Value Line has initiated coverage of Yamana Gold (AUY) in its flagship product, The Value Line Investment Survey. The company is a Canada-based gold producer engaged in gold mining and related activities, such as exploration, extraction, processing, and reclamation. It has positions across the Americas, including in Brazil, Argentina, Chile, Mexico, and most recently, Canada itself. The company has operated under the name Yamana Gold since 2003, and its shares trade on the New York and Toronto stock exchanges under the ticker symbols AUY and YRI, respectively.
At the end of 2013, its operations consisted of seven producing mines, namely Chapada, El Peñón, Mercedes, Gualcamayo, Jacobina, Minera Florida, and Fazenda Brasileiro, with a number of development projects in the works. Yamana also maintains an equity-method investment in the Alumbrera mine in Argentina. In June 2014, the company, together with Agnico Eagle Mines Limited, acquired all outstanding shares of mining company Osisko, thereby gaining a 50% stake in the Canadian Malartic mine. The Canadian Malarctic, located in Quebec, is Canada's largest gold mine and is expected to produce more than 600,000 ounces of gold per year over the next 14 years.
In 2013, the company’s production reached 1.2 million gold equivalent ounces (GEOs). Its longer-term objective is to achieve sustainable production of between 1.5 million and 1.7 million GEOs, primarily through the expansion of its operating mines, as well as the development of new mines. Reaching this goal will likely also be aided by the advancement of its exploration properties and through targeting additional opportunities, mainly in the Americas.
Up until recently, El Peñón was Yamana’s most productive mine, with 467,523 GEOs on the board for 2013. El Peñón is a high grade underground gold-silver mine located in Chile. It is expected to yield about 448,000 GEOs in 2014. However, the Canadian Malartic mine should also be a strong contributor this year. Indeed, Canadian Malartic is expected to produce at least 300,000 GEOs annually for Yamana’s account, and should help drive a mid-teens advance in total gold-equivalent production in 2014, to about 1.475 million GEOs.
Although production levels have remained solid, Yamana was challenged in 2013 by a sharp drop in gold prices. This forced Yamana to take a write-down on its mining properties to the tune of $672.0 million ($563.9 million, after tax). Even without the impact of this charge, the bottom-line declined for the year, on a double-digit drop in revenues. For 2014, revenues will likely rebound considerably, aided by the addition of Canadian Malartic. Earnings ought to show some improvement, as well, although a meaningful bounce back is not likely to occur until next year. The company has seemingly increased focus on taking a balanced approach to production and costs, which augurs well for longer-term results.
The balance sheet appears to be in good shape. As of March 31, 2014, Yamana had over $200 million in cash and a manageable amount of debt (16% of capital). This ought to allow it a bit of room to breathe as it attempts to improve margins, while investing in its development projects. It currently has three mines in the commissioning phase, which ought to be a focal point for its cash going forward.
As for the stock, it has rebounded quite a bit over the past few months, following a steady decline through much of 2013. That said, Yamana is still trading well below historical price levels. And despite solid 3- to 5-year prospects, long-term capital gains potential appears limited, as it is unlikely this equity will return to the highs achieved in 2012 anytime soon. All told, even with a favorable position in the current gold-price environment, investment appeal seems lackluster at this juncture.
As always, we advise interested subscribers to consult our full-page review of Yamana Gold in the current issue of The Value Line Investment Survey, as well as any other supplementary reports that may follow detailing newsworthy items regarding the gold producer.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.