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Can Kinross Gold Surprise on the Cost Front?

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Higher costs

A mining company’s higher all-in sustaining costs (or AISC) makes its cash flows much more leveraged to changes in revenues. This is the reason gold miners are trying hard to reduce their AISCs in the current volatile gold price environment. Kinross Gold (KGC) has not been entirely successful in reducing its costs in 3Q15.

The AISC for Kinross came in at $941 per ounce in 3Q15 as compared to $919 in 3Q14. The higher costs were due to higher capital expenditure and fewer gold ounces sold during the period.

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Operational improvements

The production costs, however, were lower by 4% year-over-year (or YOY) as they benefited from lower energy costs, favorable foreign exchange rates, and strong operational performance. This represents the lowest per-unit cost of sales since 1Q12. Kinross completed a company-wide review of overhead spending and organizational structure. It also reduced corporate labor costs by 23%. Other operational achievements during the quarter included:

  • transition to self-perform mining at Chirano
  • ore-blending strategy at Paracatu
  • Round Mountain heap leach enhancements

Cost guidance remains

Kinross maintained its AISC guidance for the full year 2015 in the range of $975–$1,025 per ounce, which was lowered from the previous range of $1,000–$1,100 per ounce in September 2015. The above-mentioned improvements and any further weakness in currencies, including the Brazilian real and Russian ruble, could lead to an improvement in Kinross’s costs.

By comparison, Goldcorp’s (GG) AISC was $848 per ounce in 3Q15, which showed a reduction of 21% YoY. Meanwhile, Barrick Gold Corporation (ABX) reported an AISC of $771 per ounce, which showed a reduction of 8% YoY. In its 3Q15 results, Barrick also showed reductions in its AISC guidance for 2015 of 1.2%, which would put the company in the range of $830–$870 per ounce.

Goldcorp, however, maintained its AISC guidance at $850–$900 per ounce. Agnico-Eagle Mines (AEM) expects its fiscal 2015 AISC to be in the range of $840–$860 per ounce.

Investors can gain exposure to the gold industry through gold-backed ETFs like the SPDR Gold Trust ETF (GLD). Agnico-Eagle Mines accounts for 2.80% of the total holdings of the VanEck Vectors Gold Miners ETF (GDX), which provides exposure to senior and intermediate gold miners.

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