A year to forget
2013 was one of those rare years when gold lost its investment value, as it posted its first yearly price decline since 2000. Moreover, gold prices declined by around 28%, making it the biggest annual price decline in 32 years. As a consequence, most gold miners lost almost half their market capitalization. Yamana Gold (AUY), declined by 51% in 2013. In the first nine months of 2013, the company derived 72% of its net revenue from gold sales, thus making it vulnerable to declining gold prices. Even though the company's nine-month gold production increased by 22% year-over-year, gold revenue declined by 12.5%, primarily due to the drop in the company's average realized gold price from $1,661 per oz. to $1,448 per oz.
While Yamana has remained profitable in this low-price environment, other gold miners such as Barrick Gold (ABX) and Newmont (NEM) have struggled with profitability due to massive asset write-downs. Prior to this year, Barrick Gold valued its reserves on a long-term gold price assumption of $1,700 per oz.; that assumption was changed to $1,300 per oz. in the second quarter of 2013. As a result, the company recorded $8.7 billion in impairment charges in the second quarter. For Newmont, too, the change in gold price assumption from $1,500 per oz. to $1,400 per oz. in the second quarter resulted in an asset write down of $1.77 billion.
This is the reason why Yamana's conservative accounting policy differentiates it from other gold miners. The company values its reserves and resources at a price assumption of $950 per oz., which at current price levels protects it from asset write-downs. Moreover, bullion prices are expected to remain subdued in 2014 as well, averaging $1,200 per oz. At such a price level, there's a remote chance of Yamana reporting asset write-downs. However, I expect Barrick and Newmont will be forced to take further write-downs, as their price assumptions are well above current and expected gold prices.
What about efficiency?
Ever since gold prices started declining in 2013, gold producers have been under added pressure to operate at lower costs of production. Gold companies report production costs under a standard metric known as all-in sustaining costs, or AISC. The AISC includes all expenses incurred to produce gold plus costs incurred to sustain gold production. I have compared the nine-month AISC of Yamana with Barrick and Newmont:
9M 2013 AISC
$950 per oz.
$919 per oz.
$1,125 per oz.
Yamana's AISC of $950 per oz. is higher than Barrick's, primarily because of higher AISC of $1,014 per oz. reported in the first quarter. Since then, Yamana has operated with increased efficiency due to the company's ongoing cost cutting program initiated in the second quarter. The company outlined different cost-saving measures such as headcount reductions, reduced capital spending, lower compensation, and others that would lower its overall production costs.
Type of cost
Expected benefits for 2013
General and administrative
As a result, the company lowered its AISC from $1,014 per oz. in first quarter to $888 per oz. in the third quarter. In 2014, Yamana expects to produce gold at an AISC below $925 per oz. Considering the success of the ongoing cost-cutting program, I expect the company's AISC to stay under $925 per oz.
To cut costs successfully, Yamana must operate with financial flexibility. At the end of the third quarter, the company reported long-term debt of $1.08 billion, out of which $15 million is due at the end of 2014. The next debt maturity of $73.5 million comes at the end of 2016, thus providing Yamana with the financial flexibility needed. Below, I have analyzed the company's debt management by calculating its cash-flow-to-debt ratio.
Operating cash flow
(in $ million)
(in $ million)
Cash flow to
Yamana Gold has generated substantial cash flows in the past and hence posted a greater than 1.0 cash-flow-to-debt ratio. The company's cash-flow-to-debt ratio has declined on a trailing twelve-month, or TTM, basis due to lower cash flows. However, Yamana's cash-flow-to-debt ratio is better than its peers, as the table below shows.
Cash flow to debt
Debt to equity
Yamana's conservative assumptions for gold prices helped it to counter declining prices without writing down its assets, and its peers may be in for further asset write-downs. Moreover, the company's cost-cutting plan will lower its AISC. Even though the company's cash-flow-to-debt ratio declined on a TTM basis, it is still better positioned to manage debt than its peers.