In the gold mining sector Yamana Gold Incorporated (AUY) is a leader and a company worth considering for your investment portfolio. While there are many different factors to look at and consider when investing, in the article below I will look at the debt side of the company. I will analyze Yamana Gold's total debt, total liabilities, debt ratios and WACC. From this analysis we should get an idea if the company is highly leveraged, how much it is paying for its debt, what it's paying in taxes and how much to expect in return for investing in this company over the long-term.
Gaining knowledge about a company's debt and liabilities is a key component in understanding the risk of a company. In 2008 and 2009 we were able to see some of the repercussions that highly leveraged companies with large amounts of debt succumbed to. Taking into account the debt side of a company might not reveal the "pop" on the upside that an investor would like, but it will help ensure that the company is able to keep its capital and use it for growth in the future.
1. Total Debt = Long-Term Debt + Short-Term Debt
Total debt is the sum of long-term debt, which is debt that is due in one year or more, and short-term debt, which is any debt due within one year.
- 2008 - $472 million + $84 million = $556 million
- 2009 - $529 million + $0 million = $529 million
- 2010 - $487 million + $0 million = $487 million
- 2011 - $432 million + $0 million = $432 million
- 2012 TTM - $766 million + $0 billion = $766 million
Yamana Gold's total debt has increased since 2008. In 2008, the company reported a total debt of $556 million. In 2012 TTM (trailing twelve months), the company's total debt increased to $766 million. This indicates a very minimal increase in total debt over the past 4 years. Over the past 5 years, Yamana Gold's total debt has increased by 37.77%.
2. Total Liabilities
Liabilities are a company's legal debts or obligations that arise during the course of business operations, so debts are one type of liability, but not all liabilities. Total liabilities is the combination of long-term liabilities, which are the liabilities that are due in one year or more, and short-term or current liabilities, which are any liabilities due within one year.
- 2008 - $2.827 billion
- 2009 - $2.959 billion
- 2010 - $3.055 billion
- 2011 - $3.325 billion
- 2012 TTM - $3.814 billion
Yamana Gold's liabilities have also increased over the past 5 years. In 2008, the company reported liabilities at $2.827 billion; in 2012 TTM, the company reported liabilities at $3.814 billion. Over the past 5 years, Yamana Gold's liabilities have increased by 34.91%.
In analyzing Yamana Gold's total debt and liabilities, we can see that the company currently has a total debt of $766 million and liabilities at $3.814 billion. When looking at the above numbers we can see how the recent acquisition of Extorre Gold Mines Limited (XG) for $450.9 million added to the company's total debt and liabilities. Yamana Gold's total debt has increased by 37.77% while total liabilities have increased by 34.91%. As the company's amount of debt and amount of liabilities have increased over the past 5 years, the next step will reveal if the company has the ability to pay them.
3. Total Debt to Total Assets Ratio = Total Debt / Total Assets
This is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. It is calculated by adding short-term and long-term debt and then dividing by the company's total assets.
A debt ratio of greater than 1 indicates that a company has more total debt than assets; meanwhile, a debt ratio of less than 1 indicates that a company has more assets than total debt. Used along with other measures of financial health, the total debt to total assets ratio can help investors determine a company's level of risk.
- 2010 - $487 million / $10.299 billion = 0.05
- 2011 - $432 million / $10.770 billion = 0.04
- 2012 TTM - $766 million / $11.496 billion = 0.07
Yamana Gold's total debt to total assets ratio has increased over the past three years. As the total debt to total assets ratio have increased, this indicates that since 2010, the company has added more total debt than asset value. As the number is currently well below 1, this indicates that the company has more assets than total debt. Because this number is extremely low, this metric indicates very low financial risk to the company.
4. Debt ratio = Total Liabilities / Total Assets
Total liabilities divided by total assets. The debt ratio shows the proportion of a company's assets that is financed through debt. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt. Companies with high debt/asset ratios are said to be "highly leveraged." A company with a high-debt ratio or that is "highly leveraged" could be in danger if creditors start to demand repayment of debt.
- 2010 - $3.055 billion / $10.299 billion = 0.30
- 2011 - $3.325 billion / $10.770 billion = 0.31
- 2012 TTM - $3.814 billion / $11.496 billion = 0.33
In looking at Yamana Gold's total liabilities to total assets ratio over the past three years, we can see that this ratio has also increased. The ratio has increased from 0.30 in 2010 to 0.33 in 2012 TTM. As the 2012 TTM numbers are below the 0.50 mark, this indicates that Yamana has not financed most of the company's assets through debt. As the number has increased very slightly, so is the risk to the company.
5. Debt-to-Equity Ratio = Total Liabilities / Shareholders' Equity
The debt-to-equity ratio is another leverage ratio that compares a company's total liabilities with its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligators have committed to the company versus what the shareholders have committed.
A high debt-to-equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in the company reporting volatile earnings. In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations, and therefore is considered a riskier investment.
- 2010 - $3.055 billion / $7.244 billion = 0.42
- 2011 - $3.325 billion / $7.445 billion = 0.45
- 2012 TTM - $3.814 billion / $7.682 billion = 0.50
Compared to 2010, Yamana Gold's debt-to-equity ratio has increased. The ratio has increased from 0.42 to 0.50. As the ratio is currently below 1, this indicates that shareholders have invested more than suppliers, lenders, creditors and obligators. 0.50 indicates a moderately low amount of risk for the company. As the ratio is below 1 and considered moderately low, so is the risk for the company.
6. Capitalization Ratio = LT Debt / LT Debt + Shareholders' Equity
(LT Debt = Long-Term Debt)
The capitalization ratio tells the investors the extent to which the company is using its equity to support operations and growth. This ratio helps in the assessment of risk. Companies with a high capitalization ratio are considered to be risky because they are at a risk of insolvency if they fail to repay their debt on time. Companies with a high capitalization ratio may also find it difficult to get more loans in the future.
- 2010 - $487 million / $7.731 billion = 0.06
- 2011 - $432 million / $7.877 billion = 0.05
- 2012 TTM - $766 million / $8.448 billion = 0.09
Over the past three years, Yamana Gold's capitalization ratio has increased from 0.06 to 0.09. This implies that the company has less equity compared with its long-term debt. As this is the case, the company has had less equity to support its operations and add growth through its equity. As the ratio is increasing, financially this implies a slight increase of risk to the company but as the ratio is only 0.09 this implies extremely low financial risk.
7. Cash Flow to Total Debt Ratio = Operating Cash Flow / Total Debt
This coverage ratio compares a company's operating cash flow with its total debt. This ratio provides an indication of a company's ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company's ability to carry its total debt. The larger the ratio, the better a company can weather rough economic conditions.
- 2010 - $615 million / $487 million = 1.26
- 2011 - $1.226 billion / $432 million = 2.83
- 2012 TTM - $1.129 billion / $766 million = 1.47
Over the past three years, the cash flow to total debt ratio has increased. The ratio has increased from 1.26 in 2010 to 1.47 in 2012 TTM. As the ratio is above 1, this implies that the company has the ability to cover its total debt with its yearly cash flow from operations.
Based on the five debt ratios listed above, we can see that Yamana Gold has very little financial risk based on its debt and liabilities. Even though there has been an increase in the ratios thus indicating an increase of risk to the company from a debt point of view, the ratios are very low and show no signs of creating financial distress to the company. As the price of gold looks to be strong in 2013, the company should be able to make money on its assets and not be burdened by massive amounts of debt and debt obligations. The next step will reveal how much the company will pay for the debt incurred.
Cost of Debt
The cost of debt is the effective rate that a company pays on its total debt.
As a company acquires debt through various bonds, loans and other forms of debt, the cost of debt is a useful metric. It gives an idea as to the overall rate being paid by the company to use debt financing.
This measure is also useful because it gives investors an idea as to the riskiness of the company compared with others. The higher the cost of debt, the higher the risk.
8. Cost of debt (before tax) = Corporate Bond rate of company's bond rating.
- Senior debt notes rate of 5.53% with a maturity of December 21, 2014. = 5.53%
- Current cost of Debt as of January February 11th 2013 = 5.53%
9. Current tax rate (Income Tax Total / Income Before Tax)
- 2008 - $20 million / $429 million = 4.66%
- 2009 - $137 million / $317 million = 43.21%
- 2010 - $161 million / $552 million = 29.16%
- 2011 - $270 million / $818 million = 33.01%
- 2012 TTM - $343 million / $706 million = 48.58%
2009 - 2012 TTM 5-year average = 38.49%
From 2009 - 2012 TTM Yamana Gold has averaged tax rate of 38.49%.
10. Cost of Debt (After Tax) = (Cost of Debt Before Tax) (1 - Tax Rate)
The effective rate that a company pays on its current debt after tax.
- .0553 x (1 - .3849) = Cost of debt after tax
The cost of debt after tax for Yamana Gold is 3.40%
Cost of Equity or R Equity = Risk Free Rate + Beta Equity (Average Market Return - Risk Free Rate)
The cost of equity is the return a firm theoretically pays to its equity investors (for example, shareholders) to compensate for the risk they undertake by investing in their company.
- Risk Free Rate = U.S. 10-year bond = 1.95% (Bloomberg)
- Average Market Return 1950 - 2012 = 7%
- Beta = (Google Finance) Yamana Gold's Beta = 0.71
Risk Free Rate + Beta Equity (Average Market Return - Risk Free Rate)
- 1.95 + 0.71 (7-1.95)
- 1.95 + 0.71 x 5.05
- 1.95 + 3.59 = 5.54%
Currently, Yamana Gold has a Cost of Equity or R Equity of 5.54%, so investors should expect to get a return of 5.54% per-year average over the long term on their investment to compensate for the risk they undertake by investing in this company.
(Please note that this is the CAPM approach to finding the cost of equity. Inherently, there are some flaws with this approach and that the numbers are very "general." This approach is based off of the S&P average return from 1950 - 2012 at 7%, the U.S. 10-year bond for the risk-free rate which is susceptible to daily change and Google finance beta.)
Weighted Average Cost of Capital or WACC
The WACC calculation is a calculation of a company's cost of capital in which each category of capital is equally weighted. All capital sources such as common stock, preferred stock, bonds and all other long-term debt are included in this calculation.
As the WACC of a firm increases, and the beta and rate of return on equity increases, this is an indicator of a decrease in valuation and a higher risk.
By taking the weighted average, we can see how much interest the company has to pay for every dollar it finances.
For this calculation, you will need to know the following listed below:
Tax Rate = 38.49% (Yamana Gold's four-year average Tax Rate)
Cost of Debt (before tax) or R debt = 5.53%
Cost of Equity or R equity = 5.54%
Debt (Total Liabilities) for 2012 TTM or D = $3.814 billion
Stock Price = $16.02 (February 11th, 2013)
Outstanding Shares = 751.46 million
Equity = Stock price x Outstanding Shares or E = $12.038 billion
Debt + Equity or D+E = $15.852 billion
WACC = R = (1 - Tax Rate) x R debt (D/D+E) + R equity (E/D+E)
(1 - Tax Rate) x R debt (D/D+E) + R equity (E/D+E)
(1 - .3849) x .0553 x ($3.814/$15.852) + .0554 ($12.038/$15.852)
.6151 x .0553 x .2406 + .0554 x .7594
.0082 + .0421
Based on the calculations above, we can conclude that Yamana pays 5.03% on every dollar that it finances, or 5.03 cents on every dollar. From this calculation, we understand that on every dollar the company spends on an investment, the company must make $.0503 plus the cost of the investment for the investment to be feasible for the company.
Debt Side Summary
All indications above reveal that Yamana Gold is a financially sound company on the debt side. Even though Yamana Gold purchased Extorre Gold Mines Limited in August for $450.9 million my analysis indicates that the company could afford the transaction without causing financial stress to the company. Because Yamana purchased Extorre Gold Mines, the analysis indicates a slight increase of risk to the shareholder from a debt point of view. Having stated this, the risk increase is very small and the overall risk to the shareholder from the debt side is quite low. The CAPM supports this statement by revealing that the investor needs 5.54% year-over-year over the long term to get good value on their money.
Cerro Moro project in Argentina
Even though the purchase of Extorre Gold Mines Limited in August 2012 added debt to the company's balance sheet, the project looks to be able to add significant earnings and production growth in the future. With the purchase of Extorre Gold Mines Limited came the Cerro Moro mine project in Argentina. Yamana Gold is expecting this mine project to add approximately 200,000 ounces of gold equivalent per year beginning in 2015 when they estimate production to begin. Yamana chairman and CEO Peter Marrone stated, "This would represent an increase in production of more than 10 per cent and additional growth in cash flow and earnings."
Currently, many analysts have a positive outlook for Yamana Gold. Over the next five years analysts at MSN Money are estimating an average of 11.80% growth in earnings year over year, which is well above the industry average of 8.40%. On February 4th, analysts at Barclays gave Goldcorp a rating of "Overweight" with a target price of $22.00. A $22.00 price target signifies an upside of 37.32% from this point.
The above analysis reveals that Yamana Gold Incorporated is a very financially sound company on the debt side with upside moving forward. The analysis indicates that Yamana Gold did not overextend itself with the purchase of Extorre Gold Mines Limited and has set itself up nicely for growth in the future. Currently, analysts have a $22.00 price target on this stock. As the chart below indicates, this is excellent opportunity to invest in a financially sound gold mining company with future prospects and good upside potential.
Chart sourced by (finviz)