Kinross, Oversold Situation Still Challenged By Valuation (KGC)

Kinross Gold Corporation (NYSE: KGC) is being punished unusually hard when you consider that gold is trading at $1650 per ounce.  It has not suffered any sudden serious problems, but the outlook for production and the cost of that production is really taking a toll on the stock.

For 2012, Kinross now expects to produce approximately 2.6 million to 2.8 million gold equivalent ounces from its current operations. It has also said that the implied production cost of sales per gold equivalent ounce is now expected to be in the range of $670 to $715 per ounce for 2012.

The 2011 ranges are expected to hold up.  Kinross also noted that its entire production for 2011 would come in roughly around 2.6 million gold equivalent ounce, while the production cost of sales is now expected to be close to $600 per gold equivalent ounce.

Sales attributable to third parties are a part of the change and it further noted, “Production is expected to be affected positively in 2012 by the planned acceleration of Fort Knox heap leach throughput, expected full-year operation of the third ball mill at Paracatu, and forecast increased production at Tasiast further to completion of the initial expansion phase. These expected gains are anticipated to be partially offset by a planned decline in grades, particularly at Kupol and Kettle River-Buckhorn. The 2012 production cost of sales per gold equivalent ounce is expected to increase due to anticipated higher consumable and labour costs and an expected decline in grades at certain existing mines.”

The production targets and cost targets have several key assumptions.  The basis presumes that gold remains $1,500 and silver remains at $30 per ounce.  It assumes $95 per barrel in oil, and foreign exchange rates as follows: 1.75 Brazilian reais/USD; 1.00 Canadian dollar/USD; 30 Russian roubles/USD; 500 Chilean pesos/USD; 1.60 Ghanaian cedi/USD; 285 Mauritanian ouguiya/USD; and finally $1.35 USD/Euro.

Kinross shares are down 17.5% at $10.44 on very active trading volume against a prior 52-week trading range of $12.80 to $18.25.

JON C. OGG