I have been behind Yamana Gold (NYSE:AUY) and several of its competitors since the middle of summer 2012. The reasons are two-fold. First, I am bullish long-term on precious metal prices. For reasons why I am generally bullish on the precious metals, please review prior articles here and here. Secondly, I believe AUY is the strongest of the gold miners for the long-term, given its rate of growth, its increasing and sustainable dividend, its recently depressed share price as the sector has sold off, and because it is the lowest cost gold producer of all the major miners. For more on why AUY may be an excellent long-term buy, see this detailed piece. The purpose of this article is to review some of the strengths of Yamana relative to its major competitors and to provide an update of reserves at one of the company's properties that will be coming into production in the future.
Brief Review of Key Metrics Relative to Major Competitors
Some important considerations when comparing gold companies are cash cost per ounce of production, debt-to-equity ratio and current dividend yield. Table 1 below shows that the lowest cost gold producer is AUY at a paltry $201 per ounce produced, followed by the behemoth of the gold mining sector, Goldcorp (GG). When other companies are spending $400, $500 or almost $700 an ounce, its not hard to see the advantage AUY has in regards to sustained profitability. The company with the lowest debt to equity at 1.6% is the smaller Eldorado Gold (EGO). Yamana ranks second in the debt-to-equity metric. When it comes to annual yield, the best company is Newmont (NEM) followed by Barrick Gold (ABX), paying 3.3% and 2.5% respectively. 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. While I hold GG in high regard, AUY also has one other consideration, which leads me to prefer it over GG, 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 $400.4 million.
Table 1*. Major Gold Company 2012 Cash Cost Per Ounce of Gold Produced, Debt-to-Equity Ratio and Dividend Yield as of January 1, 2013
Cash Cost Per Ounce Gold ($)
Debt to Equity (%)
AuRico Gold (AUQ)
New Gold (NGD)
*Source: Yahoo Finance.
Increased Production Guidance
Although AUY operates low cost mining operations, is conservative in its spending and is growing its dividend, one important issue is the amount of metals being produced. Unlike many of its competitors, AUY actually just broadened its 2014 gold production outlook. However, 2013 guidance was revised slightly to the downside, 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.
New Reserve Resource Discovery Helps Ensure Future Growth
Earlier this week, on February 13, 2013, Yamana announced a very positive update on its Cerro Moro Project in Santa Cruz Argentina. For those unfamiliar with the company's holdings, Cerro Moro is a development stage project that was acquired in summer of 2012 and is located in the Deseado area of the Santa Cruz Province, Argentina. As part of the update, investors were given more reasons to be bullish on the long-term prospects of the company. First, the company announced initial indicated resources of 1.95 million gold equivalent ounces, which is a significant increase of 44% from the previous estimate before AUY acquired the project. These resources contain 4.16 million tons of ore with an average grade of 14.6 grams gold per ton. Further, there is an inferred mineral resource of 490,000 gold equivalent ounces contained in 3.60 million tons of ore with an average grade of 4.2 grams of gold per ton. Secondly, AUY informed investors that it has begun work on development of the site and initiating a feasibility study. AUY ultimately sees a planned construction decision expected in 2014 and a potential start-up of production in 2016.
AUY CEO and chairman Peter Marrone stated AUY's "objective is to produce high quality ounces with comparatively low costs to achieve growth in both production per share and cash flow per share. With our initial mineral resource at Cerro Moro, along with the initial operation plan and exploration potential, we are confident that this asset will contribute positively to that objective." He added that AUY is "committed to deliver superior value to our shareholders and Cerro Moro will be a significant contributor to that."
At the time of this writing, AUY trades at $15.70. This is a three-month low presenting an excellent opportunity to add to an existing position or to initiate a new position. 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 33.0, the forward P/E is an attractive 10.9. The five-year PEG ratio is at 1.6, 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 expect another dividend increase in 2013. Given AUY's strength relative to its peers in this undervalued sector, its depressed share price, combined with its recent find in Cerro Moro, I believe AUY is now an even stronger buy than it was just a month ago.
Disclosure: I am long ABX, GG, AUY, EGO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long many gold and silver stocks given their depressed share prices. I also own physical gold and silver. I believe AUY is the strongest of the gold miners and have a standing order to double my position at $15.00 per share. My investment is long-term (at least 5 years).