Is Kinross Following the Barrick Model of Discipline?
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In an industry that has been known for following a philosophy of growth at all costs, as the impact of many of those costs surface, a new era may be dawning for gold miners. Over the past several months, some of the major gold miners have revamped their management structure in hopes of setting a cleaner course of discipline. While this shift in corporate strategy originated at Barrick Gold Corp. (NYSE: ABX), the transition underway at Kinross Gold Corp. (NYSE: KGC) may represent a more significant investment opportunity for investors at current levels. While Kinross is not without its problems, early signs indicate that the company may be following Barrick’s example and returning to a policy of discipline. If this is the case, in the early days of the turnaround, the stock represents a good value and an attractive way to gain exposure to gold.
A Turning Tide
Going back to June 2012, after dismissing its CEO, Barrick hired Jamie Sokalsky to fill the role. After a subsequent earnings miss in which rising costs played a significant role, Mr. Sokalsky announced his intention to refocus the company. “Going forward, returns will drive production. Production will not drive returns.” Prior to this approach, and largely driven by the parabolic move up in gold prices, most major miners looked for growth in their production capabilities and paid very little attention to the costs that were paid for that growth. Whether sparked by the earnings miss or always his intention, Mr. Sokalsky indicated that this was no longer an acceptable approach for the world’s largest gold miner. As some evidence that the policy was meant to be followed, Barrick immediately began exploring some divestiture options to cut costs and pad the near-term bottom line.
The Kinross Story
As was the case with Barrick, Kinross has faced some significant pressures as a result of soaring costs. The most notable amongst these are those associated with the company’s Tasiast project in Mauritania. Kinross was recently forced to take a $1 billion loan in order to meet unexpected expenses that have resulted from the project. While the Kinross corporate website still refers to the project as the company’s top development effort and a critical piece of its growth strategy, it is clear that cost has become a significant issue.
The good news for investors is that Kinross, like Barrick, is under the guidance of a new CEO. Largely in response to the issues created by the cost overruns at Tasiast, Kinross replaced Tye Burt with J. Paul Rollinson. Mr. Rollinson has stated that his top priority is controlling costs, having already slowed progress on some of the company’s other development projects. Additionally, he has shaken up much of the management team under the auspices of placing the company on a new path.
Strangely missing from Mr. Rollinson’s stated plans is a comprehensive solution for the Tasiast project moving forward. Having taken over in the midst of a cost debacle, he was left with little choice other than to name cost control as the priority. Initiating such measures and following through with them is another matter altogether. Skepticism aside, the company seems to be following Barrick’s lead and targeting a more disciplined way forward.
Given the heavy loss caused by Tasiast, it is difficult to get a meaningful valuation comparison on Kinross relative to its peers. While Barrick still looks to be an excellent value at a P/E of 9.1, peers look expensive with Goldcorp Inc. (NYSE: GG) trading at a P/E of 24.5 and Newmont Mining Corp. (NYSE: NEM) trading at a multiple of 104.6. On this, and many other metrics, Barrick still appears to be the best bet in the industry, not in small part because it is the largest by production volume and has had time to get itself back on track.
Where Kinross makes its most compelling case is in terms of its recent performance. Over the past three months –as can be seen below – the stock has significantly underperformed its peers. Kinross is the only one of the above names that is down over the period and lags Newmont, its closest peer, by a full 8% and Goldcorp by over 14%. While the underperformance is deserved, it may also create an opportunity for the investor willing to carry the additional risk. The company owns several valuable assets and has a book value of $11.10 per share for the most recent quarter. Trading as far below book as it is, the potential reward justifies taking a chance on the company getting itself on track and catching back up with its peers. Despite the missteps, Kinross is a buy at these levels.
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