The Street Favors Goldcorp; Yamana Has 30% Upside

| About: Yamana Gold (AUY)

Goldcorp (NYSE:GG), despite being favored on the Street, in my view, is less undervalued than Yamana Gold is (NYSE:AUY). The companies are rated a "buy" and a near "strong buy," respectively. The reason I am optimistic about Yamana is due to its strong growth profile and how its projects are proceeding faster than planned, which is more of an exception in the industry. Furthermore, I find that even in the event of an unreasonable multiple contraction and a 2012 EPS miss, shareholder value would still manage to appreciate.

From a multiples perspective, Yamana is the cheaper of the two. It trades at a respective 17.1x and 11.1x past and forward earnings while offering a multiple of 1.4%. Goldcorp, on the other hand, trades at a respective 20.4x and 14.6x past and forward earnings while offering a multiple of 1.2%.

At the third-quarter earnings call, Yamana's COO, Ludovico Costa, noted strong performance:

"Production increased this quarter by 5.6% versus the previous quarter of 2010. Continuing to build on the production increases we have seen sequentially throughout the year, with Q3 exceeding Q1 production by 11.5%. We continue to expect production to increase quarter-over-quarter again in Q4, as we have demonstrated during this first nine months of 2010.

We are on track to produce between $1.03 million to $1.1 million gold equivalent ounces as previously guided. Chapada had a stand-out quarter achieving record concentrate in copper production. At Chapada, we completed the expansion to 20 million tons per year last year, and the optimizations to increase throughput to approximately 22 million tons per year are currently underway".

Production is holding up so well that Yamana is even transitioning to larger trucks. Grades are higher than expected and cash costs are declining at projects, like for Chapada and El Penon. In the latter, the average gold grade mine improved 10% sequentially. The Mercedes mine, located in Mexico, will begin production earlier than anticipated, meaning before the end of the year. The gold producer will boost its feasibility rate there to 1,500tpd and will increase throughput thereafter by improving facilities. The mine has about 114K tones of ore and investors are reasonably expecting 120K GEO/year worth of production.

Consensus estimates for the company's EPS are that it will grow by 60.7% to $0.98 and then by 27.6% and 22.4% more in the following two years. Assuming a multiple of 15.5x and a conservative 2012 EPS of $1.21, the rough intrinsic value of the stock is $18.76, implying 32.1% upside. Even if the multiple were to plummet to 13.5x and 2012 EPS turns out to be 13.6% below the consensus at $1.08, the stock would still appreciate.

Goldcorp similarly has an impressive growth story going for it. The Cerro Negro project located 600m above sea level is just made for mining and has reserves of 4.26 Moz Au - a figure to be expanded upon in later quarters. Furthermore, the drill program has expanded Marianas and San Marco potential, which will yield greater ore shoots. With that said, the company still faces execution risks in Penasquito. During the third quarter, it had record cash flow that exceeded $470M and improved earnings by 65%. Outstanding production occurred at Red Lake was nevertheless offset by the effect of poor weather at Los Filos and soft production at Alumbrera and Marigold.

Consensus estimates for Goldcorp's EPS are that it will grow by 64.2% to $2.25 in 2011 and then by 40% and 23.2% more in the following two years. Assuming a multiple of 18x and a conservative 2012 EPS of $3.05, the rough intrinsic value of the stock is $54.90.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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