- Yamana is performing exceptionally well both operationally and financially.
- The current operations more than support Yamana's $3.8 billion valuation.
- Yamana is getting zero value for MARA, even though its 56.25% stake is worth ~$2.5 billion at current gold and copper prices.
- Yamana is well-positioned to deliver on all of this value.
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Yamana Gold's (AUY) financial results that were released after the close last Thursday were exceptional. Revenue increased to $452.2 million compared to $437.4 million in Q2 2021, while operating cash flow surged 24% QoQ to $190.6 million. This, despite lower realized prices for gold and silver in the third quarter, as gold equivalent production increased to 256,464 ounces compared to 242,341 ounces in Q2 2021, while AISC fell to $1,041 per GEO (down from $1,081 per GEO in the prior quarter). The higher output and lower costs more than offset the decline in Au and Ag.
(Source: Yamana Gold Q3 2021 Press Release)
Free cash flow came in at $81.6 million last quarter vs. $51.2 million in Q2 2021.
Yamana expects Q4 to be the strongest quarter of the year and is forecasting that production will exceed 270,000 GEO, while AISC this quarter is expected to be the lowest of the year.
How did the stock react to this news?
It tanked almost 7% and was one of the worst performers of the day.
I don't see any reason for the shares to decline like they did last week. The company is performing exceptionally well both operationally and financially. Their mines — on average — are hitting or exceeding targets, and Yamana has paid down a substantial amount of debt over the last few years and significantly lowered its financing costs last quarter.
Net debt at the end of Q2 2019 was almost $1.8 billion.
(Source: Yamana Gold Q2 2019 MD&A)
At the end of Q3 2021, net debt was $532.8 million, and that doesn't include $220.2 million of cash held by the MARA project for utilization on MARA, which is part of the current cash balance. In addition, total equity has increased by over $1 billion in the last two years and is now $5.1 billion.
(Source: Yamana Gold Q3 2021 MD&A)
Last quarter, the company also issued $500 million of 2.63% Senior Notes due 2031. It used the proceeds from the notes, plus some cash, to redeem $719 million of existing notes with an average interest of 4.83%. The refinancing has reduced Yamana's annual interest by $21.6 million compared to the second quarter of 2021 and roughly $60 million lower than Q2 2019.
(Source: Yamana Gold Q3 2021 FS)
The only negative that I saw in the report is that despite the free cash flow, net debt did increase slightly in Q3. However, that's because there was a $53.3 million early redemption premium on the notes the company repurchased. That's a high price, but Yamana will recoup that cost within 2 1/2 years via savings on interest. Also, the company bought back $14.3 million of its stock in Q3. If Yamana can at least replicate Q3 operating cash flow this quarter, I expect net debt to decline $30-$50 million in Q4 2021, and that's assuming a similar amount of share repurchases as well.(Source: Yamana Gold Q3 2021 FS)
Yamana's Valuation = Amazingly Cheap
Yamana's market cap is now $3.8 billion. This is a 1 million gold equivalent ounce producer with wide margins and generating robust operating and free cash flow ($350-$450 million FCF at $1,800 gold and $24-$26 silver). The 10-year outlook calls for stable, 1 million GEO production until Wasamac comes online, which will boost output by another ~200,000 ounces.
(Source: Yamana Gold Presentation)
Yamana's asset base, however, has a mine life much longer than 10 years.
Canadian Malartic - 2039+
Canadian Malartic, currently the flagship operation and a 50/50 JV with Agnico Eagle (AEM), has an 18-year LOM and is expected to produce at least until 2039.
Just this morning, Agnico Eagle released an update on exploration drilling at the East Gouldie deposit at Malartic, which included hole MEX21-208 that "was drilled into the shallower, western portion of the deposit" and intersected a wide swath of higher grade gold mineralization, hitting 6.8 g/t gold over 41.4 meters at a depth of 1,069 meters, and included 10.2 g/t gold over 21.7 meters. Hole MEX21-203R intersected 7.9 g/t gold over 25.5 meters at 1,496 meters depth, including 14.5 g/t gold over 10.6 meters. The entire system at Malartic remains open at depth and down plunge, likely leading to a much longer mine life.
(Source: Agnico Eagle)
Jacobina - 20+ Years
Thanks to recent discoveries at Jacobina, Yamana is talking about a mine life of several decades "at a production level well above the planned Phase 2 expansion annual production level of 230,000 ounces, and likely 270,000 ounces, which is the planned annual production level for the Phase 3 expansion."
Jacobina is currently producing under 200,000 ounces of gold per year.
El Peñón - 20+ Years Of Reserve Replacement
El Peñón has less than 10 years of reserves remaining, but it has a more than 20-year history of reserve replacement. The operation continually replaced ounces mined since 1999 and has consistently maintained a reserve life of six to eight years since it went into production.
Cerro Moro - Short LOM, But Heap Leach Option And Incredible Exploration Potential
Yamana uses a high cut-off grade at Cerro Moro, but they are studying whether a heap leach would be economical, as there is a significant amount of ore below the cut-off grade. Bringing 1-2 g/t material into the fold could greatly extend the current short mine life of the operation.
Also, the operation has enormous exploration potential, and Yamana has released some exceptional drill results lately. Particularly at Naty, which is 25 km SSW of the Cerro Moro (Morro) plant.
(Source: Yamana Gold)
Recent drilling at Naty intercepted a whopping 30.68 g/t gold and 3,824.7 g/t silver over a true width of 10.37 meters (Hole MD3255) just below surface. Deposits like this are potential game-changers.
(Source: Yamana Gold)
The current operations more than support Yamana's valuation.
But that's not all...
MARA Alone Is Worth $2.5 Billion
Investors are not only undervaluing the mines in production, but they are giving zero value to one of Yamana's key future assets, which is the MARA project in Argentina.
MARA was formed by integrating the Agua Rica project with the Minera Alumbrera plant and infrastructure. MARA is one of the most interesting copper projects in the world because the joint venture plans to use the existing process plant at Alumbrera (with ore conveyed 35km from Agua Rica to the plant), thereby greatly reducing the capital intensity of the project.
The project has a mine life from 2026 to 2052, and there is additional LOM extension likely. While this is primarily a copper deposit with a stunning 11.7 billion pounds of copper reserves, there are also over 7 million ounces of gold and 100 million ounces of silver in reserves. At just over $3.00 per pound copper, the mine's free cash flow during the first four years of full production will average ~$1 billion.
(Source: Yamana Gold)
(Source: Yamana Gold)
At $4.00 per pound copper and $1,700 gold, the NPV of MARA is north of $4 billion, and that's at an 8% discount rate. Yamana owns 56.25% of the project, with Newmont (NEM) and Glencore (OTCPK:GLCNF) owning 25.00% and 18.75% interests, respectively. Yamana is getting zero value for MARA, even though its 56.25% stake is worth ~$2.5 billion at current gold and copper prices.
As Yamana's CEO, Daniel Racine, said in the Q3 conference call (paraphrasing some parts for clarity):
There's many (analysts) that are carrying no value for MARA after we even published a strong prefeasibility study last year. The numbers we showed on our side are speaking for themselves. That mine is half built. We have integrated Alumbrera and Agua Rica together to form MARA. There's always risk to spend $2.5 / $2.8 billion on a project, or $5 billion if you have to build a mill. This is behind us, the mill is built. We have the permits for the tailings facilities, we have all the infrastructure in place at Alumbrera to operate the mill. We have the permit to do it. We have a huge open pit to even dispose tailings in the future. We have pipelines to transport the concentrate to the port. So that all exist.
What we need to do at MARA is to strip a big open pit and install conveyors overland to the mill. So that's something very simple to do...When we look at the valuation that's put on the market compared to the numbers you saw on the slide at $1300 and $3 copper....there's a lot of value there. We're working to show you the value, we're going to probably share a final feasibility study next year, were in the permitting phase. There's a lot of interest on that project and our goal at Yamana is to demonstrate the potential of MARA...we see huge potential with MARA in the future.
MARA will be built, the only question is how Yamana will proceed with its majority stake in the project? It does seem that the company is interested in at least keeping a small ownership percentage, but they've also discussed a potential spin-off. For now, the JV will continue to move the project forward.
AUY Is A Core Holding That Should Be At $8.00, Not $4.00
It's hard to believe that AUY is now only a few percent above its September 2021 lows and is at risk of breaking down. The value is undeniable, and the shares should be trading at $8.00 or 2x the price.
The sentiment in the gold mining sector is still quite bearish, but that will change, and AUY should be one of the top performers on the reversal.
This company generates free cash flow at $1,500, $1,600, $1,700, etc. It doesn't matter if gold drops $100 per ounce, AUY will still be making money.
The price of gold and copper would need to decline by 20-30% to support the current price of AUY. And that's the thing about Yamana, it gives investors significant exposure to not just gold, but copper and silver as well. For any investor looking to play this trio of metals, AUY is extraordinarily compelling, especially below $4.00.
Yamana is well-positioned to deliver on all of this value.
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This article was written by
I’m a private investor with a strong track record of outperformance, and also currently work as a research consultant for high-net-worth clients who invest in the precious metals sector.
My focus was mostly on Tech/Internet when I started investing, but almost 20 years ago I became extremely interested in the gold and silver sector as I anticipated a major bull run.
I’ve been doing in-depth research on gold and silver miners since then. I'm familiar with their stories, their stock patterns, their highs and lows, their operations/projects, their successes and failures, their management teams and turnover at the top, and all other facets of these precious metal companies.
This sector is my singular focus as I expect a massive bull market will unfold. These mining stocks are the cheapest they have been in over a decade, some in fact, are near multi-decade lows as they are oversold and significantly undervalued. I expect strong appreciation in these mining stocks as the bull market in gold and silver recommences.
I believe in buying value, and not chasing the next hot stock. I use several basic investing principles, the main one being buying the balance sheet. I wait for opportunities to present themselves and then establish positions. I believe in doing your homework, and I have a very research intensive focus.
*Disclaimer* I am not a Certified Financial Advisor. My research and articles should not be interpreted as a recommendation to purchase, sell, or hold any security at any time. The accuracy, completeness, or timeliness of the information posted in my articles is not guaranteed. Do not rely on any statement that I make in my articles. All readers and subscribers should always conduct their own research and should consult a professional financial advisor when it comes to making investment decisions.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of AUY,AEM either through stock ownership, options, or other derivatives. 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.
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