2 Gold Stocks to Short, 1 to Hold
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IAM Gold (NYSE: IAG)
In a recent press release, the company announced its 4Q12 gold production, higher than the forecasted figure of 205.35koz. The Street expects the cash costs to come near $700/oz.
Key highlights of the press release:
- 2012 production missed the low end of guidance of 840-910kozs at 830kozs. Cash costs come in +/- 3% of the upper end of $670-$695/oz guidance.
- 2013 CapEx guidance given for some assets was largely in-line with Street’s estimates: The Street estimates $720 million in CapEx for 2013. IAG did not provide a consolidated figure. IAG provided guidance for Essakane, Westwood and Niobec totaling $485 million.
- Growth (to a IAG projected 1.4-1.6Mozs by 2017) is highly back-end loaded. Cote Lake operations are expected to lead to a 5% increase in resources.
The areas of concern are:
(i) The details of the Westwood ramp up and achievement of the expected production and costs there;
(ii) Essakane production and cost profile in 2013 and 2014 given the harder ore and the expansion coming on stream;
(iii) Concerns regarding whether the Sadiola sulphide expansion receives the go-ahead from Anglogold (if not, a further +10% of growth would be removed from our 2015 onward profile); and
(iv) Low operating cash flow less non-growth related CapEx in 2013 to sustain 2012 levels of production (largely at Essakane).
Kinross Gold Corp (NYSE: KGC)
The Street forecasts 4Q12 gold production of 635.93koz and 667.06koz GEO (gold equivalent ounces) at a cash cost of $662/oz.
Investors’ focus is on the results of the annual impairment test that Kinross is required to conduct on its goodwill balance. Most analysts prefer to be on the sidelines in advance of a quarter with a potential write-down. For Kinross, there is a high risk that it will write down a large portion of the remaining $2.13 billion in goodwill from the Red Back acquisition attributable to Tasiast and Chirano. Kinross' goodwill plus carrying value for Tasiast ($2.94 billion excld. goodwill) and Chirano ($1.15 billion excld. goodwill) was $6.22 billion at Q3/12. This compares to the combined $2.8 billion that Credit Suisse carries for Tasiast ($1.6 billion) and Chirano ($1.2 billion). KGC will calculate the "fair value less costs to sell" for Tasiast and Chirano in the impairment test, so it will likely use a higher gold price than the Street (and also include a multiple in-line with previous gold industry transactions). Therefore, despite the significant difference between CS’ estimate of $2.8 billion and Kinross' $6.22 billion, the write-down is not expected to exceed the $2.13 billion goodwill balance.
The Tasiast NAV is based on the 30ktpd mill option processing higher grade ore, which is the most likely scenario that KGC will pursue. KGC might not pursue the construction of a larger mill to process lower grade ore, as this scenario lowers the NAV of the asset.
Though Kinross's current operations are expected to continue to improve, the focus is on the potential write-down as well as 2013 guidance.
In comparison to the potential 2013 guidance, CS estimates 2.79 million GEO, $676/oz total cash costs and $1.64 billion in total CapEx ($0.53 billion allocated to non-growth). This 2013 production estimate reflects a stronger year from Fort Knox, Tasiast and Chirano vs. 2012.
New Gold (NYSEMKT: NGD)
The Street forecasts 4Q12 gold production of 123.34koz at a cash cost of $235/oz by-product or $658/oz co-product and copper production of 18.6Mlbs at $1.29/lb co-product.
The Street expects no surprises in 2013 guidance, with CS expecting modest YoY growth (8% to 456kozs) and much lower by-product cash costs with a full year of production from New Afton (down 58% to $173/oz).
Investors’ focus with NG is on the ramp up at New Afton and reserve/resource growth at Blackwater, both of which are expected to be positive. At New Afton, NG has targeted a full mining rate ramp up of 11ktpd by Feb. 2013, while the mill should already be producing at 11ktpd by the end of Q4/12 (drawing down stockpiles). At Blackwater, over 77% of the assays in NGD's 250,000 meter drill program conducted in 2012 remain outstanding and will be incorporated in the 2012YE reserve/resource update.
Investors in gold equities are always more interested in the press release carrying future guidance rather than the earnings release itself. Therefore, a guidance of future CapEx, production and growth is an important catalyst for any gold stock.
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