Yamana Gold Should Shine Bright Once Again as Production Ramps Up
After struggling for about two years, I think it is time for gold mining stocks to be accumulated at current levels. Even George Soros got back into them a few months ago. I think that at $1,250 per ounce, there are struggles that will need to be overcome in cost-cutting measures, labor, etc., but if gold comes back to the $1,300 level and above, I think these stocks will shine brightly. I have previously outlined the various reasons why I believe the metals and mining stocks, particularly with gold and silver exposure, are buys. From 2009 to 2012, quantitative easing was pushing gold and silver to the moon.
It all changed in October 2012, and the sector has since been as unattractive as the plague. But is now a good time to enter the gold mining stocks? The short answer is yes, particularly for the long term, as I see gold prices continuing to rise due to inflationary pressures over time. Right now inflation is at bay, and deflation has been a concern. However, it is only a matter of time before it picks up, in my opinion. Those holding gold, silver, and stocks in the sector as insurance against inflation will be rewarded. Among my favorite gold miners is Yamana Gold (NYSE:AUY). The stock has been beaten down. It currently sits at $8.08, having been cut in half as metal prices have plummeted. However, with costs under control and metal prices stabilizing, I think it is time to get back in and do some buying in this name.
Before citing some specific numbers, I want to summarize the company’s properties. The company has precious metal properties and land positions throughout the Americas, including in Brazil, Chile, Argentina, and Mexico. Its portfolio includes seven operating gold mines: Chapada (copper, gold), El Peñón (gold, silver), Jacobina, Gualcamayo, Minera Florida (gold, silver, zinc), Fazenda Brasileiro, and Mercedes (gold, silver), as well as a 12.5 percent indirect interest in the Alumbrera mine (copper, gold, molybdenum). It also has various development-stage projects and exploration properties in Brazil, Chile, Argentina, and Mexico. That said, let’s delve into why this company is turning around and it’s a buy.
I mentioned that costs are under control. This is because in the most recent quarter, both production and costs were within budget expectations. I think a huge reason to buy is that production is expected to accelerate quarter-over-quarter, with the biggest increases expected at Chapada, El Penon, Mercedes, and Jacobina. Gualcamayo production increased 10 percent over fourth-quarter 2013 and 28 percent over first-quarter 2013 with the contribution from the Lower West and Amelia Ines. Further, April 2014 production was a record of approximately 20,000 ounces. Pilar production increased 13 percent over fourth-quarter 2013 as the ramp-up accelerated.
Total production for the first four months was approximately 380,000 gold equivalent ounces (GEO). Looking beyond, second-quarter average monthly production is expected to be 16 percent higher than the average monthly production in the first quarter, with costs being stagnant or declining. April production at Jacobina was 6,000 ounces, as grade quality continued to increase and is expected to increase to approximately 2 grams per ton by the fourth quarter. I should also point out that the updated Cerro Moro feasibility study reduces initial capital expenditure to $126 million, and once complete, the project is expected to create significant value and provide robust returns.
Overall, Yamana delivered on the financial end as well, but the year-over-year comparison is quite harrowing. Revenues were $353.9 million in the first quarter, compared with $534.9 million in the first quarter of 2013. Mine operating earnings were $33.1 million, compared with $208 million in the first quarter of 2013. Lower revenues and mine operating earnings were due to lower metal prices and to lower volume of gold and copper sales. Lower metal prices accounted for 58 percent of the variance in revenues.
It saw production of 271,908 GEO and 27.6 million pounds of copper. It had byproduct cash costs of $450 per GEO on a byproduct basis and $640 per GEO on a co-product basis, while all-in sustaining cash costs were $975 per GEO on a co-product basis and $820 per GEO on a byproduct basis. Adjusted earnings from continuing operations came in at $12.1 million, or 2 cents per share. But all things considered, Yamana had net loss of $28.7 million (4 cents per share). However, cash flows before changes in non-cash working capital were $93.6million. Cash flows after changes in non-cash working capital were a healthy $39 million.
Peter Marrone, chairman and CEO, said in a press release: “In the first quarter, we delivered production in line with our budget at costs consistent with the lower levels established last year. Subsequently, for the month of April we delivered a significant production increase which is a trend we expect to continue throughout the second quarter and balance of the year, positioning us well for our production this year. We also expect to balance production growth with cost containment and margin preservation. Expansionary capital expenditures were down significantly compared to first quarter last year and with the second quarter expected to be the last period of the current phase of expansionary capital spending, we expect our cash balance to increase in coming quarters. The combination of increasing production at lower costs, and the continued focus on balancing top and bottom line growth is expected to result in quarterly cash flow returning to the baseline level we established last year.”
I think the company is a strong one. The stock has sold off in fairness. With gold dropping $600 per ounce, silver being cut by more than 60 percent, and copper just coming back from multiyear lows, the pressure is on. But the company has cut its costs significantly and is ramping up production. There may be a few more quarters of pain ahead, but I think it is a good time to start accumulating a position.
Disclosure: Christopher F. Davis is long Yamana Gold. He has a buy rating on the stock and a $12.50 price target.