The Canada-based gold miner Yamana Gold (AUY) holds production, exploration, and development assets in Argentina, Brazil, Chile, Colombia, and Mexico. The company has a diversified portfolio of assets providing sustainable gold production supported by a large mineral reserve and resource base. As of the end of 2012, AUY had total proved and probable gold equivalent reserves of 19.3 million ounces and total measured and indicated gold resources of 15.6 million ounces.
AUY has one of the lowest cash costs in the industry and operations in some of the world's most stable mining jurisdictions. Through expansion projects and acquisitions, the company has aggressively boosted its production, increasing its gold equivalent production to 1.2 million ounces in 2012 from 1.0 million ounces in 2010. The Canadian gold miner is targeting an annual production rate of approximately 1.75 million gold equivalent ounces in 2014.
Yamana's strong growth potential and below-average cost structure make it one of the most attractive players in the gold industry. The company has several advanced gold mining projects in the works that should help it achieve above-average production growth over the intermediate term. Yamana offers strong production and free cash flow growth going forward.
No Write-Downs for Yamana
As declining gold prices, underperforming assets, and ill-advised deals are making life difficult for the gold companies, a number of them have announced billions in write-downs over the last 2 years. Barrick Gold (ABX) recently announced that it has recorded $8.7 billion in impairment charges largely driven by significant decreases in the metal prices. Newmont (NEM), Goldcorp (GG), and Kinross Gold (KGC) all posted huge impairment charges linking to the plunging gold prices in 2Q. NEM, GG, and KGC together recorded $6 billion in impairment charges in the second quarter.
However, Yamana concluded that there are no impairment charges pertaining to its mineral interests as at the end of 2Q13. The company is less likely to take significant write-downs at year end due to its use of a $950 per ounce gold price to measure reserves at the end of 2012.
While Others Reduced or Suspended, Yamana Maintained Its Dividend
While ABX cut its dividend by 75% and KGC suspended it, AUY maintained its quarterly dividend of $0.065 per share. Shareholders of record on Monday, September 30th will be given a dividend of $0.065 per share on Friday, October 11th. This represents a $0.26 dividend on an annualized basis and a yield of 2.7%. The ex-dividend date of this dividend is Thursday, September 26th.
The company remains confident it can maintain its dividend policy in the current gold price environment given a reduction in capital and exploration spending in the coming years.
AUY reported 2Q13 adjusted EPS of $0.07, missing consensus estimates of $0.10 by 3 cents. The headline loss of ($0.01) per share was adjusted for several one-timers including non-cash unrealized FX losses on income taxes and impairment of investment in AFS and other assets. The lower than expected revenues due to all three factors -- production, sales volume, and price -- largely resulted in the earnings miss.
AUY produced 296,000 gold equivalent ounces in the quarter at by-product cash costs of $476 per ounce, co-product costs of $577 per ounce, and all-in sustaining costs of $916 per ounce. Lower sales volumes coupled with lower realized gold ($1,385 per ounce) and copper prices of $3.05 per pound resulted in weaker than expected results.
In light of the current weak gold price environment, AUY is trimming low-margin ounces including production at some of the development projects. The company has lowered its expected production to 1.4 to 1.5 million ounces in 2014, from a previous forecast of 1.6 million ounces and 1.55 million ounces in 2015 (from 1.7 million ounces) at $850 per ounce all-in sustaining costs in both years. However, the company continues to target long-term annual production of more than 1.7 million ounces.
Valuations and Financials
Yamana is trading at decent valuations. It has a forward P/E of 14.1, compared to 15.4 of the S&P 500 and 14.4 of S&P/TSX. It has a PEG ratio of 0.6. The company has a price-to-book ratio of 0.9 compared to the industry average of 1.0 and AUY's own 5 year average of 1.3. It has a price-to-sales ratio of 3.3 compared to the historical average of 5.7. Finally AUY has a price-to-cash flow ratio of 6.6 compared to the industry average of 8.1 and company 3 year average of 11.8.
The company has $1.1 billion in available cash and undrawn credit, and $1.06 billion in long-term debt.
Conclusion And Investment Thesis
We have a buy rating on Yamana. While Yamana, like all other gold companies, is operating in challenging times; looking at the long-term picture, this Toronto-based gold miner presents a good investment opportunity. The company offers strong production and free cash flow growth going forward. The company has a well defined portfolio strategy and near-term production growth.
Yamana is among the lowest cash cost producers in the industry. The company has a track record of turning around assets or divesting if the asset no longer fits within its cost structure. The company is planning to lower its already low-cost structure by another $115 million. Most of the growth capital expenditure is also done.
Looking forward, the company is poised to post strong results in 2H13 and 2014 as new mines ramp up. Moreover, unlike its peers, Yamana gold is less likely to take significant write-downs at year end due to its use of a $950 per ounce gold price to measure reserves at the end of 2012. The company also has an excellent exploration track record. It is trading at decent valuations and has an attractive dividend yield of 2.7%. While others in the industry are either reducing or suspending dividend, Yamana remains confident it can maintain its dividend policy in the current gold price environment given a reduction in capital and exploration spending in the coming years.