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How Much Production Upside Can Kinross’s Acquisitions Provide?

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Kinross’s production profile

Kinross Gold’s (KGC) long-term declining production profile is one factor that concerns investors. The current asset purchases add to the company’s long-term production upside. In this article, we’ll analyze how much production and cost upside investors can expect from the company’s asset purchases in the US.

For more detail about Kinross’s production profile, please read Why is Kinross’s Long-Term Production Profile in Decline?

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Upside to production

During its management call, Kinross Gold (KGC) noted that it expects to add approximately 430,000 ounces of combined average annual production to its portfolio over the first three years. This should help the company’s near-term production levels, with still more upside in the medium to long term. These assets should not only help Kinross increase its production, but they should also help lower the overall costs for the company.

According to management estimates for the last 12 months (or LTM), Kinross Gold’s cash costs would have come to $692 per ounce on a pro forma basis for the US portfolio against $697 per ounce without these new assets. Its LTM pro forma production from the US would have been 1,092,000 ounces against 701,000 ounces without the new assets.

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Improvement in costs

Kinross Gold (KGC) estimates its all-in sustaining costs (or AISC) to be $700–$1,130 per ounce for Bald Mountain and $850–$1,000 per ounce for Round Mountain for the next three years. This compares favorably with Kinross’s 2015 AISC guidance of $975–$1,075 per ounce. However, investors should note that Barrick’s 2015 AISC midpoint guidance for Bald Mountain and Round Mountain is higher at $1,150 and $1,000 per ounce, respectively. Kinross expects to lower its costs with its process solution management at the Round Mountain mine and the recent capital investment program to benefit costs at the Bald Mountain mine.

Many of Kinross’s peers, including Newmont Mining (NEM), Agnico-Eagle Mines (AEM), Yamana Gold (AUY), and AngloGold Ashanti (AU), are also working toward containing their costs to weather the current gold price environment. The iShares Gold Trust ETF (IAU) and the VanEck Vectors Gold Miners ETF (GDX) are two major ETFs of the gold industry. Agnico-Eagle Mines (AEM) and Newmont Mining Corporation (NEM) form 5.5% and 6.1%, respectively, of GDX’s holdings.

In addition to the production decline, investors were also concerned about Kinross’s increased Russia exposure. In the next part of this series, we’ll see if that changes after Kinross’s acquisition of assets in the US.

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