Soon after I published an article about Yamana Gold's (NYSE:AUY) decision to offer shares of its subsidiary Brio Gold for $208 million, the company decided not to go through with the sale. This sale could have improved Yamana's all-in sustaining cost and put some needed cash in its pocket. Moreover, the company provided a recent update on its Q4 performance with estimates for 2015 and outlook for 2016-2018; it shows lower silver and gold production than previously expected this year and next. And also a reduction in the dividend. But not all was bad news. If all goes as planned, Yamana plans to slash its production costs this year. Nonetheless, this news didn't impress investors as the company's stock lost 16% from its value since the start of the year, while the price of gold actually rallied. Let's tackle these recent news items and see how the company is expected to do.
For 2015, Yamana anticipates its gold and silver output to be in the guidance range, but still slightly down than the mid-point, as indicated in the following table. Copper production is expected to be a bit higher than expected.
But the main issue is the outlook for the coming years: The company revised down its outlook for 2016 and 2017 compared to the guidance it provided earlier last year. In gold, most of the downward revision is attributed to lower yield from El Peñón, Gualcamayo, Mercedes and Brio Gold. For its silver production, the revisions relate to all its mines that produce silver including Chapada and El Peñón. But it also includes a delay in Cerro Moro that will start to produce only in 2018 and not in 2017 as estimated back in early 2015.
Higher than expected cash costs in 2015 - fall in costs in 2016
Yamana expects to finish 2015 with an average cash cost of $596 per ounces compared with an average of $545. The average cash cost for silver is also up from $6 to an estimated $7.12 per ounce.
For 2016, however, the Canadian gold producer expects its cash cost on a by-product basis will be slashed to $525. In terms of all-in sustaining costs are also expected to be lower this year compared to last: Currently, the company expects it to reach $780 per ounce of gold - back in 2015 the AISC was around $844 or 7.4% higher.
In terms of capex, the company plans to allocate $275 million on sustaining capital, $120 million on expansionary capital, and exploration spending will be $82 million. The total capex is only slightly lower than the amount allotted in 2015. Given its lower operating cash flow, Yamana won't be able to finance its capex from its operating cash flow alone. It will either need to take on more debt, raise capital (not a good idea in the current market conditions) or sell non-core assets - perhaps Brio Gold will be sold later this year.
Whether the company actually reaches this goal- especially considering it isn't expected to reach this year's goals when it comes to cash costs- remains to be seen. And given the weakness of the gold market, the company will have to put more effort towards reaching its goals in order to offset the possible further decline of gold prices. But it's worth pointing out that if the company succeeds in bringing its AISC below $800 this would place Yamana as one of the low cost gold producers (if not the lowest).
Finally, in an effort to save up on cash Yamana also decided to slash its dividend by two thirds to an annual level of $0.02. Based on the current price of the stock this place an annual yield of 1.3%, which isn't far off the annual yield other bigger gold producers offer such as Barrick Gold (NYSE:ABX) and Newmont Mining (NYSE:NEM). This move will save $36 million a year - not much for a company with an annual revenue of $1.8 billion. But it could at least pay off a small portion of its capex. So while this move is prudent in times of low gold prices, it could be construed as if the company faces or may face in the future a cash flow problem. But given the company's credit facility and close to $250 million in cash this shouldn't be an issue - at least not in 2016 of 2017. And if in terms of debt repayment, the total principal payments in 2016 are expected to be $73.5 million and no payments in 2017.
Given the dividend cut and revised outlook investors were expected to react harshly to this news. Perhaps investors remain, as they should, concerned over the cash flow and the message a dividend cut sends. But not all is bad: The company expects to bring its costs down in 2016 to very low levels. Whether it actually succeeds in implementing its plans is a whole different story. I will note that gold producers that were able to slash their production costs all awhile keeping debt levels low tended to outperform their rivals. For now, Yamana doesn't fit this profile. It all boils down to Yamana's execution of its plans and where gold is heading (let's not forget Mike Tyson's famous quote: "Everybody has a plan until they get punched in the mouth"). For more please see: Yamana Isn't Doing Much Better
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.