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XMFSinchiruna (27.56)

A snapshot of Yamana from last Fall, and something to compare the upcoming Q4 results to.

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February 16, 2008 – Comments (4)

With the quarterly and year-end earnings release on the horizon for Yamana, I though it timely to post this analysis I wrote after their third quarter earnings statement.  Yamana might just be the best-positioned player in the gold patch, provided they continue to deliver the free cash flow, organic production growth, and low production costs that have brought them this far.

 

The gold patch has been so hot lately that investors hurling darts at company names on the wall would have been likely to find more winners than losers over the past year.  Like any hot sector, though, the further we advance into a bullish cycle, the more critical due diligence becomes to identify the companies that will go the extra mile.  After gobbling up one small gold company (Northern Orion) and one medium-sized one (Meridian Gold) recently, Yamana Gold has boldly doubled its market cap and emerged as one of the leading intermediate producers of the shiny yellow stuff.  Though the market initially punished Yamana’s stock for the move, it has since recovered back to pre-merger levels.  Members of The Motley Fool’s CAPS community are resoundingly bullish, giving Yamana its highest rating of five stars.  With the release of their 3rd Quarter earnings report yesterday, we thought we’d take the opportunity to take a closer look at the fundamentals and see whether investors can hit a bull’s-eye with Yamana Gold.

 

Yamana posted earnings this quarter of $30 Million, or $.08 per share, and a 300% increase over the $.04 per share loss booked for Q3 2006.  Were it not for some unfortunate contract terms for their copper by-product, earnings would have come in far better at $0.20 per share.  Analysts were looking for a monster quarter at $0.25 per share, so shares are down nearly 10% on the news, but a closer look suggests that Yamana could be an attractive buy here.  Year over year, Yamana enjoyed a 1,216% increase in earnings from mine operations, thanks primarily to the start-up of Yamana’s #1 cash cow, the Chapada mine in Brazil.

 

Conspicuously absent from Yamana’s balance sheet is an ounce of debt!  They managed to acquire two gold companies last quarter without going into debt, with only reasonable levels of share dilution, and they’re still sitting on $67 million in the bank.  That stash appears to be growing as well, with a 50% jump in cash from operations recorded over the previous quarter (Q2’07!).  The company is targeting $2 billion in free cash flow by the end of 2010.

 

The cost a company incurs to produce each ounce of gold is a matter of grave concern within the industry, and with rising energy costs and scarcity of equipment and experienced labor, gold companies have been feeling the pinch despite the meteoric rise in gold prices.  When judged by this metric, Yamana begins to look like the gold company with a silver lining.  Thanks to its copper reserves of 2.3 billion pounds, and over 6 million ounces of silver acquired from the Meridian properties, Yamana is poised to remain an industry leader in terms of cash costs for production.  Their cash cost per ounce of gold declined from $337 in Q3 2006 to -$339 for the current quarter!  Yes, that’s a minus sign!  Yamana’s press release asserts that those negative cash costs are sustainable, and with the price of silver expected to rise in lock-step with gold, that sounds like a reasonable claim to this fool.

 

Yamana’s low cash costs deliver a competitive advantage over its peers, but has the market rewarded Yamana for its accomplishments?  On November 13, 2007, Yamana traded at a Price to Cash Flow ratio of 12.6 for 2007, compared to an average of 23.9 for its peer group (names like Agnico-Eagle, IAMGold, Kinross, etc.).  Price to earnings multiples were even more compelling, with Yamana trading at 16.5 times its estimated 2007 earnings, while its peer group trades at an average multiple of 39.7. 

 

With its buying spree completed, Yamana Gold is now turning its focus to organic growth from existing properties through 2012, with a projected increase in gold production from 1 million ounces in 2007 to a sustainable 2.2 million ounces per year by 2012.  In a stable price environment for gold and silver, Yamana appears poised to perform quite well going forward.  If, however, we continue to see precious metals prices rising as they have been (as many analysts are now forecasting), Yamana Gold could just be the bull’s-eye that fools are aiming for.

4 Comments – Post Your Own

#1) On February 16, 2008 at 1:33 PM, LordZ wrote:

Dude gold is so overbought, the earnings to price ratio sucks according to my calculations and what the expectations of earnings will be, big deal that the price of gold is high if you have to overpay to buy into the stock what good is that.

Yeah this might make a good caps play, but in real life there are better places to invest your money.

More than likely the cost of gold will go back down maybe it might drop to half. Imagine what 400 dollar an ounce will do.

Thats still a lot per ounce.

 

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#2) On February 17, 2008 at 2:45 PM, crimfunk (73.25) wrote:

I'm also in the oversold camp, after the last December run I closed long positions in ABX, NEM, and AUY.  The dollar looks like it might form a bottom s/t.  I still like the metals long term but I'll just trade in and out of them.

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#3) On February 18, 2008 at 4:16 PM, XMFSinchiruna (27.56) wrote:

With all due respect, LordZ, on what evidence are you basing your assessment that gold is 'overbought'?  Have you seen any technical indicators on the gold chart to indicate that the massive bull run in place since 2001?  Have you seen any macro data to indicate fundamental strength behind the US Dollar?  Have industry analysts that you read been forecasting a declining price of gold?  Bull markets don't reverse themselves just because.... there must be a reason for a reversal.  Tell me what will precipitate a reversal, and perhaps then we have something to debate in earnest.

 Also, I would make the claim that a 'good caps play' is no different from a great investment within a real portfolio.  My CAPS portfolio is substantially similar to my actual portfolio. 

 Gold will double from here before it ever gets back to $400... IF it ever gets back there.  I have loads of evidence to support this hypothesis, which I would be happy to discuss.  So let's keep the dialogue going.

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#4) On February 18, 2008 at 4:40 PM, XMFSinchiruna (27.56) wrote:

Out of curiosity, LordZ, I took a look at your CAPS profile. First of all, welcome to the CAPS community.  You've made some great picks early on, and I'm sure you'll do very well as time goes on.

 What struck me as strange, however, given your comments about gold being likely to drop by half back to the $400s, is that you have selected the following gold and silver companies as outperforms for your CAPS portfolio:  GLD,AEM,HL,NG,KGC,MFN,CDE,LIHR,SA,SSRI,FCX,GSS,AAUK,GFI,AUY, ABX, and others.

So you'll forgive me if I can't quite make out where you stand on the subject.

 

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