Gold and silver have both performed brilliantly in the last few weeks. The gold ETFs, IAU and GLD, and the silver ETF, SLV, were all on a tear in August rising 4.83%, 4.91% and 13.52%, respectively. I had begun pounding the table on the metals as well as gold stocks at the end of July and silver stocks shortly thereafter. I reiterated these buys throughout the month highlighting many companies along the way. The mining company ETFs I recommended in July and August: GDX, GDXJ, NUGT and SIL were up 12.06%, 12.8%, 37.02% and 17.35%, respectively, in the month of August.
The month ended with fireworks after Federal Reserve Chairman Ben Bernanke gave his highly anticipated speech at Jackson Hole, Wyoming. In short, he did not really say anything (or not say anything) that kept QE3 on the table or took it off. Interpretation of the speech has been in the eye of the beholder. Suffice it to say QE3 is not explicitly off the table, and this gave the metals another boost.
The next big move for the precious metals and related companies will likely be on Thursday when the European Central Bank's governing council meets. This meeting will be well followed by investors after Mario Draghi's now infamous whatever it takes speech. Following every word of these meetings may matter for the short-term trader, but will not matter as much for the long-term investor. For the mid- to long-term investor, existing central bank actions along with global uncertainty has already set the long-term trajectory of precious metal prices upward. I believe that gold and silver miners may outperform the metals over the next year or so as their correlation with the metals return to historical norms. In this article, I want to highlight a stellar gold miner that my readers have inquired about and I think could perform very well in the next few years.
My readers have been adamant about one gold company more than any other in response to my gold articles and through private inquiries. That company is Yamana Gold (AUY). I have only briefly mentioned it in a few of my mining articles related to larger competitors Goldcorp (GG), Barrick Gold (ABX) and Newmont Mining (NEM). After taking into consideration the feedback received from my audience and reviewing the company in further detail, I think AUY is an excellent buy.
AUY is primarily a gold producer, but it also engages in mining of other precious metals such as silver and copper as well as molybdenum and zinc. The company has operations throughout the western hemisphere but chiefly in Mexico, Brazil, Argentina and Chile. AUY's property portfolio includes seven operating gold mines in total, including the Chapada mine, the Jacobina mining complex, and the Fazenda Brasileiro mine in Brazil. In Chile, it operates the El Peñón mine and the Minera Florida mine. In Mexico, AUY operates the Mercedes mine. In Argentina, the primary project is at the Gualcamayo mine. AUY also has a 12.5% indirect interest in the Alumbrera copper/gold/molybdenum mine in Argentina. Finally, the company holds interests in various advanced and near development stage projects and exploration properties in Brazil, Chile, and Argentina.
The company's most recent earnings report was disappointing, but followed the pattern of most precious metal companies reporting disappointing earnings. AUY reported a Q2, missing on top and bottom lines. Net earnings were $43 million or 6 cents per share versus the 22 cents estimated by analysts. This was 77% decline from the $195 million profit, or 26 cents per share, in the same quarter a year ago. Excluding one-time items, the company said adjusted profit was 18 cents per share. Revenue came in at $536 million down from $573 million as lower metal prices and reduced volume of copper concentrate sales hurt. The company said the decline was somewhat offset by increased sales of gold contributed by the Mercedes Mine in Mexico which was under construction a year ago.
Gross margin for Q2 was 62.5%, which was 400 basis points worse than the comparable quarter last year. Operating margin was 26.5%, which was 1,470 basis points worse than the comparable quarter last year, while net margin was 8.0%, 2,600 basis points worse than the prior-year quarter. Total gold production was 288,700 ounces compared to 278,737 ounces a year ago, while total copper production slipped to 40.4 million pounds, which was down from 70.7 million pounds a year ago. The company sold 268,441 gold equivalent ounces, which were up from 261,926 ounces a year prior. Copper sales fell to 37.4 million pounds from 41.6 million pounds a year ago.
Turning to the balance sheet, the company had $698 million in cash and equivalents on hand at the end of Q2 with an increasing debt to asset ratio. Some of this debt results from the fact that AUY has increased its exploration budget nearly 300% over the last four years, positioning it up for continued top line growth in the years ahead. AUY still has a debt-to-equity ratio of less than 0.1 whereas its larger competitors GG, ABX and NEM have taken on more debt to finance multi-billion dollar projects. Cash flow amounted to $241 million in the quarter compared with the year-prior figure of $331 million. The decline stemmed from lower earnings and investment into developing its assets. They also recently announced the completion of the previously announced agreement to acquire all issued and outstanding shares of Extorre Gold Mines Limited. Further a lot of progress has been made at most of the company's exploration and development projects as summarized in table 1.
Table 1. Yamana Gold's Project Development Progress Highlights, As Reported To Investors At Close Of The Second Quarter, August 2012.
Project Operation Site
Results from the feasibility study indicate production of approximately 175,000 ounces per year for the first four years and a mine life of 11 years. Discussions have begun with joint venture partner, Codelco (43% owner of the project), on the feasibility study, possible optimizations and advancing the project toward a construction decision.
El Peñón, Chile
A new vein has been discovered approximately 300 meters east of Fortuna and a new zone of significant mineralization has been identified south of the main Dorada vein and to the west between Dorada and Providencia. Drilling has delineated a new high grade deposit at the Elizabeth vein located 400 meters east of Victoria within Pampa Augusta Victoria. This will significantly extend mine life and further enhance production at, or above, a 440,000 ounce sustainable production level.
Mineralization has now been identified along a strike length of almost 16 kilometers with the discovery of significant gold and copper mineralization encountered approximately 2,500 meters south of Corpo Sul. This will potentially enhance throughput through the blending of these higher grade ores and allow further development in size and scale to result in an entirely new mine. Additional concessions along the strike to the south were acquired providing further regional upside potential.
New discovery at Barrancas where drilling has intersected mineralization approximately 600 meters north of Lagunas Norte. Infill drilling at Lupita is confirming the width and grades of mineralization and continuing growth of measured and indicated mineral resources. These are expected to enhance the mineral resource base, extend mine life and facilitate higher throughput and sustainable production levels.
Maria Lazarus, located 10 kilometers west of Jordino, has returned drill results similar to Jordino in both grade and width. Drilling two kilometers south east of Jordino intersected coarse visible gold indicating that the system is open in that direction. These discoveries continue to confirm a cluster of mineralized zones and represent possible ore sources for production at Pilar.
Looking ahead, production for fiscal 2012 is slated to be about 1.2 to 1.3 million gold equivalent ounces, most of which will come from the Mercedes mine in Mexico as production ramps up. For fiscal 2013, production is also expected to be around 1.5 to 1.7 million gold equivalent ounces, most of which will come from full-year production from Santa Luz and Ernesto Pau-a-Pique operations. By fiscal 2014, production is targeted to be at a sustainable level of approximately 1.75 million gold equivalent ounces. This includes production from the existing mines and development projects for which construction decisions, mentioned in table 1, have been made. Should the company stay on track and on budget, they are poised for strong growth. I believe that the company believes it will stay on budget and grow steadily as it increased the dividend 18% to 6.5 cents per share in the most recent quarter.
AUY has a 52-week range of $12.35-$18.16 and currently trades at $17.13 a share on average daily volume of 5.6 million. While not as cheap as GG, NEM and GG on its current P/E multiple of 30.5 the forward P/E is still an attractive 12.2. The 5-year PEG ratio is a 1.7 however, but does not reflect potential (or likely) surges in precious metal prices in the next 5 years. Analysts currently have a $21 price target consensus on the stock with a mean recommendation of 'buy'. I believe that AUY has great potential due to its debt management, ability to maintain and raise the dividend as well as clear growth plans moving forward. While I like all the companies in the gold and silver mining space, AUY is quickly becoming one of my favorites.