Overhead Dulls Kinross Gold
Higher gold prices bode well for Kinross top-line growth. Kinross Gold Corp. (KGC) has received approval for a huge investment in the Paracatu mine expansion, which is expected to start production in July. The various exploration and expansion activities undertaken will enhance production levels. The Bema acquisition will result in various synergies.
However, declining production levels at some of the existing operations and higher mining, energy, and administrative overhead costs are likely to constrain margin expansion. Consequently, we reiterate our Hold recommendation on shares of KGC, with a six-month target price of $21.00.
Kinross Gold has cleared its hedge book and thus stands fully levered to spot gold prices. At the Maricunga mine, we believe enhanced capacity will boost production volume. We are also optimistic about Kinross exploration projects. The company's production is expected to go up to 1.9 2 million ounces of gold in 2008 and to 2.5-2.6 million gold equivalent ounces in 2009 driven by increased production from its three new projects Paracatu, Kupol, and Buckhorn.
Beyond exploration activities, Kinross makes meaningful acquisitions to boost reserves. We remain cautious about Kinross near-term performance due to rising cash costs and falling production numbers at some of its existing operations. Cost of sales per gold equivalent ounce is expected to average between $385 and $395 for the full year 2008 as against the previously stated guidance of between $365 and $375.
But we expect burgeoning costs to squeeze near-term operating numbers. Meanwhile, the Brazilian Real's appreciation against the U.S. dollar is leading to higher than budgeted costs associated with the Paracatu expansion. Further, KGC's debt level has gone up significantly due to acquisitions. Although the various acquisitions are likely to help Kinross boost future growth, the company is vulnerable to integration risk.
Baker Hughes Target Upped to $95
We reiterate our Buy recommendation and EPS estimates for Baker Hughes, Inc. (BHI) shares ahead of the company's second-quarter results. Despite the company's relatively soft results in the last quarter, our long-term view of the business continues to remain favorable.
We expect strong revenue growth during the second half of 2008, powered by an improved North American outlook and continued international expansion. Being a premium oilfield service player, the company remains well-positioned to capitalize on the current oilfield cycle.
Baker Hughes shares trade at a discount to its peers despite the company's strong oilfield service franchise and growing international footprint.
