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XMFSinchiruna (26.40)

Applying Community Intelligence to Find the Missing Gold



August 13, 2009 – Comments (23)

Ok, Fools, time to pool our collective skills to make sense of a mystifying earnings release.

Although I am a self-taught Fool, and not a CPA, my readers know that I am fully capable of dissecting an earnings report and interpreting results effectively. I have poured through thousands of earnings releases over the years, and reported on companies within a wide range of sectors. Furthermore, my particular focus upon precious metal miners has yielded a comprehensive understanding of this sector and the characteristic elements (from non-hedge currency derivatives to variations in by-product accounting methods) affecting income for the miners.

For the second time in a row, Kinross Gold (KGC) has left me rather stumped in my attempts to reconcile robust revenue and operating margins with paltry net earnings. When Yamana Gold (AUY) reported paltry earnings of its own despite similarly strong operating metrics, at least the release contained all the data I needed to recognize the culprits and break the issues down for Fools to consider. I may not be happy with Yamana's backfiring derivatives or currency exposures, but at least their release was transparent enough to make sense of it all.

Not so in the case of Kinross. Unless I'm missing something, I am unable to account for tens of millions of dollars within the giant moat between revenue of $598.1 million and adjusted net earnings of just $84.3 million. I had similar difficulty last quarter, and kicked myself for skirting the issue (alluding to the unimpressive net result without breaking down the culprits). From my write-up last quarter:

Although gold prices were lower in the first quarter compared with last year, Kinross enjoyed a 61% increase in revenue, costs declined 11% to $419 per gold equivalent ounce (GEO), and operating earnings increased 72%. Net earnings, unfortunately, were up an unremarkable 8%, to $76.5 million.

I'm not willing to skirt the issue any longer. I e-mailed investor relations after the prior quarter, and received no response (nice investor relations ... don't you hate that?) I'm calling out Kinross Gold for failing to provide adequate data with which to reconcile revenue to operating earnings, and/or operating earnings to adjusted net [Reconciliation of adjusted net to net is a-ok]. I call upon the collective skills of this Foolish community to see if together we can make sense of the results ... I'm perfectly willing (indeed, hoping) to admit that I've missed something that is indeed provided within the data. Whether the deficiency lies in the provision of data or my interpretation of it, I think we'll all agree that Kinross could do a much more effective job of reconciling the data in a format that shareholders will have a reasonable chance of decoding.

Here is the earnings release:

I find a discrepency of 10s of millions of $ that I can not account for within the data provided. Let's see if you have better luck. :) 

Come on you CPAs and math geeks ... we need you now. ;)

Whatever the result, I'm sure the exercise will be a helpful one for many Fools that may not feel as comfortable navigating their way through an income statement.

Disclosure: long KGC and AUY.

23 Comments – Post Your Own

#1) On August 13, 2009 at 1:25 PM, AdirondackFund (< 20) wrote:

Disclosure: short KGC

Reason:  misreporting of Earnings, Income Statements and Balance Sheets.

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#2) On August 13, 2009 at 1:40 PM, catoismymotor (< 20) wrote:

Were any Mini Coopers seen fleeing the KGC offices at high speed?

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#3) On August 13, 2009 at 1:55 PM, XMFSinchiruna (26.40) wrote:


Okay, you have my attention ... please elaborate. :)



I am preparing to pour through the earnings call transcript for any possible insight.

I think this is a perfect use of community intelligence ... I can't wait to see what we come up with.

I loved what we were able to do in the case of the AAUK delisting mystery, and I thoroughly enjoyed the discussion that resulted from our collective analysis of the still-unsolved mysteries surrounding the $134 billion bond caper. We have so many intelligent Fools in this community from a range of backgrounds and areas of expertise, that on those occasions when I can't find satisfactory answers to a nagging question, you all are the folks I turn to.

Thanks for your input!

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#4) On August 13, 2009 at 1:56 PM, XMFSinchiruna (26.40) wrote:


love that movie! :)

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#5) On August 13, 2009 at 2:01 PM, SockMarket (34.50) wrote:

according to their presentation earnings are up 70% (adjusted). They claim adjustments are as follows:

Foreign exchange losses $57.5mm
Non-hedged derivatives losses (gains) $3.2mm
Taxes in respect of prior years $4.5mm
Losses (gains) on sale of assets and investments – net -0.2mm

something is wrong here, unadjusted earnings are DOWN from 08, the CAN dollar has not fallen tremendously in value since then. I will look into this and write when I can figure out what is going on.

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#6) On August 13, 2009 at 2:16 PM, XMFSinchiruna (26.40) wrote:


Hi Daniel, Thanks for looking into it.

Those adjustments you listed reconcile net earnings to adjusted net, and in fact are fairly typical for what the industry experienced this quarter (see my articles on earnings for AUY and AEM - currency adjustements were rampant due to the weakening USD).

My confusion does not stem from these items applied to adjusted net, but rather with the calculation of adjusted net in the first place. I have not been successful accounting either for their calculation of operating earnings of $154.5 million, nor their adjusted net of $84.3m.

Fool on!

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#7) On August 13, 2009 at 3:00 PM, outoffocus (23.82) wrote:

Come on you CPAs and math geeks ... we need you now. ;)

I could help but it'll cost you. Just kidding.

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#8) On August 13, 2009 at 3:20 PM, gembree (99.78) wrote:

If you could be a little more specific, it would be helpful.  I assume you are looking at the Consolidated Statement of Operations in Exhibit 99.1 of the 6-K?  What part of this is suspect?

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#9) On August 13, 2009 at 3:22 PM, XMFSinchiruna (26.40) wrote:


Now you're going to bargain for a free pocket protector? ;)

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#10) On August 13, 2009 at 3:38 PM, gembree (99.78) wrote:

I mean, the most obvious thing is that the Kupol mine now provides 75% of operating profit, but because it's only 75% owned, it's 100% consolidated for purposes of revenue and operating profit, but the 25% minority interest is siphoned out of net income.  In 2008 most operating profit came from wholly owned operations.

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#11) On August 13, 2009 at 3:53 PM, outoffocus (23.82) wrote:


No I'll just take the standard four function calculator.  You know, cutbacks and all.

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#12) On August 13, 2009 at 4:21 PM, XMFSinchiruna (26.40) wrote:


Sure, we can work from the 6-k: 99.1.

In fact, I'm glad you mentioned the EDGAR form, because although these are often substantially identical to the associated earnings press releases, in this case there is indeed more detail here on the derivative contracts ... which are in fact uglier than I had realized.

What I'm looking for is their accounting for how they arrived at $154.5m for operating earnings and adjusted net of $84.3m. Income and mining tax expense of $21.6m was tucked into the text of the release, and the 6-k itemizes $26.5m in G&A, which gets us into the ballpark on operating earnings. [I still can't get it to come out exact, though ... how do they get away with not providing a single, concise consolidated statement of income the way every other company seems to provide?]

Where I find absolutely no information within the 6-k is in getting from operating earnings of $154.5m to adjusted net of $84.3m. Is anyone with their CPA goggles on able to decipher that phase of the accounting process? My suspicion is that this is where derivatives will come into play in one form or another. The only accounting of fair value of derivatives is a comparison to December 30, 2008 ... so this is not revealing a mark-to-market write-down for the quarter.

Thanks again for any insights you can bring to the table.

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#13) On August 13, 2009 at 4:36 PM, XMFSinchiruna (26.40) wrote:


That's an interesting thought about minority interests being accounted for just above the bottom line.

Most miners with joint ventures account for this on the top line, adjusting revenue to reflect allocated sales. Do they really have that much leeway in how they would account for such things? If that's the case, are we notin dire need of greater standardization of accounting procedures? 

Newmont Mining caught my attention in July, when net income of $306m was nearly chopped in half by a $144m line item called "net income attributable to noncontrolling interests". Newmont has a ton of joint ventures, so a big hit would be expected, but again I found it strange for that hit to come from beneath the bottom line like that (subtracted from net income).

Either way, until we can locate a similar line item in Kinross' calculation of adjusted net, we're just speculating. I think we've narrowed the culprits down to the two most likely possibilities: derivatives and non-controlling interests (non-operating stakeholders). But my question remains ... where is the accounting of it, and how can it be permissible for this information to be so difficult to ascertain? Is anyone here familiar with accounting regulations, and might it seem that the filings are deficient in this respect?

Thanks again, everyone, for your very helpful input.

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#14) On August 13, 2009 at 6:33 PM, TMFTortoise (97.53) wrote:


I think you're going at it from the wrong direction.

You can't go directly from GAAP operating income of $154.5 M to adjusted net income of $84.3 M. You have to stop at GAAP net income first.

The biggest single charge between operating income and net income is "other expenses" of ($78.8 M). This is broken down further in the 6-K report. $57.5 M is currency translation effects (more on this in a moment), $16 M is interest expense, and there's another $6.1 M in derivative losses and an interest in a diamond mine.

Other large charges between operating and net income are income and mining taxes and income that's not controlled ("non-controlling interest"). That last one is probably an application of a particular Canadian GAAP rule which should be detailed in the annual report's footnotes to financial statements (usually the first footnote).

Some, but not all of those expenses, are backed out in going back from net income to adjusted net income. These are the currency translation (which is fair), derivative losses (may or may not be fair -- depends on how often they occur), and reassessments of prior year taxes (again, may or may not be fair). The biggest one, by far, is the foreign currency exchange loss.

Foreign currency losses. You probably already know this, so forgive me for stating the obvious. One thing that tripped me up once on this is to realize that the weakening dollar is not what happened over this quarter (Apr 1 - Jun 30, start to finish), but where the currencies sit relative to last year's quarter.

One also has to recognize what currency is used to report the results in. They report in USD. This means they don't translate into CAD and then into USD, they translate directly into USD.This part of the 6-K clues us in on that:

"For the second quarter of 2009, foreign exchange losses were $57.5 million which relates to the translation of net monetary liabilities denominated in foreign currencies to the U.S. dollar. During the second quarter of 2009, the Brazilian real, Russian rouble, Canadian dollar and Chilean peso strengthened compared with the U.S. dollar by 16%, 8%, 8% and 9%, respectively, which resulted in a loss."

These are the currencies they do business in and, because their financial statements are in USD, they have to translate to USD and, this time, suffer a loss.

That's the major adjustment from net income to adjusted net income.

But I think where you are running into trouble is by going in the wrong direction, as I wrote at the beginning.


Jim (TMFGebinr)

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#15) On August 13, 2009 at 8:06 PM, XMFSinchiruna (26.40) wrote:


Thanks for your perspective on this. In looking back through the 6-K, I just finally discovered the Consolidated Statement of Operations table... THAT's what I was looking for. :) 

My above questions were based on the assumption that Kinross had provided no such statement of operations. That's the part I found so irregular, but it turns out I just overlooked the data table I was searching for entirely. Serves me right for spending most of my time with the earnings release and only going to the 6-K after writing the post. (oops)

The currency translation effect is plenty familiar to me ... the entire industry has been toiling with it ... especially this quarter. It relates to revaluation of future taxes and other expenses that will be incurred in local non-USD currencies, which will be derived from USD-denominated revenues at a less favorable exchange rate.

Anyway, thanks to everyone who commented on this post ... it turns out everything is in order, and Kinross did in fact post sufficient data ... I simply didn't see it. I'll not fail next time to thoroughly scrutinize the 6-K filing before I question accounting methodologies. That being said, this entire exercise could have been avoided by Kinross simply including the statement of operations table in the earnings press release the way every other company I cover routinely does, rather than offering only an inferior "summary of financial and operating results".

Rather anticlimactic, I know, to call in a four alarm fire for a false alarm, but like an unscheduled fire drill it was great to know how many Fools had my back when something didn't seem to add up. :)

My apologies for the false alarm. I'm relieved that everything is in order at the house of Kinross, but hope that they'll begin to include the relevant table in the press release from now on.


Now that I located the appropriate table, you were right, that $28.8 item for "non-controlling interest" does indeed relate to minority stakes in mines like Kupol (representing $16.8m of it).


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#16) On August 14, 2009 at 8:08 AM, XMFSinchiruna (26.40) wrote:

To my double-embarrassment, the statement of operations is indeed included within the press release as well ... I just didn't see it!

Time to get my eyes checked? ;)

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#17) On August 14, 2009 at 8:09 AM, gembree (99.78) wrote:


Well, it's hardly transparent even with the consolidated statement... I can't blame you for not instantly assessing a miner correctly!  The byzantine subsidiary chains and array of special charges have more or less driven me away from them entirely.

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#18) On August 14, 2009 at 12:59 PM, puccini3005 (30.14) wrote:

Your embarrasment is my gain - this post and comments were very educational to me.  Thanks!  Thanks to TMFGebinr also, if I could rec comment #14 I would.  Very clarifying...

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#19) On August 14, 2009 at 2:21 PM, XMFSinchiruna (26.40) wrote:


That's all I needed to hear ... my embarrassment, then, was well worth it!


Fool on!

I'll post a link to my final analysis on Kinross' earnings after it's published.

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#20) On August 14, 2009 at 2:35 PM, XMFSinchiruna (26.40) wrote:


And yes, I consider Jim a number-crunching guru, which is why I e-mailed him asking for his Foolish perspective. :)

I'm glad you found his comments as useful as I did.

Since we've made something of a case-study out of this Kinross filing, let me know if you (or anyone) have any further questions about interpreting or reconciling the #s.

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#21) On August 14, 2009 at 6:55 PM, XMFSinchiruna (26.40) wrote:

Here is my analysis of Kinross' earnings, and a novel idea for addressing the impact of dollar devaluation on the bottom line.

Let me know what you think about the brainstorm.

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#22) On August 14, 2009 at 10:40 PM, Tastylunch (28.58) wrote:


This post is exactly why I like/respect you.

Honest, thorough, willing explore/challenge and self effacingly humble.

Good stuff.

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#23) On August 15, 2009 at 1:42 PM, silverincite (35.19) wrote:

Just throwing it out there, Aurizon Mines (AZK, ARZ.TO) a gold miner who actually made gains from derivatives/hedges:



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