Kinross Gold Stock Set For Another 80% Rally?

Despite more than doubling from its March lows of this year, at the current price of $7 per share, we believe Kinross Gold stock (NYSE: KGC) is still undervalued. KGC stock has rallied from $3.47 to $7.20 off the recent bottom compared to the S&P 500 which increased 64% from its recent lows. The stock has outperformed the broader market due to sharp rise in prices of precious metals (gold and silver) during the pandemic. With gradual lifting of lockdowns and easing of supply constraints, production and shipments are expected to go up, while the global price outlook still remains positive despite recent volatility. We believe higher revenue and improved earnings in 2021, further augmented by acquisition of new projects (70% in Peak project), is likely to drive another 80% rally in the stock. Our dashboard What Factors Drove 68% Change In Kinross Gold Stock Between 2017 And Now? provides the key numbers behind our thinking.

Some of the stock price rise between 2017-2019 is justified by the 5.9% increase in Kinross Gold’s revenues. Higher sales were led by an increase in shipments as well as higher price realization as gold prices had started rising in 2019 on the back of increased buying by central banks and lower interest rates. Higher revenue led to a 4% increase in the company’s P/S multiple from 1.62x in 2017 to 1.68x in 2019. However, the multiple shot up in 2020 with a significant uptick in prices of precious metals following the outbreak of the coronavirus pandemic. The P/S multiple currently stands close to 2.60x and is likely to stay at such an elevated level in the near term considering expectations of higher volume and positive price outlook.

Where is the stock headed?

A slowdown in economic and industrial activities and expectations of a global recession, following the outbreak of coronavirus this year, has increased gold’s value as a hedging instrument, which, in turn, led to a surge in global gold prices. With rising investment in the yellow metal by major central banks and expectations of interest rates declining, gold prices already saw a sharp rise in 2019. This trend was further boosted by the current Covid-19 crisis. This was reflected in the company’s recent results, where total revenues for the first nine months of 2020 increased 21% on y-o-y basis while earnings more than doubled.

With the gradual lifting of lockdowns, the gold rally also seems to have faced impediments after the price increased from $1,500/ounce at the beginning of 2020 to over $1,950/ounce in September 2020. In fact, with economies opening up, the gold price has declined over recent weeks to close to $1,830/ounce currently. However, with the new spike in Covid-positive cases and the economic recovery being slower than expected, precious metals’ price outlook remains positive with gold and silver prices expected to remain elevated. The actual movement in commodity prices and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia.

With consumer demand increasing and supply constraints easing, gold and silver production and shipments are expected to go up further. Additionally, the company buying a 70% stake in the Peak project in Alaska is also expected to boost volume in 2021. As revenue and earnings growth remains strong in 2021 due to volume and price effect, the P/S multiple will also remain high around its current levels. Thus, the company’s outperformance during the pandemic, and with investors’ focus having shifted to 2021, a continued strong performance outlook for 2021 is likely to drive KGC stock up by another 80% to almost $13.

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