The gold market has changed quite a lot since we last looked at Yamana Gold (AUY). Gold prices have increased drastically, trading at around $1,258 per ounce after rebounding from $1,185 per ounce in December 2013. Such trailing variations during 2013 had a great impact on Yamana's revenues, as the company had to sell its inventory at a low market price due to the Fed taper. The market conditions are changing now as the Asian demand for physical gold is increasing but the investors' confidence in gold miners is not reflecting this increased demand.
Ahead of the Chinese New Year of the Horse, the demand for golden horses increased and is expected to surpass last year's demand for golden snakes. Chow Sang Sang, a local jewelry store chain, reported an increase of 15%-20% in its sales in January compared with the same period of last year, while another jeweler reported a 5% increase in sales from last year. The decline of 30% in the price of gold during 2013 has also been another factor resulting in the increased demand of this New Year compared to the last. This was a seasonal increase in the price of gold due to high demand touching the peak of $1,267 per ounce, which has started to come back to market equilibrium, currently sitting at level of $1,258 per ounce. Although this was only seasonal fluctuation in price level, but it has provided a good start for gold miners who suffered huge losses in 2013 when prices fell even below support level of $1,200 per ounce twice.
India is still not revising its import tariff policy even amidst reports of high volumes of smuggling. The amount of gold recovered from smugglers was close to $33.6 million between April and October, which is almost double the figure recovered from smugglers during the full financial year ended 31 March, 2013. This smuggling activity has led to a 30-day ban from Pakistan on the import of gold but looking at the country's reserve volume, this ban won't be affecting gold prices. India is determined to maintain the import tariff up till March, when it will evaluate updating the policy, which means that the demand from the country won't be changing until the last month of the first quarter of 2014.
Mine Depletion Period
Ernesto/Pau a Pique
*Reserves are as of 31 December, 2012 (Source: Yamana Gold)
The reason for using 50:1 as gold equivalent of silver was to determine the depletion time according to the estimates of the company rather than market levels.
Nine-month production (30th Sep 2013)
*GEO assumes gold plus the gold equivalent of silver using a ratio of 50:1
*Only proven reserves are used in calculation of depletion
*Reserves are as of 31 December, 2012
Depletion time (Quarters)
*Mercedes mine started commercial production in Feb 2012, which means that the mine is still being developed.
*Ernesto/Pau-a-Pique, C1 Santa Luz and Pilar mines are not included in the calculation because they are still not in commercial production.
Gold Equivalent Ounce (GEO) production mentioned above is for the third quarter of 2013. Looking at the estimated depletion time of all the mines, we see that El Penon will run out in 4 quarters, which means that the company has to focus on the exploration of new mines or must increase its capital spending in order to maintain such high production; especially from El Penon, as this mine contributed 40% of the total production in the third quarter of 2013.
Actual Production Costs Per Ounce
Gold Equivalent once
Amount in $
Total Cost per Equivalent ounce
S 1,040/ oz.
Cost per Equivalent ounce (excluding tax)
$ 969/ oz.
*GEO assumes gold plus the gold equivalent of silver using a ratio of 60:1 and 366:1 for gold equivalent of copper
We have used 60:1 and 366:1 as gold equivalent of silver and copper respectively on the basis of the average market price of the respective mineral for the third quarter. From the above calculations, we can see that the actual cost for the company of producing gold, silver and copper is $1040/oz., which is still lower than the market. This indicates that the company is looking strong in terms of controlling its costs.
Since our last update, Yamana has increased from $8.72 per share to $9.25 per share, which is in the direction of our estimated price of $9.85 per share.
Amounts in ($ Millions)
Cash and Cash equivalents
The company's market cap has changed since our last report, increasing the Enterprise Value to be almost $7.8 billion. That being said, our EV/share will be closest to $10.39 per share, still indicating the growth potential of the share. Therefore, Yamana is still worth investing in even though it has been downgraded by HSBC Securities.
Additional disclosure: Equity Flux is a team of analysts. This article was written by our Basic Material analyst. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.