It is crisis time in the Eurozone and elsewhere. Stock markets will crash at least as hard as in 2008 when Europe goes into recession. Gold is a crisis hedge, but it drops in a stock market crash also (just not a badly). And gold mining stocks are a great performing asset, but only after most of the stock market crisis has passed because the world is dominated by Keynesian economics. The financial media, government technocrats, and almost all PhD economists practice the voodoo economic religion of Keynesian economics. Keynesian investors flee stock markets in a panic and run to US government bonds. Bonds are bought in dollars. Demand for dollars increases, demand for gold drops. This is an opportunity of immense proportions if you keep your powder dry.
It is gold miners week at www.myhighdividendstocks.com, but not because gold miners are high dividend stocks. Most are no or low dividend stocks. However, gold mining stocks will offer some huge capital appreciation potential once the US and European stock markets crash again. Every central bank in the world is printing money (Dollars, Euros, Yen, Pounds, and Yuan) and the commodity gold is priced in fiat currencies, so as more money is printed the price of gold expressed in fiat currencies goes up. It really is that simple. Gold mining companies can increase their profit margins when the cost of extracting gold from the Earth’s crust goes up a little and the price of gold goes up a lot. But gold mining companies tend to be more volatile than the price of the underlying commodity. They amplify gold’s gains and losses as you will see below.
So what is the best price for several of the gold majors that offers capital preservation and maximum opportunity for capital appreciation with maybe some dividends thrown in for good measure? That’s what I hope to find out this week for you and I.
Next up is Kinross Gold Corp. (KGC)
Morningstar’s take: Kinross Gold is an intermediate-size gold company with operations in the U.S., Russia, Chile, Brazil, Ecuador, Ghana, and Mauritania. The company generates over 90% of revenue from gold sales and the rest from silver. Copper and other metal output is negligible. We do not think the company has an economic moat, as Kinross' mines are generally medium- to high-cost compared to industry peers. Over the years, Kinross has gone through a series of acquisitions and asset swaps to compile a portfolio of gold projects, however, the rising capital costs of these projects and higher production costs will be a big concern going forward.
Kinross Gold is a Canadian-based gold mining company with 62 million ounces of proven and probable gold reserves, 91 million ounces of silver reserves, and an annual production of 2.3 million ounces of gold. The company operates eight producing mines and five projects in the U.S., Latin America, Western Africa, and Russia.
Price: $13.26
Shares: 1.14 billion
Market capitalization: $15.08 billion
Bonds outstanding: $3.3 billion
None of Kinross’ bonds are due anytime soon.
DIVIDEND RECORD – Kinross has been paying a low semi-annual dividend since 2008. There isn’t much history there, but they have grown the dividend by 50% from $0.04 to $0.06 in 4 years.
Dividend: $0.06 semi-annually
Dividend yield: 0.9% ($0.12 annual DIV/$13.26 share price)
Dividend payout ratio: 15% to 38% depending on how you calculate ($0.12/$0.81 recent EPS or $0.12/$0.26 avg adjusted EPS over six years)
EARNING POWER – Six year average adjusted earnings of $0.26 per share @ 1.142 billion shares
(Earnings adjusted for changes in capitalization – Kinross has increase the number of shares by 223% since 2006)
EPS Net Inc. Shares Adj EPS
2006 $0.47 $165 M 353 M $0.14
2007 $0.59 $334 M 566 M $0.29
2008 ($1.28) ($807 M) 629 M ($0.71)
2009 $0.44 $310 M 697 M $0.27
2010 $0.93 $772 M 829 M $0.68
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2011 Q1 $0.22 $256 M 1,139 M $0.22
2011 Q2 $0.22 $247 M 1,141 M $0.22
2011 Q3 $0.19 $213 M 1,142 M $0.19
2011 Q4 $0.24 E $274 M E 1,142 M $0.24 E
20011 E $0.87 $990 M E 1,142 M $0.87 E
Six year average adjusted earnings of $0.26 per share.
Consider contrarian buying at $2.08 (8 times average adj EPS)
Consider value buying at $3.12 (12 times average adj EPS)
Consider speculative selling at $5.20 (20 times average adj EPS)
Kinross Gold Corp is currently trading at 51 times average adjusted annual earnings. The is highly speculative pricing.
BALANCE SHEET – That is a nice balance sheet, but goodwill accounts for 33% of assets. It would still be a good balance sheet if goodwill were zero.
Book value per share: $13.22
Price to book value ratio: 1.00 (good)
Current ratio: 4.43 latest quarter (over 2.0 is good)
Quick ratio: 3.19 latest quarter (over 1.0 is good)
Debt to equity ratio: 0.09 (this is good)
CONCLUSION – Kinross Gold Corp. is a low dividend grower that is speculatively priced for its earning power. The company’s balance sheet is strong.
Kinross bottomed in the $8.81 dollar range in October 2008 several months before the US stock market bottom in March of 2009. That represented the best investment entry into Kinross since late 2008. The gold price will go down at least half of the percentage of the stock market’s decline. This happened in 2008-2009. US stocks dropped about 50% and gold dropped about 25%. However, Kinross dropped even more than the broader market or gold. It dropped almost 67% from $26.84 in March 2008 down to $8.81 by October 2008. Don’t think that it won’t happen again. Wait for another bottom near value territory at $5.20 per share. Kinross would be yielding about 2.3% if it keeps its new dividend rate at such a low price. The good news is that gold will continue to go up in price as the world’s sovereign debt crisis worsens, but you have to buy extremely low to preserve your capital when purchasing mining stocks.
DISCLOSURE – I don’t own Kinross Gold Corp. (KGC).
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