Kinross Gold Update $ 5/8 KGC-NYSE August 5, 2000
K-TORONTO
Kinross Gold which we briefly analyzed earlier continues to make new all-time lows. Last week the stock hit $ 9/16. It would seem that the stock is heading lower as these days, a stock going down is a reason to sell. In a conversation with the Company last week, they said that "investors" were afraid of a reverse split that the Company may make in order to maintain a price above $1 to satisfy NYSE rules. The Company has no intention of instituting a reverse split. The other thing the "investors" believed was that the Company was going out of business because of the low stock price. Finally, the Company suspended dividends on a preferred issue to conserve cash. WHAT A SURPRISE. It had been yielding around 16%. The preferred promptly got cut in half.
In the old days, when fundamentals were analyzed and reality played a role, the preferred dividend suspension would have been fully expected. It is cumulative and will accrue nonetheless. We almost expected it to rise on the news, but it was a big surprise to "investors". Furthermore, the common certainly should have been stronger as the move bolstered the Company's finances going forward. Instead, an "analyst" downgraded the common.
This type of action on its face should be enough to scare professionals, if there are any left. Today, only good news is allowed and every development is given a positive spin. Earnings are fudged by excluding this and that just as are inflation numbers. IBM operating profits from selling goods and services were down considerably in the 2Q, but by borrowing money and buying back stock and through other income they came out "ahead". The stock shot up as "investors" saw them come out "ahead". IBM's balance sheet is getting uglier and uglier, but fundamentals like a balance sheet are of no concern. Balance sheets are old fashioned.
I don't need charts, or talking heads or economic statistics, only history to see that we are going from the ridiculous to the sublime.
Each day the air is taken out of one or more stocks as they drop 40-50%. Debacles like that used to be occasional and didn't involve large cap stocks, usually just speculative stocks, but again today, most stocks are speculative due to their price relative to their fundamentals. It is scary. I think a Mercedes is a good car but I won't pay a million dollars for one!
Back to Kinross. The stock is being arbitraged to death and "investors" are playing right along. Each day, the stock rises in Toronto (where 85% of the stock trades). Since there are no buyers in the US other than the specialist in NY,
he (she) keeps dropping the bid. After accumulating a 100,000 shares or so they dump it on the bid in Toronto, making a 5-10% profit. This is a vicious cycle which only reinforces the perceptions of today's "investors". "See, it keeps going down, they must be going bankrupt, sell".
If gold keeps falling and stays here for four or five years, Kinross may go under, but we see this scenario as unlikely. Conversely, if gold was to rise $100 per ounce (to $370, not a big number in our book) , Kinross annual cash flow would increase from about $50 million to $150 million annually. At one point last week, the market value of the Company was down to $166 million. Therefore, the market cap was equal to about 1X CASH FLOW AT $370 GOLD. It was also at about one-third of book value which has been adjusted to $300 gold after last year's writedown of assets. If you have any belief in gold, this would seem to be a very cheap stock.
I am an aficionado of old newspapers. I was reading an article the other day from the New York Times business section from 1978 about gold. It was at $251 (over $500 adjusted to today's dollar). The comments were that "gold was up $1 today for technical reasons" but there was no reason to expect any real upside. Eighteen months later it was at $800 per ounce. In an article from the Wall Street Journal in early October 1987, Abbey Joseph Cohen was saying that the market was heading higher. Three weeks later the crash of 87 occurred. Remember, even the "experts" can be wrong.
THIS IS NOT AN OFFER TO BUY OR SELL ANY SECURITY. IT IS FOR INFORMATIONAL PURPOSES ONLY. THE INFORMATION CONTAINED HEREIN IS BELIEVED TO BE ACCURATE, BUT ITS
ACCURACY IS NOT GUARANTEED. WE WERE NOT COMPENSATED FOR THIS ARTICLE IN ANY WAY. WE AND OUR AFFILIATES HOLD A LARGE POSITION IN THE COMMON STOCK OF KINROSS GOLD AND CONTINUE TO ACCUMULATE IT IN THE OPEN MARKET.