Cautious on Kinross

Benj Gallander, Ben Stadelmann, and Philip MacKellar
Monday December 3, 2018

Though we remain imperfect, we do our utmost to stray not too far afield from what has proven successful over the many years that the stock market has been one of our major preoccupations. Baseball and curling are a couple of others.

This means that most of our purchases are during tax loss selling season, which is occurring now. So far this year, Benj has not added to the President’s Portfolio, while Ben and Phil MacKellar, who manage the Vice-President’s Portfolio, have only bought one position. Those numbers will swell this month, though cherry-picking remains the order of the day.

The rationale for this buying pattern is pretty simple: it’s a matter of supply and demand. Many people wait till December to sell off their losers, which swells the supply and reduces the price, all things being equal. That creates more and better bargains, and we are all about deals.

Then, toward the end of the year, the Santa Claus Rally normally takes place, which tends to boost the value of our acquisitions even more than the markets in general, since our stocks were beaten down. Voilà, we are given a head start on potentially stellar returns!

Naturally, our search for bargains is a continuing event throughout the year. Then, as the leaves are falling, the wish list is pared down to several candidates with the potential to join our select group of stocks. When the stalking is finished, we pounce like a lion on its prey. Perhaps we have been watching too much Discovery Channel.

One stock that has been on our Stock Watch List for years, but never quite makes the cut, is Kinross Gold. There are numerous reasons why. Our feeling is that, for this miner to shine, the price of gold needs to jump. Although the corporate bottom line is improving, it has been choppy at best, and the debt load is much fatter than we’d like to see.

The share count has done about a double since 2008, to about 1.3 billion, so a consolidation might be in the cards, especially with the stock trading at a lowly $3.75 or so. A reverse split normally hurts a stock’s valuation.

Directors and executives are also very well compensated — perhaps too well, given the languishing stock price. The company used to pay a dividend, circa 2013; it does not appear that one will be reinstated soon, which would seem to rule out a partial return should the stock price resist climbing.

Yet with all the negatives, the stock remains of strong interest to us. With governmental, corporate and personal debt high, and the money supply jacked up and the yield curve flattening, a recession warning is flashing. That could lead to a flight to perceived safety, boosting the gold price.

The company has some tremendous projects in diverse locales, including the Americas, West Africa and Russia, which combined have an all-in sustaining production cost of less than $1,000 an ounce. That leaves reasonable room for profit. Lastly, the share value could have plenty of upside: as recently as a decade ago, it traded above $24.

However, at the end of the day, there seem to be better options out there in this sector; for example, Alacer Gold, which we have written about before. Kinross will stay on the list, perhaps for purchase in another year. Or, ultimately, it could end up being one of the many companies that we take a pass on that subsequently moves up smartly in price. That would not surprise.

Where investing methodologies are concerned, it is important not to move willy-nilly between one and another. Generally, such behaviour decreases returns. As with much of the population, we value investors want more money in the pocket for Boxing Week.