Yamana Gold: A Gold Miner For The Gold Rebound

Mar.23.14 | About: Yamana Gold (AUY)

Summary

Gold price shows some strength again since early January 2014, and the trend will continue until 2015 in my opinion. It is time to look at the gold miners now.

Yamana Gold is a well-run dividend company with growth potential for 2014. It can be compared to other good companies in the gold sector, like Barrick or Newmont.

Yamana Gold is another gold miner suffering from the depressed precious metal prices but should be considered as a good investment potential for 2014/2015.

In this study, I will look at a top-tier gold miner similar in size to Barrick Gold (NYSE:ABX) or Newmont Mining (NYSE:NEM).

1 - A quick look at gold price first.

Gold miners have suffered some severe and damaging financial blows during 2013. Gold price had the worst year and lost 28% of its value. It closed on 12/31/2013 at $1,204.50/oz.

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts

Most gold miners were forced to impair their gold assets, cut capital expenditure, close uneconomical projects, and Yamana Gold (NYSE:AUY) is not an exception. The plunge was brutal, and ended up abruptly the 12-year bull market for the precious metal.

However, since the beginning of 2014, gold price has shown some resilience, and the precious metal is trading above the support level of $1,175/$1,200 per oz, which is very positive, in my opinion. Since early January 2014, gold has risen slowly above $1,360/oz and has shown strength and momentum, especially helped by the East (China and India, mainly). The gold price is up since January 2014, showing clearly a bottom around $1,200/oz.

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Gold Price in US Dollars data by YCharts

The most important question that any investor must answer now is, if he or she believes this trend will continue and if gold can reach a price at or above $1,475/oz in 2014.

I think it is possible to forecast a value between $1,450/$1,500 per oz for the second half of 2014. It is only 10% higher than today's price. Of course, it is a difficult call due to the many supply and demand factors involved.

I justify my gold price target based on these four simple elements:

  1. The demand from Asia will be even stronger than experienced in 2013 (China and India).
  2. The Western gold market, through Gold ETF, mainly, will reverse its negative 2013 net sell (about 880 tons sold in 2013), by turning into a net positive again in 2014.
  3. China's economy is showing some worrisome signs lately, and this uncertainty will fuel gold demand around the world.
  4. The momentum has changed, and many analysts are turning bullish in their forecast for gold again. (Bank of America Merrill Lynch, George Soros, Deutsche Bank and others)

If this nascent trend can continue, then it is perhaps the right time to shop for the perfect gold miner and see which one(s) offers the best potential for growth in a new positive gold trend?

After Janet Yellen, the new chairman of the Federal Reserve, commented on the US economy, the precious metals' prices went down. However, I do not believe this downside effect will change the bullish trend in motion. Gold is around $1,335 and Silver is at $20.28 on March 21, 2014.

Given this background, here is a candidate for your consideration, Yamana Gold.

2 - Yamana Gold Inc.

Yamana Gold Inc. is a top-tier gold producer based in Toronto Canada with eight producing gold mines, three exploration properties, and two new projects, all in Mexico or in South America (Brazil, Chile and Argentina). The company produces other metals like copper, molybdenum, zinc and silver, mainly, as by-products.

The Company was founded in 2003 and is headquartered in Toronto, Canada.

I am showing the company in simple comparison tables below, because I believe it is the easiest and the best way to describe a company to an average investor interested in starting a long stock position.

Financials comparison 2012/2013

Description 2013 2012
Revenue $ billion 1.8427 2.3368
Total debt $ billion 1.2048 0.7659
Impairment $ billion 0.536 0
Dividends per share $ 0.15/2014 0.24
Cash and Cash equivalent $ million 300.2 529.5
Earnings per shares excluding impairment 0.05 0.26
Total shares outstanding 752,697 749,591
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Yamana production snapshot

Production (million) 2012 2013 2014E
*Gold Production (ozEq) 1.28 1.32 1.4
Copper production (lbs) Chapada 150.6 130.2 134
All-in co-product cash cost AISC 924(1)
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* Silver is treated as gold production with a ration 1/50 by the company.(The actual ration is 1:66 today)

(1) AISC was $1,014 in Q1 2013.

Detailed per producing mined 2013.

N Mine name and location Description Metals Gold ozEq Copper M lbs
1 Chapada, Brazil Open pit Gold/copper 110,618 130.2
2 El Penon, Chile Underground Gold/Silver 467,523 0
3 Gualcamayo, Argentina Open pit Gold 120,337 0
4 Mercedes, Mexico Underground Gold/Silver 141,618 0
5 Jacobina, Brazil Underground Gold 73,685 0
6 Minera Florida, Chile Underground Gold/Silver 118,590 0
7 Fazenda Brasileiro, Brazil Underground Gold 70,079 0
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As we can see, El Penon, Chile is the miner's flagship with a production in ozEq around 39% of the total produced by the Company.

Projects.

N Location Description start-up date
1 Ernesto, Brazil Open pit and underground gold mine. Commissioning in process. -
2 C1-Santa Luz, Brazil Open pit gold mine. Commissioning in process. -
3 Pilar, Brazil Underground gold mine. Commissioning in process. -
4 Cerro Moro, Argentina Planed decision by 2014. Probable reserve 1.5 million OzEq and grade 24.34g/T 2016
5 Suyai, Argentina Permit application to be submitted in 2014. Production metal concentrate. -
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3 - Analyses and recommendation.

Yamana is a top-tier gold company with a clear growth potential for 2014, 2015 and beyond, assuming of course that gold price will trend up in 2014/2015. It will have a revenue at about $2.1 billion in 2014 based on $1,475 for gold and earnings estimated at $0.16/share.

Recently, Yamana Gold reported its financial results for 2013, and it missed on both revenue and earnings as expected. The Street was expecting $0.07, and the company posted $0.05 for 2013 on $1.84 billion in revenue, far less than 2012 ($2.34 billion). It was not a surprise with gold price under $1,250/oz in Q4 2013.

Dividends were lowered in 2014 to reflect the gold negative momentum and now stand at $0.15. Here is what Peter Marrone CEO said recently:

"The payout to shareholders through dividends can be represented by ounces of gold sold and the margins at the time. If you look at the compression of margins that has occurred with the rapid decline in metal prices over the past year, the dividend payout of equivalent ounces from previous years would decline significantly. When looking at current metal prices and margins, one can see that the same number of gold ounces providing a higher cash distribution before would have a lower cash value today. In setting our dividend, we took these issues into account."

If you look at the gold price during 2013, you will see that it tumbled 28% affecting revenues and earnings. The company's gold production, year to year, is expected to grow 6% in 2014 with an all-in cash cost still under 1,000/ozEq.

Another negative consequence of this gold depression the company unfortunately had to face in 2013 is the heavy impairment of its assets on the balance sheet due to lower gold/silver and copper price. ($536 million after tax)

Yamana Gold like many others was forced to reduce the value of its reserves. Look at the table below and compare to Barrick Gold and Newmont Mining. Most of these companies used $1,100/oz of gold for their new reserves' valuation, which is way down from the $1,600/oz and more used in 2012.

Impairment $ billions 2013 2012
Yamana Gold *0.536 0
Barrick Gold 11.54 4.4
Newmont Mining 2.875 0.08
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* After taxes.

An important element we must also analyze carefully is the all-in cash cost compared to the industry. The company is giving an all-in cash cost (AISC) at $924 for 2013. This all-in cash cost is under $1,000/oz and show a good productivity and a management in control.

All cost excluding write-downs and taxes

2012 2013
All cost excluding Write-downs and taxes 990 1,041
AISC - 924
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(Note: Alumbrera project has been removed from this calculation in 2013 and will create some disparities when comparing AISC from 2012 to 2013). An AISC of $924 is very reasonable for the industry, and shows a company which is succeeding at controlling its basic cost structure.

On a negative note, the debt level increased 57% from 2012 to 2013, while cash decreased 43% for the same period. This is not a surprise again but simply a reminder for 2014.

Finally, technically the stock price is entering a bullish formation with the 50MA crossing the 200MA (Gold cross).

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AUY data by YCharts

The price per share is now attractive at $9.38 assuming that gold price and other metals' prices are about to rise in 2014.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AUY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.