Yamana Gold: The Market Is Showing No Respect

About: Yamana Gold Inc. (AUY)
by: Fun Trading

Revenues were $407.1 million with adjusted earnings, excluding certain items of $24.0 million or $0.02 per share. Revenues were down 10.5% from the prior-year quarter and missed consensus estimates.

The goal is to reduce net debt to EBITDA to 1.5x after the sale of Chapada is completed. The company intends to raise the dividend to $0.04/share as well.

It makes sense to buy and accumulate now, hoping that investors will lose confidence in the dollar later this year and bolster the gold price.

Image: Gold-Copper Chapada Mine in Brazil. Source: Sandstorm Gold.

Investment Thesis

The Canadian-based Yamana Gold (AUY) is a mid-tier gold, silver, and copper producer operating seven mines throughout Canada, Brazil, Chile, and Argentina.

It would not surprise many readers here by saying that the company has poorly performed for quite a long time and delivered colorless results in 2018 which pushed down the stock to a depressing and concerning level.

The main issue is that the miner offers no real impetus on the horizon and management seems desperately powerless to deliver the enthusiasm that the market needs to get tricked into buying, and without it, the stock is slowly sinking into oblivion.

In this situation, it is tricky to recommend buying AUY even if the stock price seems to offer now a real opportunity (double bottom) after the recent divestiture of the gold-copper Chapada mine in Brazil to the Swedish Lundin that I discussed a couple of weeks ago on Seeking Alpha.

Chart Data by YCharts

Note: Yamana Gold announced on October 25, 2018, that it sold its Gualcamayo mine in Argentina to Mineros S.A. in an $85 million deal.

The mine is on track to achieve Yamana's 2018 gold production guidance of 100,000 ounces.

Then, this article is looking a little bit at the rearview mirror and indicates seven producing mines while the company owns only five if we take away Chapada and Gualcamayo.

Daniel Racine, President and CEO, said in the conference call:

Our first quarter production of 272,000 GEO ounces exceeded expectation, while all-in sustaining cost of $930 per gold equivalent ounces were in line with expectation. Year-on-year production rose 29%, led by record production at Jacobina, and a 6% increase at Minera, Florida. We had also benefited from new contribution from Cerro Moro. Our 2019 mine-by-mine outlook for production and cost is unchanged.

Yamana Gold - Balance Sheet in 1Q'2019. The raw numbers

Yamana Gold 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q18 1Q'19
Total Revenues in $ Million 493.4 478.8 449.7 431.5 416.8 500.5 407.1
Net Income in $ Million 43.5 -196.9 160.1 18.0 -81.3 -61.4 -4.1
EBITDA $ Million 188.5 -219.2 -9.3 172.9 37.0 136.3 144.4
Profit margin % (0 if loss) 8.8% 0 0 4.2% 0 0 0
EPS diluted in $/share 0.04 -0.21 -0.17 0.02 -0.09 -0.06 0.00
Cash from operations in $ Million 149.8 158.3 122.4 102.4 64.3 114.7 12.4
Capital Expenditure in $ Million -0.1 -327.2 149.8 104.0 102.6 108.4 70.0
Free Cash Flow in $ Million 149.9 -485.5 -27.4 -1.6 -38.1 6.3 -57.6
Total Cash $ Million 248.5 162.1 137.2 114.4 120.7 105.9 115.0
Total Debt in $ Million 1,643 1,748 1,638 1,697 1,778 1,757 1,793
Dividend per share in $ 0.005 0.005 0.005 0.005 0.005 0.005 0.005
Shares outstanding (diluted) in Million 948.8 948.5 948.7 949.0 949.1 949.3 949.9
Gold Production K Oz 3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19
Gold Equivalent ounce (GEO) Production K Oz [with Brio] 281,315 282,041 248,088 248,177 268,843 292,483 271,987
Silver Production M oz 1.43 1.17 0.90 1.31 2.55 3.26 3.02
Copper Production Mlbs 37.1 - - 31.1 28.6 39.0 28.1
Gold price realized $/ Oz 1,278 1,286 1,328 1,304 1,213 1,226 1,301
Silver price $/Oz 16.66 16.49 16.93 16.53 15.14 14.59 15.52
Copper Price $/lb 2.89 3.02 3.13 3.09 2.93 2.90 2.91
AISC co-product $/Oz 905 925 840 847




Sources: Company filings and Morningstar

Gold production details and commentary

Note: Production for Brio Gold (sold) and others is not included in the graph above to make a better comparison. The company has indicated this quarter that silver will be treated as gold equivalent ounce GEO, with a ratio of 83.8:1.

As a reminder, the Leagold (OTCQX:LMCNF) transaction closed in the second quarter of 2018. Upon completion of the arrangement and following the recently announced planned equity issue by Leagold, Yamana owns approximately 20.5% of Leagold.

Total production for the first quarter was 271,987 GEO from Yamana's seven producing mines, up over 28% from a year ago.

GEO AISC co-product was $865 per ounce in 1Q'19, which is satisfactory. However, gold AISC on a co-product basis is $801 per ounce.

  • Total silver production for 1Q'19 was 3,016,298 Ag Oz, down 7.60% sequentially due to lower output in Cerro Moro mine.
  • Total copper production was 28.1M lbs from Chapada mine, the only mine producing copper for Yamana, which is in the process to be sold.

An interesting element is that Argentina is introducing a new export tax (cost ~$30 million). The company is increasing CapEx by 33% in 2019 for an "aggressive" drill program.

Daniel Racine said in the conference call:

Operating result for the quarter was solid, both with respect to production and cost. On a non-adjusted basis, our net loss was $4.1 million or nil per share. On an adjusted basis we earned $0.02 per share. Cash flow from operation before net change in working capital adjustment was $103.2 million. This exclude deferred revenue from our copper advanced sale program totaling $25.1 million. Copper production during the quarter was 28.1 million tons. On a by-product basis taking copper as a by-product credit, our GEO cash costs and all-in sustaining costs were $526 and $665 respectively.

The company has changed its guidance after the divestiture of Chapada. Please see the graph below.

Source: AUY Presentation

First quarter 2019 financials. Commentary

1 - Revenues of $407.1 million.

Revenues were $407.1 million with adjusted earnings, excluding certain items of $24.0 million or $0.02 per share. Revenues were down 10.5% from the prior-year quarter and missed consensus estimates by $7.4 million as a result of lower metal prices. The company received $1,301 per Oz this quarter compared to $1,328 per Oz a year ago.

Jason Leblanc, CFO, said in the conference call:

We delivered $407 million in revenue in the first quarter compared to $455 million in the same quarter last year. Revenue was impacted by lower gold and copper prices partly offset by higher year-on-year silver sales. Despite the decline in revenue gross margin increased by $10 million dollars over the last year underpinned by operational results and cost improvements.

2 - Net debt is $1.68 billion.

As of March 31, 2019, Yamana Gold had $115 million in cash on hand and securities with total liquidity at $695.4 million. Net debt is now $1.68 billion. However, the company intends to use the $800 million that it will receive from Lundin to repay the debt.

The goal is to reduce net debt to EBITDA to 1.5x after the sale of Chapada is completed with a target to 1.0x later.

Source: AUY Presentation

The early retirement of debt will provide an annualized interest savings of more than $35 million per year.

3 - Free Cash Flow

The company free cash flow is minus $91 million yearly. Free cash flow for 1Q'19 was minus $57.6 million which is not supporting the dividend of $0.02 per share which will be increased to $0.04 per share after the Chapada sale is completed.

With the Cerro Moro starting to produce, it is logical to expect a reduction of CapEx shortly. In 2019, the most significant capital spending will be Canadian Malartic extension project with $34 million price tag (Yamana Gold 50% share) and Jacobina mine.

Conclusion and Technical Analysis

The Toronto-based Yamana Gold performance is quite disappointing. The stock is now re-testing the November 2018 low despite indicating the sale of Chapada and the significant debt reduction and a potential new agreement for the Agua Rica project in Argentina that seems interesting project with a lot of growth potential.

Source: AUY presentation.

However, the market doesn't seem impressed by the recent sale of its Gold-Copper mine. Furthermore, Yamana Gold has often been considered as a proxy for gold, and the metal is quite bearish now, adding more selling pressure.

But, it comes to a point where the valuation opportunity is greater than the risk of a further downside, and I believe we are very close to this situation where the stock is undervalued due to an oversold condition.

Technical Analysis

AUY is forming a descending triangle pattern with line resistance at about $2.65 (I recommend selling part of your position at this level unless the gold price is showing strength) and reliable line support (double bottom) where it makes sense to buy and accumulate, hoping that investors will lose confidence in the dollar later this year.

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Disclosure: I am/we are long AUY. 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.

Additional disclosure: I started to accumulate AUY due to an attractive valuation