Tag: K

Kinross and other gold producers

I note today that Kinross (TSX: K) announced quarterly results but also eliminated their semi-annual dividend, citing uncertainty in the gold market (not to mention the company’s rather large debt burden).

Whenever you see corporations eliminate dividends, there is typically an adverse market reaction because management is signalling the fortunes of the company are not sufficient to sustain the dividend. There are frequent opportunities to profit from this if you believe the conditions that caused the dividend termination are short-term in nature. Another factor that accelerates the price decline is that dividend funds (or other mutual funds) that have in their portfolio management guidelines the requirement to only be invested in companies with dividends will be getting their robotic traders to sell shares to the market, which will also put downward price pressure on the stock.

Strictly in terms of financial theory, two identical companies, one pay a dividend and one not paying a dividend, should be trading at identical values (after adjusting for tax implications of shareholders and the associated reduction of balance sheet equity for the dividends given). However, the market has a very deep perception difference between income-yielding instruments and non-income yielding instruments – there is quite a high premium these days on income-bearing investments even when it makes no sense.

I note that after today’s quarterly report from Kinross that the stock is down about 3%, which is less than one would expect given the announcement. This might suggest that a bottom is forming around here, but I am far from being an expert analyst on gold mining companies, and I’m not about to become one in the next month. A lot of these companies have deep issues with cost containment – even though the underlying commodity price has skyrocketed from prices 10 years ago, the costs to extract the resource seemingly climb up at the same rate!

Investors should also be warned that commodities can trade under marginal costs of extraction much longer than one would intuitively expect!

Finally, recall that these resources all tend to fall into cyclical traps. The general public never catches wind until most of the hype has been priced into the respective shares. Recall in the past decade:

2006: Uranium
2008: Potash
2010: Lithium
2011: Rare Earths, Gold/Silver
2013: Bitcoins

Next is…?

Gold producers

I have no interest in the major gold producers (or minor ones for that matter), but I find it odd that companies like Barrick Gold (TSX: ABX) and Kinross (TSX: K) are hitting lows when they are so wildly profitable.

Kinross is down by about half, but they have geopolitical issues which can justify some of the decrease. However, Barrick is down 20% (which is uncharacteristic of the stock, which is one of the lowest volatility stocks out there) and they continue to rake in the cash – selling prices of $1,700/Oz and total costs of about $740/Oz from their last quarterly report. The market is probably trying to price a significant increase in cash costs over the medium term.

I continue to be leery about commodity-based firms at this time.