I must admit that I am running out of titles for my Yamana Gold (NYSE: AUY) articles. I covered all Yamana Gold's quarterly reports in 2015, and each time I had to invent a new description for the company's performance when the performance itself did not change.
For the first quarter of 2015, I chose "Yamana Gold: Yet Another Bleak Earnings Report". For the second quarter of 2015, the title was "Yamana Gold: Not Impressive Once Again". Speaking about the third quarter of 2015, I ran out of alternatives and produced "First Impressions from Yamana Gold's 3Q results". In that article, I called Yamana Gold's performance "disappointing and unimpressive".
This time, the title came easier. The rally in gold lifted Yamana's shares back to the levels seen in October 2015, and, in my view, they deserve a sell rating.
Last year was spent in discussions about the monetization of Brio Gold. Initially, the company was talking about an IPO. The proceeds from the IPO would have been used to pay down the outstanding balance on the revolving line of credit. Then the company stated that besides IPO, it was evaluating reverse takeover, joint venture with private equity firms, a disposition to, or merger with, other companies and other financing and liquidity options.
The writing was on the wall - nobody was interested in an IPO of Brio Gold. As a reminder, gold prices in October 2015 were trading in a range between $1150 and $1200 per ounce. That's not far away from today's prices. As I am writing this article, gold costs $1211 per ounce.
Given the price of gold, nothing should have changed regarding the potential for Brio Gold's IPO. As a result, the company took a 180 degree turn and announced that Brio Gold will acquire Riachos dos Machados gold mine for $51 million. The company expects that the purchase will bring an after-tax internal rate of return of approximately 50%.
I find it interesting that the company completely changed its strategy regarding Brio Gold and stated in the quarterly report that "at this time, there are no final decisions made with respect to the monetization of all or any portion of this division". I don't think that inconsistency is a good way to build value. Time will tell, but I think it's premature to bet on outstanding results of Brio Gold.
Where is the catalyst?
In 2015, the company produced 1.28 million ounces of gold at all-in sustaining costs of $842 per ounce. In 2016, Yamana Gold expects to produce between 1.23 million and 1.31 million ounces of gold. During the conference call, the company stated that it expected to be closer to the high end of its guidance. Yamana Gold expects production of 1.29 million ounces of gold at 2017 and 1.35 million ounces of gold in 2018. So, the company expects a flat production profile in the next few years.
With this in mind, let's ask a question - what will help Yamana Gold shares without production growth? The first candidate is, of course, the gold price. Imagine gold at $1500 and every gold company will be a winner. However, if we look beyond the gold price, we'll have trouble finding why 2016 or 2017 will be different from 2015 or 2014. Yamana Gold plans to continue to reduce its debt by $300 million in two years, but I don't think that debt was weighing heavily on the company's shares.
The company already failed on the divestment front. In the report, Yamana Gold stated that the reason for a change in Brio Gold's plans was the division's improved performance. In my view, if the company was serious about divesting Brio Gold (and I think it was, the whole story lasted many months), the supposed improvements in performance should have led to a successful deal.
The company has just recorded an impairment of $2.6 billion, which was caused by the downward revision of long-term gold price from $1300 per ounce to $1250 per ounce. In its impairment test, the company used estimates of $18.75 per ounce of silver (current price is $15.20 per ounce) and $2.85 per pound of copper (current price is $2.11 per pound).
In my view, an impairment equal to the company's current market capitalization that was caused by a $50 decrease in the gold price estimate is a bad signal. If prices stay at or below current levels at the end of 2016, we can expect more impairments from Yamana Gold.
I can't think of a criterion that would positively diversify Yamana Gold from its peers. It's not a higher-cost producer that provides leverage for gold prices when they fluctuate around its costs like IAMGOLD (NYSE: IAG). It's not a massive debt reduction story like Barrick Gold (NYSE: ABX). It's not a dividend and growth story like Randgold Resources (NYSE: GOLD). Even analysts, who are typically optimistic about stocks, have, according to Yahoo Finance, a median target of $2.50 for the company's shares.
The tide lifted all boats, but I don't think that Yamana Gold's shares will be able to stay at current levels unless gold prides marches further. The company has problems with execution and strategy, and it does not look like that anything will change on this front in 2016. I think I'll write a couple more of "unimpressive and bleak" articles covering Yamana Gold's results this year.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short 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.