Yamana gold (NYSE:AUY), which I consider to be a best of breed investment in the gold mining sector, has been under heavy selling pressure lately, along with its competitors after the recent drop in gold and silver prices. The stock is down about 20% in three months, while gold and silver prices are down about 10%. For more on why gold and silver have fallen and what to expect in the coming weeks, see this recent explanation.
As a long-term investor, the sell-off in AUY has offered the opportunity to expand my long position. As I have stated in prior articles, I generally like to buy in a pyramid structure and this recent weakness has allowed that opportunity. However, an important short-term crossroads for the direction of the stock is approaching for AUY, as it is set to release its quarterly earnings report after the close tomorrow (Feb. 20). The purpose of this article is to briefly review the keys to success, preview the earnings report and discuss what to look for.
The key to success for the miners is having a sustainable low cost business structure. AUY is a conservative company when it comes to is debt and investments and manages to keep its labor costs quite low. In comparison, most gold mining companies have seen substantial cost pressures which have affected the way these companies operate, and has impacted their revenues significantly. As stated previously, AUY is the lowest cost producer of all the major gold miners, boasting an average cost of $201 per ounce produced.
Furthermore, the company has been taking the necessary steps to expand its future profit potential as earlier this month on Feb. 13, 2013, Yamana announced a very positive update on its Cerro Moro Project in Santa Cruz Argentina. 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. 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. However, the political climate in Argentina has been somewhat risky for miners, and given that a significant portion of AUY's revenues are generated from Argentina, we must listen closely to the conference call and scour the quarterly report for any potential long-term implications of doing business in Argentina.
So what can we expect for the earnings? Well, analysts are not expecting much compared to the year-ago quarter. In fact, consensus earnings per share estimates have been reduced by $0.03 for the quarter and have been slashed by $0.25 for 2013. The numbers to beat on this earnings report are $665 million on the top line in revenues as well as $0.25 on the bottom line in earnings (the low estimate is $0.22 and the high estimate is $0.29). Thus, compared to the year ago quarter analysts, on average, are expecting no change in earnings, but an 18% change in revenues.
Other numbers to focus on are the ounces of gold and silver produced, the average cost of ounce sold, as well as the cost to produce them and finally the companies cash flows. As the mining stocks have been under pressure for months, AUY is set to rebound if it can produce a successful quarter. I am most concerned with the average price of gold and silver. The quarter began with six month highs for gold and silver prices in the beginning of October. However, the prices steadily declined for the quarter. Thus, this average sale price will depend on when the bulk of their production and sales occurred. I am not concerned with their operating costs as AUY has consistently kept costs low. Finally, depending on the numbers, I will also be listening closely to the conference call for any hints at a dividend boost in 2013, as the company has raised the dividend every year for four years, up 550% over this time.
Disclosure: I am long AUY. 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.