To value gold miners, we’ll use the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple. It’s a good measure for capital-intensive industries since it helps investors compare companies with different capital structures.
Kinross Gold (KGC) is trading at a forward valuation multiple of 5.1x, the lowest among its closest peers (GDX) (SGDM). That’s in line with Kinross’s historical discount to its peers. As you can see in the above graph, its EBITDA margin estimates are only higher than Newmont Mining’s (NEM). As we saw previously in the series, Kinross’s higher unit costs have led to pressure on its margins. While some of the production growth concerns have been allayed by the start of the Tasiast Phase 1 expansion, geopolitical risks still weigh on investors’ minds.
Kinross Gold stock has significantly outperformed its closest peers year-to-date due to its operational strength. Because of this strength, its valuation discount compared to its peers’ average has fallen to 30.0% compared to a discount of 40.0% to its senior peers’ average multiple.
The company has demonstrated successfully that it can cut costs, improve its production growth profile, and reduce its risky exposure. In addition to continuous progress on these initiatives, positive results from its Tasiast expansion studies could act as a positive catalyst and lead to a rerating of the stock. The decision on Phase 2 of the Tasiast expansion and Round Mountain Phase W in September 2017 could act as a key catalyst for the stock going forward.