We hate to agree with the uber-annoying Jim Cramer, but he has picked this one right. Cramer says that Yamana is the cheapest and best gold stock and prefers Yamana over more obvious picks such as Newmont or Goldcorp.
We have long been a fan of Yamana Gold and recently announced that we picked up Jan $12.50 call options on Yamana. Why? Let’s take a deeper dive into Yamana Gold.
Yamana Gold Profile
Yamana is a Canadian gold producer with significant gold production from four operating mines in Brazil, as well as gold and copper-gold development stage properties, exploration properties, and land positions in all three major mineral areas in Brazil. Brazil enjoys political stability, has the largest economy of South America (ranked #10 in the world) and offer a large industrial base.
The country’s geological potential is abundant and relatively under-explored. Additionally, the government permitting process is efficient and expedient since mining is culturally embedded in Brazil. Yamana has also been benefiting from a weak Real in Brazil, although it has been strengthening with the impressive growth of the Brazilian economy.
In addition to the Brazilian properties, Yamana also owns an operating mine in Honduras and significant exploration concessions in Nicaragua.
Yamana is currently only producing gold, but they expect to have copper production by the end of the year. Yamama is completely unhedged and leveraged to gold, but has hedged 50 million lb. of 2007 copper production and 90 million lb. of 2008 copper production respectively.
Yamana Goes Shopping
Yamana acquired RNC in March of 2006, immediately adding 130,000 ounces of gold production to their business via the San Andres gold mine in Honduras.
Next was the acquisition of Desert Sun, which closed in April 2006. Through this acquisition Yamana added the Jacobina Mine in Brazil to their list of properties. Jacobina is a long-life mine boasting proven and probable gold reserves of over 1.5 million ounces. Measured and indicated gold reserves are 2.3 million ounces and infered reserves are over 3 million ounces.
Yamana has also made a friendly takeover bid for junior minor Viceroy Exploration. Viceroy’s principal asset is the advanced exploration-stage Gualcamayo gold project in San Juan province, Argentina. The measured and indicated resource for Gualcamayo is 1.43 million ounces of gold, with a further inferred resource of 611,000 ounces.
With these acquisitions, Yamana is estimating production of one million ounces by 2008 - impressive growth considering 2005 production of 220,000 ounces.
In total, Yamana can now claim measured and indicated gold resources of 11.8 million ounces, plus inferred resources of 6.9 million ounces. Proven and probable gold reserves of 7.2 million ounces, plus proven and probable copper reserves of 2.3 billion pounds. With a resource base this solid, we think Yamana has significant operational and valuation upside.
Another bright spot for Yamana is their management. Led by Peter Marrone, President and Chief Executive Officer of Yamana, their management team consists of long-time Brazilian industry veterans, who know the country, the culture, the politics and the labor force. They’ve been very strong operators, showing the ability to increase production efficiently and quickly from acquired mines and also to build their own new mines, which is another skill entirely.
Jim Cramer referenced falling gold prices and asked Mr. Marrone if his company could continue to produce at a profit with gold prices dropping below $600. Peter Marrone replied that Yamana will enjoy zero-cost gold production, taking into account the sales of copper as a byproduct. So the entire price they fetch per ounce of gold is all profit. 100% margin is an attractive proposition, although it would be nice to see the data supporting this claim. Overall, Mr. Marrone came across as very competent and confident in the future for gold and Yamana.
While we picked up Jan06 warrants, expecting a powerful rise in gold prices before the end of the year, you might want to consider the newly-available warrants. Yamana’s publicly traded warrants result from the acquisition of Desert Sun Mining which had public warrants outstanding. These warrants now trade on the TSX in Toronto under the symbol YRI.WT.A. Each warrant is exercisable at C$2.50 to receive 0.60 of a Yamana Gold share. The warrants expire on Nov. 20, 2008.
AUY 1-yr chart:
Disclosure: Author owns warrents in AUY.