Stock selection in the gold mining sector can be difficult. For reasons why I am generally bullish on the precious metals, please review prior articles here and here. The purpose of this article is to highlight some of the key metrics of Yamana Gold (NYSE:AUY) relative to its major competitors, provide updated production information and highlight some operational risk.
The following table can help point investors in the direction of stocks in the sector to consider. Three of the most important metrics for gold companies are cash cost per ounce of production, debt to equity ratio and current dividend yield. Table 1 shows that the lowest cost gold producer is AUY, followed by Goldcorp (GG). The company with the lowest debt to equity at 1.6% but a cash cost per ounce that is 2.5 times as high as AUY is Eldorado Gold (EGO). The next lowest company displaying superb debt management is again Yamana Gold. When it comes to yield, the best company is Newmont (NYSE:NEM) followed by Barrick Gold (NYSE:ABX). GG and AUY pay a slightly lower dividend, both yielding about 1.6% annually, however, their debt to equity and cash costs are very low. AUY also has one other consideration, dividend growth. Last year, AUY increased the dividend 18% to 6.5 cents per share, continuing a trend of annual dividend increases. AUY has exceeded the dividend growth in the last three years of its competitors. In fact, AUY has increased its dividend 550% in the last three years. AUY is financially stable, and thus the dividend is sustainable. The balance sheet of the company as of Q3 2012 shows the company currently has over $1.15 billion in available funds, including a cash balance of $400.4 million. All things considered, we see that AUY stacks up mighty well against its competition.
Table 1*. Major Gold Company 2012 Cash Cost Per Ounce of Gold Produced, Debt to Equity Ratio and Dividend Yield as of January 1, 2013
Cash Cost Per Ounce Gold ($)
Debt to Equity (%)
AuRico Gold (AUQ)
New Gold (NGD)
*Source: Yahoo Finance.
While the table above references cash costs for gold produced as AUY is principally a gold producer, it is important to note that AUY also engages in excavating other precious metals such as a significant amount of silver, as well as copper, molybdenum and zinc. The company has operations throughout the western hemisphere but mainly in Mexico, Brazil, Argentina, and Chile. AUY's property portfolio includes seven operating gold mines in total, including the Chapada mine, the Jacobina mining complex, and the Fazenda Brasileiro mine in Brazil. In Chile, it operates the El Peñón mine and the Minera Florida mine. In Mexico, AUY operates the Mercedes mine. In Argentina, the primary project is at the Gualcamayo mine. AUY also has a 12.5% indirect interest in the Alumbrera copper/gold/molybdenum mine in Argentina. Finally, the company holds interests in various advanced and near development stage projects and exploration properties in Brazil, Chile, and Argentina.
These properties are not without risks. Mining in some of these jurisdictions exposes it to the socioeconomic conditions as well as the laws governing the mining industry in foreign countries. Inherent risks with conducting foreign operations include, but are not limited to, high rates of inflation; military repression; war or civil war; social and labor unrest; and organized crime and hostage taking, which cannot be timely predicted and could have a material adverse effect on the company's operations and profitability. The governments in those countries are currently generally supportive of the mining industry, but changes in government laws and regulations including taxation, royalties, the repatriation of profits, restrictions on production, export controls, changes in taxation policies, environmental and ecological compliance, expropriation of property, and shifts in the political stability of the country could adversely affect the company's exploration, development, and production initiatives in these countries.
Although AUY does operate in less stable jurisdictions than some other higher cost competitors, it actually just broadened its 2014 gold production outlook. This news was well received by investors as the stock got a small pop after this announcement. However, 2013 guidance was revised lower very slightly, which muted any breakout the stock could have. AUY announced that for fiscal 2013, it expects production to be slightly less that its original estimate of 1.48 to 1.66 million ounce. AUY is now seeing production come in the range of 1.44 to 1.60 million ounces. For fiscal 2014, it expects production to increase by at least 33% from fiscal 2012 levels to a range of 1.60 - 1.77 million ounces. Planned production beginning in fiscal 2014 and continuing into fiscal 2015 is now targeted at a sustainable level of 1.75 million ounces per year.
Analysts continue to be very bullish on the stock. AUY recently had its price target increased from $21.00 to $24.00 by analysts at RBC Capital, who have an outperform rating on the stock. Further last quarter there were a series of opinions in the analyst community that were positive on the stock. Scotia Capital upgraded the stock to an outperform rating in a report issued on October 18, 2012. Analysts at Barclays Capital initiated coverage on AUY in a research note to investors on October 16, 2012 with an overweight rating and a $25.00 price target on the stock. Morgan Stanley (NYSE:MS) initiated coverage on AUY on October 10, 2012. They too have an overweight rating and a $25.00 price target. Dundee Securities also raised their price target on shares of AUY from $17.00 to $22.00 in a research note to investors on October 3, 2012. Analysts currently have a mean $23.01 price target consensus on the stock with a mean recommendation of "buy."
At the time of this writing, AUY trades at a near three-month low of $16.24 a share on average daily volume of 5.5 million. AUY has a 52-week range of $12.68-$20.59. While trading at a premium relative to larger competitors GG and ABX on its current P/E multiple of 34.0, the forward P/E is an attractive 11.2. The five-year PEG ratio is at 1.7, but it does not reflect changes in precious metal prices in the next five years stemming from inflation and currency debasement resulting from central bank action, which could directly benefit revenue. I believe that AUY has great potential due to its debt management, ability to maintain and raise the dividend, as well as clear growth plans moving forward. With its incredibly low cash cost per ounce of gold produced, I believe it will stay on budget and continue to grow steadily, despite any political risks it may face. I'll be looking for another dividend increase in 2013 even though it just increased the dividend 18% to 6.5 cents per share. The price of gold miners in general have been depressed for some time, and I think it is only a matter of time before there is a rotation into this sector by investors looking for value. Noted market bear Marc Faber recently stated that as overbought as the market has been, this is one sector where he feels there is value and would be looking make an investment. Given AUY's clear strength relative to its peers, I believe this stock deserves consideration.