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DENVER ( TheStreet ) -- Kinross Gold ( KGC) is hoping its recent acquisition of Red Back will help it finally take advantage of surging gold prices . Kinross shares year to date have fallen 0.89% while the gold price has rallied 17%. Even Market Vectors Gold Miners ETF ( GDX), of which Kinross if the fifth- largest holding, is up 16% as the company's growing pains crimped its ability to give leverage to investors. Kinross is one of the largest gold producers in the world with a market cap of $13.23 billion. The company earned 16 cents a share in the second quarter and produced 538,270 ounces of gold. Its cash costs were up 14% from a year earlier to $496 but the company still achieved a record profit margin of $622 an ounce. Kinross has eight producing mines but ballooning demand and constricting global mine supply led Kinross to buy Red Back for $7 billion, a 21% premium, which already has two working mines and more on the way. I sat down with CEO Tye Burt at the Denver Gold Forum to see if Kinross was desperate or just ahead of the curve. You recently bought Red Back for over $7 billion, a 21% premium. Did you overpay? Burt: We don't think we overpaid. We think we acquired one of the new best gold deposits in the world today with significant upside from the ounces that are known today. I think if you look at the consensus of research that followed our releases on the project and following our outline on what the potential is the Street has strongly endorsed the deal and our stock is up strongly on the back of closing it. So we're excited, we think we've created a new hypergrowth senior that will grow faster than any of the other major gold producers in the world today. Now were you desperate? Burt: No, Kinross stand alone has a tremendous growth profile ... Here was a chance to turbocharge it and take it even further and faster with a high-quality asset that has tremendous upside. How long until Red Back's deposit will become accretive to Kinross? Burt: We have a 36-month plan to put the new mill into production and during that time we will be drilling the deposit very aggressively and adding ounces even as we proceed with the engineering and construction work for the new mill. It will take about a year to see further additions to our very large ounce profit and then a subsequent two years to build the new mill.
In the meantime, do you expect more short-term weakness or more costs while you ramp up production? Burt: We don't. We see more production growth line from here because
with Red Back we're also adding two currently producing mines to our already eight-mine portfolio so we see strong production right through. Will you make more acquisitions down the road? Burt: That's not the current plan. We have a tremendous growth profile. We have to build five large growth projects over the next five years so we think we have the asset suite that we want right now. Of course, we are always looking for bolt-ons in some of those core regions which are complementary to the current mines. Now over the last year Kinross' stock has not really been able to take advantage of high gold prices and the big rally we've seen with the other miners and the gold price. Why do you think that is? Burt: Well, we had a strong growth trend from 2005 ... through 2008. We've added three large new mines and dramatically cranked up our production while we reduced our cash costs. In the meantime, we acquired a new project so I think that was take a deep breath, get on the launch pad for the next round and here we go. Now in your last quarter though your gold production did slow and your cash costs rose, so aside from Red Back what steps are you taking to combat these issues? Burt: Well aside from Red Back, we are building new mines, three other big projects within Kinross and several at-site projects to enhance our current assets. Our cash costs trended up a little bit because our Brazilian operation is producing more ounces and that's slightly higher cost than the rest of the portfolio, but its performing now at a level which is very exciting and it has a 35-year mine life so this will be a very great deposit for us. Then Red Back kicks in about three years as I mentioned, then after that our new project in Ecuador ... followed by Cerro Casale in Chile. We have strong growth from a number of sources over the next five years. Do you have an exit strategy and I ask because it seems like you share a lot of properties with Barrick Gold (ABX)so I have to wonder are you looking to partner more with them or are you looking for them to buy you out? Burt: Barrick is a very strong partner. We're with them in Nevada at Round Mountain and also in Cerro Casale in Chile but we have no specific plans for any kind of exit at this point. Who are your biggest competitors as you see it? Burt: Well, the obvious senior producers in the gold industry include Newmont Mining ( NEM) here in the U.S., Goldcorp ( GG) in Canada and AngloGold ( AU) from South Africa. Your margin for last quarter was $622 an ounce. Has that peaked? Burt: Well, that's a record margin because our cost was good and the gold price was high. We expect the gold price to continue even higher than here given the fundamentals for the metal; that'll mean our margins will keep expanding as we add lower cost production, which will drive the cost line down.
So what is your long-term price target for gold? Burt: We don't have a long-term price target but we do think the fundamentals for the metal are tremendous. There are a couple of big drivers today. One, gold has tended to be an economic barometer for investor sentiment and we think investors anxious about financial markets today are moving strongly into gold which is helping drive the price. Central banks are now net buyers of gold in the last three-six months, which is a tremendous new driver for the gold price, but most important
is the supply side. The supply of new mines of new production of replacement ounces has slowed and is declining so it's in that environment that we're excited about our growth profile because we think that goes directly against the trend in the industry. And what does $1,300 gold mean for your company? Burt: It means $800 an ounce margins which is a tremendous benefit for shareholders. It means rising cash flow and rising cash flow per share and it means we're actually driving great margins in a tough competitive industry and we're excited about that. For an investor looking at gold for the first time and gold is at $1,300 what would you say to them? Burt: I would say look at the fundamentals in the metal; is supply increasing or decreasing? And the answer is its decreasing and then look at demand. There are others like you, an investor, who are looking for shelter in these turbulent markets. I would say there are a couple of different ways to invest in gold. One is bullion directly which has attached to it storage costs and security issues. Then there is the ETF which is a derivative way of buying into the underlying bullion and then there are gold equities like us and the great thing about gold equities is that they tend to outperform the gold metal. When do you hope to start outperforming the metal? Burt: We've been doing it for the last few weeks in wake of the deal and we expect to continue that as we come out fully with our future growth plans. What are some of the trends you are noticing coming out of Denver? Burt: There is a big trend to acquisitions for the senior companies that don't have growth. We expect others to follow in our footsteps as they try and buy future growth potentially in a tough competitive industry. We think we've done our major transaction and we're happy about that but the others will have to follow along. The other challenge is, of course, rising costs as commodity prices go higher, oil prices go higher, wages go higher, costs are a continuing challenge for our industry. Those are the two biggest issues : replacing the ounces and controlling the costs.
In terms of controlling the cost, is there anything in particular that you have to struggle with? Burt: Well, energy costs would be about a third of a typical open pit mine production cost so we're actively hedging our input costs in energy and so that would be an important thing to control. Wages really
are the same across the world ... and are looking like about 5%-6% per year right now. The last piece is consumables: explosives, chemicals, concrete and steel. They tend to go with CPI, they tend to go with general inflation so that's looking like 3%-4% right now and that's cost pressure that every senior has to deal with.
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