As I have stated numerous times, gold producers offer some of the most attractive defensive plays given uncertainty in the economy and runaway government spending. Just Wednesday, when the Fed announced that it will not be raising the low interest rate until at least 2014, sector-wide appreciation took off with February gold futures soaring. One of my picks, Yamana Gold (AUY), rose 9.8% at the end of Wednesday's trading and is up 20.6% since I first wrote my pitch here - a nearly 1,220 bps greater return than the Dow Jones. Eldorado (EGO) rose 5.6% on the news. At this point, I find that Yamana and Eldorado have closed much of their value gaps and provide just a defensive play.
From a multiples perspective, Yamana is the cheaper of the two. It trades at a respective 20.4x and 13.9x past and forward earnings while Eldorado trades at a respective 28.1x and 14.4x past and forward earnings. The latter, however, is preferred on the Street with its "strong buy" rating.
On the third quarter earnings call, Eldorado's CEO, Paul Wright, noted strong performance and progress:
"We are all very pleased with the quarter results and ... we are also very pleased to where we expect to be in terms of the end of the year. The mines continue to operate in accordance with the plans, with Kisladag, White Mountain, Tanjianshan, Jinfeng and Vila Nova all contributing to a record quarter of revenues, record production and record earnings. We're also very happy with a steady ramp up of production at our new Efemçukuru mine in Turkey and remain on schedule to have the construction of the concentrator treatment plant in Kisladag completed in December. Many of you, in the past few weeks, have had the opportunity to visit our assets in China and Turkey, which combined, represent approximately 75% of our net asset value…
We were also pleased in the quarter to strengthen and further clarify our commitment to delivering upon a meaningful dividend policy ... the Eldorado Board of Directors formally approved management's recommendation previously announced to expand throughput of our Kisladag mine to 475,000 ounces annually. This will be accomplished over the next three years through the planned investment of approximately $350 million."
For the fourth quarter, the company produced 169K oz of gold at a $418/oz average cash costs - slightly in-line with both external and internal expectations. Management further guided for 730K oz to 775K oz of gold production in 2012 at $430/oz to $450/oz average cash cost. While the production estimates were anticipated, the cost outlook was slightly more negative than anticipated. Eastern Dragon and Efemcukuru will be kicking in to drive greater volumes and make up for softness in the Jinfeg Mine. Eldorado is likely to yield lower grades as a result of some of the cutbacks. With management recently declaring its first semi-annual dividend, Eldorado has laid the foundation for being a strong defensive play.
Consensus estimates for Eldorado's EPS forecast are that it will grow by 63.4% to $0.62 in 2011 and then by 43.5% and 21.3% more in the following two years. Assuming a multiple of 18x and a conservative 2012 EPS of $0.86, the rough intrinsic value of the stock is $15.48, implying 10.1% upside. If the multiple were to decline to 15x and 2012 EPS turns out to be 5.6% below consensus, the stock would fall by 10.4%. The latter case is highly improbable.
Yamana, similarly, had strong performance in the third quarter. Stellar results in Chapada for copper and sequential progress elsewhere is showcasing momentum. The company will easily yield between its target of $1.03M - $1.1M gold equivalent oz, as evidenced by how it has had to transition to larger trucks just to meet greater-than-expected output levels. Furthermore, Yamana has shifted itself to the downward-sloping part of the cost curve at Chapada and El Penon. In the latter, average gold grade has improved 10% sequentially while the feasibility rate has also improved. With facilities modernization, management is suggesting confidence in the business outlook.
Consensus estimates for Yamana's EPS forecast are that it will grow by 59% to $0.97 in 2011 and then by 22.7% and 35.3% more in the following two years. Assuming a multiple of 15.5x and a conservative 2012 EPS of $1.16, the stock has roughly 6.3% upside.