Yamana Gold Gets it Right - This Time

Includes: AEM, AUY
by: Hyperinflation

Quarter after Quarter Yamana Gold (NYSE:AUY) has failed to meet their operating objectives, which has not gone unnoticed by the market. Despite the share appreciation Yamana has seen over the last month or so, the degree to which this has occurred has been rather unspectacular relative to both the gold price and its peers, such as Agnico-Eagle (NYSE:AEM).

This of course comes on the back of mediocre quarterly results in the second quarter, mostly due to production ramp up and forward guidance falling short of the market consensus. This has to do with two new mines, both of which have recently come online in a high class mine El Penon in Chile and Gualcamayo in Argentina. Due to the low expectations regarding El Penon in the short term, I think Yamana surprised the market by increasing quarter over quarter output 18% in addition to mining higher metal grades. The latter, Gualcamayo, achieved commercial production in July (although technically some production was realized in Q2) , grew production 61% from preliminary production in Q2.

This news came not too long after Yamana held an investors meeting to update investors with current and future operations, such as Mercedes. Yamana produced nearly 315,000 oz in the third quarter, helped by 108,000 from El Penon and over 39,000 oz from Gualcamayo. When I first read the press release, I thought Yamana would mess this quarter up one way or another but after reading that cash costs came in somewhere between $350-$360 oz. I realized they actually did it.

I would say the market would price a great quarter in earlier but companies with a record of disappointing , usually don't have this pleasure until the day of reckoning (official earnings announcement). It is also worth noting that Gualacamayo not only had a great quarter after commencing production, but also managed to have cash costs $100 below the companies initial projections.

In a previous article for winners during earnings season, Yamana was my top pick for mid-tier producer. I expect numbers to handily beat the previous consensus estimates as Yamana decided to finally execute their strategy during a quarter highlighted by the highest average gold price to date. So expect to see a reaction of renewed investor interest in the once loved by recently tainted company due to the combination of solid production growth, lower than expected cash costs and record gold prices.

Disclosure: Long AUY