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Morningstar | Kinross Performs Well in the First Quarter and Is on Track to Hit Guidance; Shares Look Undervalued. See Updated Analyst Note from 09 May 2019

Kinross started the year off well in the first quarter. Although production declined 7% to 606,031 attributable gold equivalent ounces (GEO) and all-in sustaining cost (AISC) rose 9% to $925 per GEO, this was largely in line with expectations. The company maintained its full-year guidance of 2.5 million GEO at AISC of $995 per GEO. The first-quarter results put the company on track to meet, if not beat, its guidance.

Much of the cost inflation occurred at Fort Knox and Bald Mountain and was attributable to mine sequencing. The Gilmore project at Fort Knox and the Vantage complex at Bald Mountain advanced as planned and should help improve performance going forward. Our forecast is largely unchanged, so we’ve maintained our U.S. dollar-denominated fair value estimate of $4 per share. Our Canadian dollar-denominated fair value estimate increases slightly to CAD 5.40 per share from CAD 5.30 due to a stronger U.S. dollar since our last update. Kinross’s no-moat rating remains unchanged.

In recent weeks, shares of Kinross have traded off and have now entered 4-star territory. After first-quarter earnings that delivered as expected and put the company in position to meet if not beat its full-year guidance, we see the recent sell-off as creating attractive risk-adjusted upside at this time.

After last raising the interest rate in December 2018, the Fed has paused its increases, leaving the federal-funds target rate at a range of 2.25% to 2.50%. Amid signs of a slowing economy including slowing consumer spending and business investment, the Federal Open Market Committee, or FOMC, now sees no rate hikes in 2019. The dot plot has reflected a meaningful change in expectations, as the December dot plot implied two rate hikes this year.

The market view is even more bearish. Current interest rate options not only imply no chance of a rate hike but more than 50% chance that there is at least one rate cut by the end of 2019.

All else equal, the turn in the Fed’s sentiment on its rate hike path has reduced 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.