Yamana Gold: A Top Stock For A High-Inflation Environment

Summary

• Seeking Alpha recently announced a “top stock for a high inflation environment” competition.
• Yamana Gold is a solid candidate for this contest.
• This is because gold stocks tend to do well during inflationary environments.
• Moreover, Yamana is prudently run, well financed, and has a diversified asset base spread across many countries and mine sites.
• Finally, the business is in growth mode.

Hoowy/iStock via Getty Images

Introduction

Yamana Gold (AUY) is one of the names best positioned for the current inflationary turmoil. It is a gold miner, and last year the organization’s production topped one million gold equivalent ounces. The corporation’s footprint includes operating mines, development projects, and exploration prospects scattered across many countries including Canada, Brazil, Chile, and Argentina. The company is currently in growth mode and is looking to expand its production profile and resource base further in the coming years.

For full disclosure, we are long Yamana Gold here at Contra the Heard, and have owned the name since last year when it was acquired at CAD $4.96 on the Toronto Stock Exchange. Given the name’s capital appreciation, lower upside versus when it was purchased, and expanding portfolio weight, we now consider the name a hold. Nevertheless, Yamana appears to be a strong candidate for weathering high inflation.

Macro Factors: Gold Miners And Inflation

The first reason why Yamana is well suited for high inflation is because it’s in the gold and precious metal space. Though the gold sector is not always consistent, it can perform well during inflationary environments. This article by Fidelity illustrates how materials have performed versus other sectors during four inflationary periods. These events include the famous 1966 to 1980 energy crisis, as well as the periods of 1942 to 1951, 1987 to 1991, and 2003 to 2008.

Top Sectors Amid Inflation (Fidelity)

As you can see from the chart, materials did well from 2003 to 2008 and 1966 to 1980. This said, the sector was flat from 1942 to 1951 and declined from 1987 to 1991. These findings mirror the findings in the following graphic by Morningstar via CNBC:

Sectoral Performance During Inflationary Periods (Morningstar Direct)

Finally, Hartford Funds has found that precious metals and mining stocks can significantly outperform the equity market, but the odds of the sector outperforming are a touch worse than flipping a coin.

Which Equity Sectors Can Combat Higher Inflation? (Hartford Funds)

To make a long story short, the gold sector can perform very well in inflationary times, but is not as consistent as the energy industry. This makes gold, and by extension Yamana, more of a wild card compared to energy companies like North European Oil Royalty Trust (NRT), which is my other pick for the top stock in a high inflation environment competition. Those interested in NRT can read about it here.

Corporate Overview And Growth Plan

Yamana possesses a strong corporate foundation thanks to its strong balance sheet, consistent cash flow generation, and well-diversified mining portfolio, with properties spread across Canada, Brazil, Chile, and Argentina. More importantly, however, it has an excellent growth profile and many development projects in the works.

Yamana held an Investor/Analyst Day in early April where management outlined the company’s three-year production targets, 10-year outlook, and long-term development plans. In 2021, the organization produced one million gold equivalent ounces; between 2022 and 2024, the business aims to grow this by 6% to 1.06 million gold equivalent ounces. In the coming year, the all-in-sustaining-cost is expected to be around $1,080.

April 2022’s Investor/Analyst Day Presentation – Slide 7 (Yamana Gold)

Yamana also released their 10-year outlook at the same event, which states they hope to grow the gold equivalent ounces to 1.25 million by 2031, eventually build to 1.5 million ounces with the development of existing resources into mines, and go beyond 1.5 million longer-term.

April 2022’s Investor/Analyst Day Presentation – Slide 18 (Yamana Gold)

To achieve these goals, the organization will develop multiple new deposits into mines and expand existing operations. In the near term, the important projects of note include the Jacobina Phase 2 project in Brazil, along with the Odyssey Mine and Wasamac Mine in Canada. All three of these projects are under development and are expected to come online over the next few years. Once these mines are up and running, Yamana will turn its attention to “advanced” projects with low capex requirements. These advanced projects are detailed in the chart below, along with the even longer-term projects that management hopes will one day push Yamana’s production profile over the 1.5-million-ounce mark.

April 2022’s Investor/Analyst Day Presentation – Slide 54 (Yamana Gold)

In summary, Yamana has a robust development pipeline which should allow the company to grow its production profile and top line for years to come. If Yamana is successful in developing these expansion projects on time and on budget, shareholders should be rewarded by capital appreciation, strong free cash flow generation, and dividend growth. This combination of attributes positions the venture well for an inflationary world.

Risks and Valuations

The company’s prospects appear bright, but there are risks involved. The primary risk here is execution. Every aspect of the mining business is difficult and requires good operational execution, from exploring and acquiring new land packages to developing new and operating existing mines in a cost-effective manner. While Yamana has an excellent growth plan, the organization’s long-term success will depend on operational excellence.

Yamana’s valuations present another potential risk. As the Seeking Alpha valuation table below suggests, the stock is more expensive today than it has been over the past five years, and this may make some investors uncomfortable. It should be pointed out, though, that the price of gold today is better than it has been for most of the past five years, and the company’s growth profile has consistently improved during that time frame as well. Nevertheless, no article on Yamana would be complete without pointing out these valuations.

Yamana Gold’s Valuation Table (Seeking Alpha)

Valuations versus peers also present a mixed picture. This Seeking Alpha peer comparison table highlights how Yamana’s valuations are generally on the high side. Here too, however, the valuations are likely justified given the organization’s significant growth profile:

Yamana Gold's Peer Valuation Table (Author via Seeking Alpha data)

Gold’s inconsistent sectoral performance during high inflation environments is another risk, as touched on in the “Macro Factors” section above. Though materials, miners, and gold companies do significantly better than most industries, energy’s returns are better and are more consistent. Therefore, energy is still the go-to sector to beat inflation.

Crypto’s emergence onto the investment landscape potentially adds to this inconsistency risk for gold and gold miners. Crypto was not around during past inflationary episodes, so there is no telling how it will actually perform. Nevertheless, it is often touted as an alternative to gold. Moreover, some suggest it is a good inflation hedge and, like gold, provides investors with some protection against certain features inherent in a fiat currency system. To make a long story short, there is a possibility that crypto steals some of gold’s thunder and diminishes the yellow metal’s prospects.

The final risk for investors to consider is changing trends or a reversal in inflation. Higher prices can cause recessions, and by so doing they often destroy demand – thereby bringing commodity prices back down. If this happens, energy names and gold names, and by extension Yamana, will fare relatively poorly.

Conclusion

Yamana has many of the features necessary to excel during a period of high inflation. It is in the gold sector, which tends to do much better than most industries during inflationary periods – albeit not as consistently as the energy space. More importantly, the organization has a well-diversified mining portfolio spread out over many countries. It also has an enviable growth profile with multiple expansion projects in the works. Therefore, investors looking to beat inflation may wish to consider Yamana, given its capital appreciation potential, and the possibility of dividend increases too. As with all securities, however, investors need to consider the risks, including the possibility of poor operational and mine development execution.

Disclaimer:

The opinions expressed – imperfect and often subject to change – are not intended nor should be taken as advice or guidance. The information enclosed in this article is deemed to be accurate and reliable, but is not guaranteed by the author.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of AUY, NRT 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.