Declining production profile
As we’ve discussed previously, production declines is a real risk for Kinross Gold (KGC) going forward. Tasiast mill expansion can help offset the decline, however, under the current gold market uncertainty, the decision on this is not forthcoming.
Kupol and Dvoinoye mines represent a significant portion of Kinross’s operations. For 2Q15, they contributed ~30% of company’s production. These mines are situated in Russia, which is a politically risky jurisdiction given the tensions between them and the west. According to the Behre Dolbear’s 2014 report, out of a survey of 25 countries, Russia and DR Congo were the lowest-rated countries. Russia came in at 24th position in terms of riskiness for mining investment.
Investors who don’t want to pick up individual companies can invest in gold miners through the VanEck Vectors Gold Miners ETF (GDX). This ETF invests in senior and intermediate gold miners. Newmont forms 6.40% of its holdings.
Kinross’s top four mines (Kupol-Dvoinoye, Fort Knox, and Paracatu) contribute ~63% of its production. The operating margin proportion from these mines is still higher. The credit rating agencies are also wary of this rising concentration profile. After downgrading Kinross in March 2015, Moody’s said, “We lowered Kinross’ ratings because we expect about two-thirds of the company’s cash flows will be generated from one mining complex in Russia, which is itself now rated Ba1.”
Increased leverage in case of M&A
In the absence of organic growth opportunities and declining reserve profile, Kinross is quite likely to resort to mergers and acquisitions (or M&A) opportunities. M&A or the Tasiast expansion could likely increase Kinross’s financial leverage, which is not desirable in a lower gold price (GLD) (IAU) environment.