1.7x and ~7.6x, respectively, indicating a meaningful discount.
Financial and valuation metrics
Year 12/20A 12/21E 12/22E
Previous target price (12M, US$) Price (21 Jun 21, US$) 52-week price range
Enterprise value (US$ m)
Research AnalystsFahad Tariq, CPA, CA