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Morningstar | Kinross Achieves 2018 Targets and Issues 2019 Guidance With No Surprises; Shares Fairly Valued

In 2018, Kinross’ attributable production fell 9% to just under 2.5 million gold equivalent ounces, as cash costs rose 10% to $734 per gold equivalent ounce and all-in sustaining costs rose 1% to $965 per ounce. This was largely in line with expectations, achieving the most recent guidance for 2.5 million gold equivalent ounces at cash costs of $730 per ounce and AISC of $975 per ounce.

Tasiast Phase One continued to ramp up, reaching record production in the fourth quarter. So far, the project has delivered throughput and recoveries within or exceeding expectations—a positive development given the unfortunate surprises too common in the gold mining industry.

With the year finishing as expected and the company issuing 2019 guidance largely in line with 2018 and our existing forecast, we’re maintaining our fair value estimates of $4 per share and CAD 5.30 per share. Our no-moat rating for Kinross remains unchanged. At current prices, shares look fairly valued on a risk-adjusted basis.

Kinross continues to engage with the Mauritanian government regarding the Phase Two expansion at Tasiast and is exploring alternatives to the original plan. Meanwhile, other development projects Round Mountain Phase W, Bald Mountain Vantage Complex, Fort Knox Gilmore, and the Russian satellite deposits continued as expected.

In December 2018, the U.S. Federal Reserve once again raised the federal-funds target rate by 25 basis points to a range of 2.25% to 2.50%. This was the fourth rate hike of the year. However, the Federal Open Market Committee appears to be taking a more cautious approach to future rate hikes. The dot plot has reflected a meaningful change in expectations. The December dot plot implied two rate hikes in 2019 versus the three hikes that had been implied back in September. Additionally, language in the FOMC statement now takes a softer tone, indicating a more cautious approach to further rate hikes.

The market has taken a bearish view on the FOMC’s more dovish tone. Current interest rate option prices imply a more-than 90% chance that there will be no rate hikes by the end of 2019. Additionally, they reflect a higher probability for a rate cut than a rate hike by the end of the year.

All else equal, a slower rate hike path reduces the downward pressure on investment demand for gold that we’ve observed over the last few years. However, the FOMC would likely return to rate hikes if inflation were to strengthen due to stronger economic growth. Although pressure on investment demand for gold has softened, we don’t expect a strong resurgence in the near future.

On the back of stabilizing investment demand, gold prices have settled in the high-$1,200 to low-$1,300 per ounce range, falling roughly in line with our forecast for a nominal gold price of $1,300 per ounce by 2020.