I Need Some Gold - Stalking Kinross Gold (KGC)

The more I hash out my earlier economic thoughts over the last half year and how things are playing out, the more I am making a bullish case for gold. I am obviously late to this game, and instead have a smallish position in Silver Wheaton (SLW) which I added in mid November [Market Seems to be Holding - Adding 2 Weak Dollar Plays]. Not a bad return at 10% net (outside of my trading around the position), but as you can see below over a 3 month period it is trailing the 4 largest gold miners, along with trailing the simple Gold ETF (GLD).



I am still going to hold onto the Silver Wheaton, but I want to get some gold exposure as well. I am relatively ambivalent on which gold miner but based on what is happening in South Africa, I want something facing away from that area of the world, with as little political risk as possible, and as unhedged as possible. From my superficial reading (I am not gold expert) it appears many of these companies (even the majors) are in "turnaround mode", so I don't really want that excess risk/reward - simply a play on all the things gold is. Newmont Mining (NEM) still has some relatively serious hedges (that they are unwinding) in place, and aside from Russia I don't see any place of major political risk that Kinross Gold mines. (or electrical risk in this case).

Further, on Jan 18th Kinross Gold provided us with some outlooks for 2008 and 2009 as summarized below

• "This will be an important year of transition at Kinross. In 2008, we expect to bring all three of our new, lower-cost development projects into production on schedule, increasing our gold equivalent production by 20 per cent this year and setting the stage for expected production of 2.5 to 2.6 million ounces in 2009, a 60-per-cent increase over 2007 production," said President and CEO Tye Burt.
• Based on a preliminary review of fourth quarter 2007 results, including the impact of higher royalty costs as a result of a higher gold price, and higher energy costs, Kinross currently expects its full-year average cost of sales for 2007 to be at the high end of, or slightly above, its previously stated cost of sales guidance range of $355 to $365 per gold equivalent ounce.
• In 2008, Kinross expects to produce approximately 1.9 - 2.0 million gold equivalent ounces, an increase of approximately 20 per cent from 2007 production levels, and 2.5 - 2.6 million gold equivalent ounces in 2009. These forecasts reflect the positive impact of new production from the Company's three development projects at Paracatu (Brazil), Kupol (Russian Federation), and Buckhorn (USA), all of which are expected to be commissioned during 2008
• Cost of sales per gold equivalent ounce is expected to average between $365 and $375 for the full year 2008. By the fourth quarter of 2008, the average cost of sales is expected to decrease to between $325 and $335 per gold equivalent ounce. As illustrated in the table below, costs are expected to decrease progressively over the course of the year as the Paracatu, Kupol, and Buckhorn projects are commissioned and total production increases. Based on the assumptions noted below, Kinross expects the average fourth quarter 2008 cost of sales per ounce to be indicative of the Company's average 2009 costs.

So if these numbers are to be believed, after a slight increase for most of 2008 over 2007 cost levels, the company expects by Q4 2008 and into 2009 to make meaningful reductions in costs (down to $325-335 per ounce), so that margin will all flow to the bottom line at that time. This is a very leveraged business, much like fertilizer in fact. While we do have some political risk in Russia, finding one of these miners without any risk is finding a needle in a haystack. I don't want to go down to the smaller fare and prefer to stick to the bigger names - again I am not trying to find the hidden gem per se, simply a company that can provide inflation hedge.

Now we saw at the worst of the selling last week that gold does not provide downside in a frantic, panic driven market - that's not the point. I do think as the US continues to print fiat money, and (eventually) the rest of the world "might" follow as their economies weaken, gold is still a good place to be. I called for $1000 gold in 2008 and that still looks very doable. [13 Outlier 2008 Predictions]. Some are calling for much higher prices and some much lower. Either way, we are trashing our dollar so it's another way (along with silver and even wheat, soybean futures, etc) to hedge away to something with consistent value - which our peso errr... dollar, no longer has. I am not going to be buying today in the mid $22s range, but instead have it on my radar and am hoping if we continue a selloff to see the stock price in the $20-$21 range. At that point I'd be beginning a position. If anyone who is reading happens to be a gold expert and has some skeleton in the closet I should know about Kinross please append a message to this post; again I would like a miner instead of the Gold ETF simply because I think there can be some nice leverage opportunities if gold continues upward (as margins expand). But of course there is also more risk as opposed to playing the simple route and just buying the metal ETF itself.

Long Silver Wheaton in fund; no personal position