Kinross battles for free cash

Being among the world's best-of-breed gold diggers, and producing positive free cash flow, can be two strangely different things.

JOHANNESBURG - 

Kinross, from time to time one of the world's most demanded Tier I gold stocks, has shown once again in its latest quarterly report just how elusive free cash flow can be, even for entities classified among the best-in-breed. Measured on operating cash flow less cash outflows on capital expenditure, Kinross's free cash flow was just a million dollars for the third quarter of 2009.

This is not much, considering that Kinross generated revenue of US$582m for the quarter, and could be something of concern, given the long term rise in dollar gold bullion prices, to current record levels. In the year to date, Kinross has generated a total of US$135m in free cash flow, substantially more encouraging than the negative US$327m for the comparable 2008 period. The improvement reflects mainly improvements in the dollar gold price.

Referencing the third quarter 2009, Kinross stated that its cost of sales per gold equivalent ounce was US$464, an increase of 14% compared with the third quarter of 2008. Cost of sales per gold ounce on a by-product basis was US$421, compared with US$362 the previous year. These so-called cash costs per ounce, universally applied by gold producers, imply that Kinross would have been generating huge profits, with a gold price of US$1,000 an ounce and higher.

Cash costs, however, do not explain anywhere near the full picture. For nearly three years, at least, Kinross has faced headwinds in its bid to generate free cash flow. The deficits have been funded by a combination of rights issues, net debt increases, and net asset sales.

Since the beginning of 2007, Kinross has raised more than US$600m from investors by way of rights issues. During 2008, US$450m in cash was raised by way the issuance of a convertible note. This equity-debt hybrid instrument will eventually be dilutive of common shareholders' interests, as are rights issues. Over the period, Kinross has also raised more than US$500m in cash selling off various investments, property, and plant.

The high rating accorded Kinross's stock has enabled a number of acquisitions where Kinross paper has been acceptable. The 2008 acquisition of Aurelian was an all-paper C$1.2bn deal, for the 13.7m ounce resource Fruta del Norte deposit in Ecuador.

Earlier this year, Teck, one of the world's most battered big mining stocks during the so-called global markets crisis, was pipped by Kinross over a 60-day right of first refusal on Anglo American‘s stake in the 6m ounce Lobo-Marte gold project located in the Maricunga district of northern Chile.

In the event, Kinross acquired Teck's 60% interest in Lobo-Marte's parent company, for some 5.6m Kinross shares, plus a net cash payment of some USD 40m, plus a defined smelter royalty. Kinross bought Anglo American's 40% stake for USD 140m.

Lobo-Marte will consolidate the presence Kinross has in the Maricunga district of Chile, and, as the company put it, "offers potential synergies using existing administration and operations". In this district are found Kinross's La Coipa mine, its Maricunga mine, and also Cerro Casale, in which Kinross holds 49% and Barrick, the world's biggest gold miner by ounces and value, 51%.

So far, the September quarter has been a mixed bag for global Tier I gold diggers. Encouraging growing free cash flow trends have been reported by Barrick and Newmont, and also reported by China's Zijin; a breakout to positive free cash flow has been indicated by AngloGold Ashanti, while Gold Fields shows strong signs of breaking above the neutral line, going forward.

Harmony, heavily exposed to South African factors, not least the strong rand, has taken a turn for the worse. Australian Tier I names Newcrest and Lihir have published positive and encouraging third quarter numbers, but only provide details of production, and very limited financial information for the quarter. Buenaventura, a more diversified metals producer, has once again published encouraging production and financial numbers. Polyus, Goldcorp and Yamana are yet to report for the third quarter.

Disclaimer

MINEWEB is an interactive publication, with rolling deadlines through each day, commencing in the Sydney morning,  and concluding, 24 hours later,  in the Vancouver evening.  If you believe your side of an issue deserves inclusion, but has failed to meet one of our deadlines, you are invited to notify the Editor in Chief in Johannesburg, and we will include you in our editing and expanding on our stories. Email him at alechogg@gmail.com

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