Yamana Gold: Growth Is on Track

Includes: ARMZF, AUY
by: David Urban

Yamana Gold (NYSE:AUY) released first quarter 2011 earnings last week, with revenues increasing by 37% to $476.1 million from $346.3 million a year ago. Earnings per share were up from $0.17 in the first quarter of 2010 to $0.20 in the most recent quarter. Operating cash flow jumped to $282.3 million from $163.1 million a year ago.

AUY produced 221,489 ounces of gold, 2.3 million ounces of silver, 38.5 million pounds of copper from Chapada, and 7.1 million pounds of copper from Alumbrera during the quarter. Total production equated to 267,368 gold equivalent ounces, up from 239,838 geo a year ago at a by-product cash cost of $14 per geo.

The extremely low by-product cash cost was due primarily to the copper mined at Chapada and Alumbrera. Production from Chapada totaled 33,392 ounces of gold and 38.5 million pounds of copper in the first quarter of 2011. Last year, production totaled 27,794 ounces of gold and 29.7 million pounds of copper. Chapada cash costs per ounce of gold were $286 per ounce and copper cash costs were $1.21 per pound. By-product cash costs were a negative 2,615 per ounce of gold.

Production at El Penon rose to 73,568 ounces of gold, up from 60,977 ounces a year ago. 2.1 million ounces of silver were mined in the first quarter of 2011 versus 2.6 million a year ago. Silver production in the first quarter fell due to lower silver content areas being mined during the quarter.

Attributable production at Alumbrera totaled 11, 374 ounces of gold at a co-product cash cost of $244 per ounce and 7.1 million pounds of copper at a co-product cash cost of $1.85 per pound. As a whole, by-product costs totaled a negative $1,452 per ounce for the quarter.

Recently, AUY entered into an agreement giving Goldcorp (NYSE:GG) and Xsastra the option to vend the Agua Rica deposit into the Alumbrera joint venture. The terms of the agreement call for AUY to receive $110 million in initial and option payments during the 36 months following execution of the documents, $150 million for approval to proceed with construction, and $50 million along with a gold royalty when commercial production is achieved.

AUY restructured its deal with Aura Minerals Inc. (OTCPK:ARMZF) during the first quarter. Originally, Aura purchased three mines from Yamana in 2009 in return for cash and royalty payments, at what was then considered very favorable terms. In March, AUY signed an agreement restructuring the debt between AUY and Aura leading to AUY acquiring more than 19 million shares of Aura at a price of C$3.83 per share. AUY now owns 18.7% of Aura.

Developmental projects at Mercedes, C1 Santa Luz, Ernesto, and Pilar continue and all four projects are expected to add more than 400,000 ounces of production in the next two years.

AUY operates in safe but complex environments in South America. By "safe," I mean that Brazil and Argentina are stable, mining-friendly jurisdictions. However, inflationary pressures from different causes create a complex operational environment. AUY’s currency hedge book adequately managed the inflationary environment by closing the hedge book loss to $300,000 in the first quarter of 2011 from $8.2 million in the first quarter of 2010.

In a shareholder-friendly move, AUY increased the dividend from $0.03 cents per share to $0.045 starting in the third quarter of 2011. The increase in the dividend is a sign that management is confident in the future and committed to returning excess cash to shareholders.

AUY is on track to deliver solid growth in production with new mines coming online in the coming years. One of my biggest concerns last quarter was how it planned on managing the inflationary environments of Argentina and Brazil; it appears to be weathering the storm just fine.

Technically, the stock has sold off with the rest of the sector but appears to be putting in a bottom near the 200-day moving average. Underlying technical signals point to a possible change in direction in the coming days.

This would be a good time to begin dollar cost averaging into a position over the long-term as it appears as though we may be putting in a bottom and the increased dividend puts a floor under the stock.

Source material: 1Q earnings release, company press releases

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AUY over the next 72 hours.