Canadian gold mining company Kinross Gold Corporation (KGC) recently received authorization from the Ecuadorian Ministry of Non-Renewable Natural Resources to re-commence advanced exploration activities at the Fruta del Norte (FDN) gold project in Zamora-Chinchipe province of Ecuador, which was put on hold last year as the gold mining activities were halted in the country.

Kinross had acquired the project last year by buying Aurelian Resources (another gold mining stock in Ecuador) for $1.2 billion. With this authorization, Kinross expects to re-commence its drilling program at FDN shortly. The program includes a 20,000 meter drilling campaign to support the completion of a feasibility study. The company plans to use four drills to execute the drilling campaign which is expected to take six months to complete. Kinross expects to complete a pre-feasibility study in January 2010.

Kinross benefits from higher gold prices, exploration projects and acquisitions. The company has cleared its hedge book and thus stands fully levered to spot gold prices. Higher gold prices will flow directly to the top line. About 40% of the reserves are located in Chile and another 40% in Russia. The company’s production is expected to go up more than 30% to 2.4 million-2.5 million oz of gold in 2009, driven by increased production from its three new projects Paracatu, Kupol and Buckhorn.

At the Paracatu mines, Kinross Gold has undertaken an expansion at a cost of $470 million. Annual production at Paracatu is forecasted to increase to about 557,000 oz of gold in the period between 2009 and 2013. Kinross has also undertaken a $270 million expansion project at the Fort Knox mine, which is expected to extend the life of the mine by 5 years and double the life-of-mine production to 2.9 million oz of gold. This will increase Fort Knox’s production to an average of 370,000 oz of gold per year during the 5 years commencing 2010. It will also reduce the average life-of-mine cost of sales to about $390 per oz.

Kinross has recently signed a deal to increase the size of its unsecured revolving credit facility to $450 million, up from $404 million. The new facility will expire in November 2012 and include a term loan for its Paracatu property in Brazil.

Kinross is a Canadian-based gold mining company with mines and projects in the US, Brazil, Chile, Ecuador and Russia. The Bema Gold Corp. acquisition has been a major contributor to Kinross’s profits in the last few quarters. We expect Kinross’s exploration projects and acquisitions to also boost its top line going forward. However, the emerging market growth is declining and production level is shrinking at some of its existing operations. We are also concerned about Kinross’s earnings volatility and lower gold reserve base. Earnings in the last quarter were lower than the Zacks Consensus Estimate. We expect higher mining and administrative costs to further constrain margins.
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