On Wednesday, October 24th Gold (NYSEARCA:GLD) slipped below the $1700/oz. threshold signaling a slowdown in the momentum of the commodity which peaked earlier this month at $1795/oz. The recent run-up in price came as a result of the Federal Reserve's implementation of QE3.
Since the start of QE3 things haven't been all that great, as GLD has fallen 3.14% and the Gold Miners (NYSEARCA:GDX) have fallen 2.44%. With that said I wanted to examine the prospects of Yamana Gold (NYSE:AUY) ahead of the company's earnings report which is due out Monday, October 29th.
Performance in the Wake of QE3
When it comes to QE3 performance Yamana Gold has actually outpaced the average negative return of the gold miners by bucking the trend and demonstrating a return of 1.19%. Many investors would generally just shrug such a number off, and continue with their day, but I strongly suggest they take a much closer look at the company.
In my opinion there are three key variables potential investors should consider before establishing a position in the company. The three variables are the company's projects in the Mercedes Mine located in Mexico, the company's development of both the Chapada and Pilar properties in Brazil, and the effect the recent spike in gold prices will have on earnings.
Mercedes Mine (Mexico)
The company's Mercedes Mine is starting to pick up speed. According to an article written by Christopher Davis, "The company said the decline in revenue was somewhat offset by increased sales of gold contributed by the Mercedes Mine in Mexico which was under construction a year ago." Could the Mercedes mine be something of a positive catalyst for Yamana over the course of the next few years? If the company can continue to demonstrate positive drilling results and a significant increase in gold production, the mine certainly possesses the ability to be a contributing factor when it comes to earnings. If the mine yields subpar results, it may in fact be a contributing factor in any sell-off the stock may experience.
Chapada and Pilar Properties (Brazil)
The second variable to consider when it comes to Yamana Gold is Brazil and two of the ongoing mining projects the company is engaged in. As many investors already know, the company has two properties in Brazil, Chapada and Pilar, both of which have recently demonstrated some very nice upside potential.
The first property, Chapada, possesses a strong upside potential in terms of what it could mean for future mining projects in the region. Chris Davis notes that research regarding the company's Chapada property, "demonstrates mineralization which has 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." The potential here is great, my only concern comes in the form of cost. If Yamana puts too much time and money into the project and the end result is less than what they expect, we could see a short-term sell-off in the stock. If investors think the end result could exceed expectations, right now may be a good time to establish a position.
The second property, Pilar, is one the company's newer projects, and "covers 590 square kilometers in the Crixas greenstone belt and is 80 kilometers south of the Chapada mine. The one million tonnes per year operation will initially involve underground mining, and gravity and carbon-in-leach processing and is already being built at capacity levels that are 30 percent higher than those contemplated in the feasibility study. Development of Caiamar, a high grade satellite deposit 38 kilometers west of Pilar is expected to increase annual production at Pilar to 140,000 - 150,000 ounces as early as 2014." If the development of Caiamar can meet or exceed both construction and production estimates as soon as 2014 (or even earlier for that matter), Pilar should be one of the more positive catalysts for years to come.
On Monday, October 29th Yamana Gold will report earnings for Q3. Analysts are expecting AUY to earn $0.23/share on revenue of $613.89 million and given the recent rise in the price of gold, those numbers are certainly attainable. If the company can demonstrate revenues in the $620.5 - $624.0 million range we could see a nice pop in the stock price. If earnings miss (though I highly doubt they will) we could see AUY trade in a range much lower than the current price of $18.68/share.
When it comes to gold and gold mining stocks the biggest catalyst is obviously the price of gold itself. If for any reason the markets see a steep drop in the price of gold (greater than 5%) and the commodity's sustainability at those levels is prolonged, I'd avoid many of the bigger names such as Barrick Gold (NYSE:ABX), Gold Corp. (NYSE:GG) and IAMGOLD (NYSE:IAG), as well.
From a company specific standpoint, there are several negative catalysts regarding Yamana potential investors need to consider. First, if there is any disruption in the process to bring the Pilar (Brazil) mining project online and as a result costs are much greater than expected, shares could trade lower. Second, if the company misses both net income and revenue numbers for the third quarter we may see a 4% - 8% selloff in the stock. Lastly, Yamana finds itself heavily exposed to various international currencies. If for any reason there is a significant drop in the dollar, AUY is going to take a considerable hit on both its top and bottom line numbers.
Disclosure: I am long ABX, GLD. 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.