I have to admit that shares of Yamana Gold (NYSE: AUY) are performing even worse that I expected. Yamana Gold's shares, which fluctuated around $4 for many months, have broken the support and are trading the $3 territory. At the same time, there was no corresponding move in the price of gold. Is Yamana Gold that weak?
In my view, the really tough times for Yamana Gold started with the purchase of Osisko Mining. Yamana Gold made this deal together with Agnico Eagle Mines (NYSE: AEM) back in 2014. The mine's performance is decent, but the price Yamana Gold paid was hefty. Agnico Eagle Mines could afford the acquisition of Osisko Mining, but for Yamana Gold this was probably a too ambitious move, and the resulting debt burden and dilution put serious pressure on Yamana Gold's shares. Lower gold prices also added to this pressure. As a result, Yamana Gold started the second quarter with $121 million of cash, $1.8 billion of long-term debt and muted growth prospects. In the third quarter, Yamana Gold plans to make an IPO of Brio Gold in order to increase the company's liquidity.
There have been no news from Yamana Gold since the company reported its first-quarter results. Gold prices are roughly at the same levels that were seen at the end of April. So what moved Yamana's shares? In my view, investors started losing patience as gold prices failed to provide any meaningful upside, and dumped shares of weaker players. An investor who was looking only at Yamana's latest presentation would have been astonished to see the company's stock performance. After all, a 33% year-over-year production growth is impressive, and so are the plans to maximize cash flow and free cash flow. However, financial statements tell the different story. The company's operating cash flow was just $2 million in the first quarter, and the impressive production growth did not turn into profits.
Multiple negative factors pushed Yamana Gold's shares to present low levels, but not everything is that bad. The company's first-quarter has been historically weak, and one could anticipate better performance in the second quarter. Yes, the company has been missing estimates for the last three quarters, but I think it has chances to return to positive earnings. In my view, shares of Yamana Gold have been excessively punished in the past few weeks and could return to the $4 territory if the company finally manages to meet expectations when it reports its second-quarter results. To me, the single most important factor will be Yamana Gold's cash flow. The company has already grown in the past year, and it's high time to translate this growth into financial results. While I think that the company's shares, which now trade at a 60% discount to book value, have decreased too far too fast, I'm not in a hurry to establish a position in Yamana Gold. The company lacked execution in the past few quarters, and I want to see positive data before considering a long position in Yamana Gold's shares.
