Is Yamana a High-Risk Play?

With shares of Yamana Gold (NYSE:AUY) trading at around $12.39, is AUY an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Yamana needs higher gold prices for higher margins and profits. Therefore, the price of gold is important. We’ll get to that in the Trends section. For now, there are some important points for Yamana. One, it has boosted production via expansion and acquisitions. Two, it always seems to have gold mining projects in the works, which has the potential to lead to increased growth. Three, Yamana is known for its below average production costs. Four, revenue has steadily increased on an annual basis. In addition to that, analysts love the stock: 18 Buy, 0 Hold, 1 Sell.

On the other hand, Yamana has missed earnings expectations for two consecutive quarters, and the miners didn’t hold up well in 2008, most of them dropping between 40 percent and 60 percent. Therefore, resiliency is very questionable.

Now let’s take a look at some comparative numbers. The chart below compares fundamentals for Yamana Gold, Goldcorp (NYSE:GG), and Barrick Gold (NYSE:ABX). Yamana has a market cap of $9.15 billion, Goldcorp has a market cap of $23.92 billion, and Barrick Gold has a market cap of $20.93 billion.

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AUY

GG

ABX

Trailing   P/E

24.37

16.82

N/A

Forward   P/E

10.95

12.63

5.67

Profit   Margin

16.18%

30.14%

-5.98%

ROE

4.81%

7.02%

-3.35%

Operating   Cash Flow

$1.04 Billion

$2.05 Billion

 $5.15 Billion

Dividend   Yield

2.20%

2.10%

4.00%

Short   Position

N/A

N/A

N/A

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Yamana is stronger than the industry average of 0.20.

Debt-To-Equity

Cash

Long-Term Debt

AUY

0.11

$347.84 Million

$860.51 Million

GG

0.10

$2.01 Billion

$2.28 Billion

ABX

0.59

$2.34 Billion

$14.80 Billion

 

T = Technicals Are Weak    

Yamana, as well as the rest of the industry, has grossly underperformed the market over the past year.

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1 Month

Year-To-Date

1 Year

3 Year

AUY

-13.31%

-27.26%

-9.17%

20.50%

GG

-4.51%

-16.93%

-14.90%

-26.90%

ABX

-19.82%

-38.48%

-42.31%

-47.69%

 

At $12.39, Yamana is trading below all its averages.

50-Day   SMA

13.66

100-Day   SMA

15.13

200-Day   SMA

16.43

 

E = Earnings Have Been Inconsistent                   

In regards to growth, earnings can be classified as inconsistent. When it comes to actual numbers, earnings are consistent. In other words, there is a predictable range. Revenue has shown slow yet steady improvements on an annual basis.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

949.36M

N/A

1.69

2.17

2.34

Diluted   EPS ($)

0.62

N/A

0.63

0.74

0.59

 

When we look at the last quarter on a year-over-year basis, we see a decline in revenue and earnings. Revenue and earnings have also declined on a sequential basis.

3/2011

6/2012

9/2012

12/2012

3/2013

Revenue   ($)in   millions

559.74

535.70

611.81

629.50

534.87

Diluted   EPS ($)

0.23

0.06

0.08

0.22

0.14

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Gold is currently trading at 1464.50/oz. It had been as high as 1920/oz. in September of 2011. And it has dipped below 1400/oz. recently. Societe Generale has a year-end price target of 1375/oz. However, there are bullish and bearish gold predictions coming from every angle.

What we do know is that QE has led to some inflation, but not rampant inflation. Many arguments have been made that debt, interest rates, and QE will still lead to rampant inflation. However, it’s only a matter of time before debts are paid off, interest rates increase, and QE ends. Therefore, this argument isn’t forward looking.

As far as the potential collapse of the U.S. dollar, humans have a tendency to wait until their backs are against the wall before fixing a problem they don’t really want to fix. Bernanke is human. In other words, the dollar will become a priority once it becomes a very dangerous situation.

It’s also important to keep in mind that Bernanke is more worried about deflation than inflation. What if Bernanke, due to outside pressures, is forced to make moves that will lead to him losing that battle? This wouldn’t be a good scenario for gold.

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Conclusion

Yamana is a well-run company with steadily increasing revenues, solid margins, and top-tier management. On the other hand, there are considerable downside risks considering industry trends.

All factors considered, Yamana is a WAIT AND SEE.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro. These positions will have no impact on my articles as they are too small to matter. I’d rather make an attempt at quality content.

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