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Are Kingsrose Mining shares a buy at today’s price?

Credit: Mark Herpel

Kingsrose Mining Limited (ASX: KRM) saw its share price gain 5.3% today to 20 cents.

In the scheme of things, it’s not a huge rise – just 1 cent and shares are still down over 83% in the past 5 years, and 23% in the past 12 months.

Shares have traded as high as 36 cents so far in 2015, but it appears unlikely that the share price will reach those levels anytime soon.

And if you think Kingsrose has the potential to follow in the footsteps of fellow gold miner St Barbara Ltd (ASX: SBM), you’d be sadly mistaken. St Barbara has seen its share price explode, soaring by 1,363% since December 2014, but the miner had been written off and has seen a new lease of life.

Getting back to Kingsrose, CEO Scott Huffadine resigned early in November 2015, despite only being appointed in January 2014. That’s a short tenure for a CEO and the company gave no explanation for his resignation, but it does raise a red flag.

Kingsrose is a small gold and silver miner with an 85% interest in two mines in South Sumatra, Indonesia at its Way Linggo Project (Way Linggo and Talang Santo). Way Linggo had been producing gold and silver for some years, but was high cost and the company made the decision to suspend activities at the mine in 2013.

Talang Santo is now the company’s only producing mine and production is low. It also has to deal with a large amount of water entering the mine operations which has restricted production in the past, and can cause production costs to escalate.

In the September quarter, Kingsrose produced just over 4,000 ounces of gold and 9,815 ounces of silver, at an all-in sustaining cost of US$1,580 an ounce (gold equivalent). By comparison, the miner produced 5,763 ounces of gold and 10,433 ounces of silver in the June quarter at a cost of US$1,116 an ounce.

Both quarters were also well above the company’s all-in sustaining cost guidance of between US$670 and US$720 an ounce.

September’s results were well above the current gold price of US$1,084 an ounce, and show that lower production and higher costs from quarter to quarter are an ongoing risk. The quarter also included US$456 an ounce of sustaining capital – showing how capital intensive gold miners can be.

The good news is that Kingsrose’s Talang Santo mine has some of the highest grades of gold per tonne, which should allow the company to bring down the all-in cost, increase production and grow cash flow.

Another issue is that Kingsrose has the same disease many gold miners seem to have – “Overly optimistic forecasts by management“. In November 2014, management lowered their already optimistic forecast for the 2015 financial year (FY15) from 40,000 ounces of gold to between 30,000 and 35,000 ounces. Kingsrose produced just 24,227 ounces of gold that year and 60,000 ounces of silver.

Unless the company can significantly increase production in the three remaining quarters, it looks headed for an even lower total than last year in FY16.

Foolish takeaway

If gold and silver prices remain steady, Kingsrose has the opportunity to make substantial profits. The major problem is that gold production remains low and production costs above the current spot gold price. The odds are more to the downside from here.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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