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Morningstar | Kinross on Track to Hit Full-Year Guidance After Reporting Few Surprises in 3Q Results. See Updated Analyst Note from 08 Nov 2018

During Kinross’s third quarter, attributable production fell 11% to 582,260 gold equivalent ounces, as cash costs rose 17% to $777 per gold equivalent ounce and all-in sustaining cost, or AISC, rose 12% to $1,049 per ounce. However, this was largely in line with our expectations, and the company is well within reaching its reiterated full-year guidance of 2.5 million gold equivalent ounces at cash costs of $730 per ounce and AISC of $975 per ounce.

Development projects advanced as expected, with Tasiast Phase One completed and the mine delivering record monthly production of roughly 29,000 ounces in October. Unfortunately, although Kinross has continued to engage with the Mauritanian government, there was no update on the possible opening of Tasiast Phase Two. Phase Two is a highly attractive development project that would boost Tasiast’s throughput from 19,000 metric tons per day to 30,000 metric tons. Meanwhile, other development projects including Round Mountain Phase W, Bald Mountain Vantage Complex, Fort Knox Gilmore, and the Russian satellite deposits continued as expected.

With the quarter largely progressing as expected and the company maintaining its full-year guidance, our forecast is largely unchanged. As a result, we’ve maintained our U.S. dollar-denominated fair value estimate of $4 per share. Due to changes in currency exchange rates, we’re raised our Canadian dollar-denominated fair value estimate to CAD 5.30 per share from CAD 5. Our no-moat rating for Kinross is unchanged.

In September 2018, the U.S. Federal Reserve once again raised the federal-funds target rate by 25 basis points to a range of 2% to 2.25%. This was the third rate hike of the year. Most central bank officials expect one additional rate hike in 2018 and three in 2019. The market appears to be largely in line with this view, as current interest rate option prices imply a more than 80% chance that there will be at least one more hike by the end of 2018.

All else equal, the prospect of higher inflation adds to gold's investment appeal, which is one reason ETF gold holdings rose through most of 2018 and spot prices remained above $1,300. However, as we had anticipated, higher inflation has emboldened the Fed to pursue rate hikes at a quicker pace, which lifts the real interest rate and, in doing so, increases the opportunity cost of holding gold.

Historically, we've observed a strong inverse relationship between the real interest rate and the price of gold. When the former rises, the latter tends to fall. We thought it was only a matter of time before gold investment adjusts to the higher opportunity cost, not only leading to slowing investment demand, but also outflow of gold from ETFs back into the gold market. Our prediction has proven true, as ETFs have seen net outflows since June through September.

On the back of weak investment demand, gold prices have fallen to nearly $1,200 per ounce. Nevertheless, we still believe gold has a promising future and we forecast a nominal gold price of $1,300 per ounce by 2020. We expect that, in the long term, Chinese and Indian jewelry demand will fill the gap left by waning investor demand.