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Stock Strategist

Poor Capital Allocation Tarnishes Gold Miner

Despite record production in 2014, Kinross' production and costs are unlikely to improve.

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 Kinross Gold (KGC) reported record production in 2014 of more than 2.7 million attributable gold equivalent ounces, a 3% increase from the year before. In addition, the company's cost-cutting efforts helped lower cost of sales to $720 per GEO and all-in sustaining costs to $973 per GEO compared with $743 per GEO and $1,063 per GEO in the prior year, respectively. Although the company hit its production and cost guidance for the year, we were a bit underwhelmed by its 2015 outlook. Kinross expects to produce 2.4 million-2.6 million GEO at a cost of sales of $720-$780 per GEO and all-in sustaining costs of $1,000-$1,100 per GEO, citing mine sequencing as the main driver of the production decline.

Kinross also announced that it will not pursue the Tasiast mill expansion at this time. Given the uncertainty of the project, we had not included its development in our explicit forecast. We have mixed feelings about the decision. Although we understand the desire to protect the balance sheet amid gold price volatility, we thought the expansion had significant potential to transform Tasiast into one of the biggest and lowest-cost mines in Kinross' portfolio. No other project in the pipeline appears as near term or impactful as the Tasiast expansion did. Although the project could still be revived, the company seems to have shifted focus for now.

Kristoffer Inton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.