Yamana Gold Could Hedge Against The Headwinds Of This Economy

Aug. 13, 2022 7:59 AM ETYamana Gold Inc. (AUY), YRI:CAGFI25 Comments
Alberto Abaterusso profile picture
Alberto Abaterusso
495 Followers

Summary

  • Here is a possible scenario for Yamana Gold Inc. as a standalone company assuming that the deal between Yamana Gold Inc. and Gold Fields Limited does not go through.
  • The Canadian gold and silver mining group Yamana Gold Inc. unfolds strong operating cash flow.
  • Trends and operational facts from Q2 2022 point to more quarters of good performance ahead.
  • Yamana Gold's asset could perform well, supported by the much-anticipated higher prices and production of the precious metal.

Gold Bars Close-up

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Author's Note, 8/14: My article represents a possible scenario for Yamana Gold as a standalone company, assuming the business combination with Gold Fields Ltd. does not go through. I have now included this information both in the bullets and at the beginning of the article for additional clarity.

Yamana Gold Inc. (NYSE:AUY) will be acquired by South Africa-based Gold Fields Limited (GFI) at a ratio of 0.6 GFI shares per share of AUY, valuing Yamana Gold at $6.7 billion. The transaction should close sometime in the second half of the current year. To complete favorably, the deal requires approvals from the shareholders of both companies and approvals from the regulators.

Assume the deal doesn't go through here is a possible scenario for Yamana Gold Inc. (AUY) should it continue as a standalone company.

Against increased inflation and a significant risk of recession, Yamana Gold Inc., a Canadian mid-sized producer of ounces of equivalent gold, represents a good hedge with its shares expected to trade above current levels.

The asset is expected to improve over the course of 2022 as the market could welcome the company's main upside operating potential, which is a strong cash flow generation.

A solid portfolio of mining operations in Argentina's Santa Cruz province, Bahia state of Brazil and Antioquia Department in Central Northwest Colombia is on track to continue to perform well after a very good second quarter of 2022. This, coupled with expectations for higher gold prices in the coming months, supports a bullish stance on Yamana Gold Inc.

About the Positive Trend of Yamana Gold's Mineral Business

Based on the positive trend of Yamana Gold Inc.'s minerals business, continued strong cash flow generation is likely to occur.

In the second quarter of 2022, the Canadian miner saw the volume of gold equivalent ounces [GEO] increase a lot year on year, as the output in the aforementioned quarter was 260,960 GEOs, compared to 241,341 GEOs the year before. Costs were consistent compared to last year, as can easily be seen from the all-in-sustain costs, which have increased by just $3 to $1,084 per GEO.

The company benefited in the second quarter from an efficient mine expansion strategy and successful exploration programs, in addition to increased throughput at most rich parts of underground deposits and access to more valuable zones of ore bodies.

Cash Flow Pays Back Yamana's Efforts

Thanks to efficient operations and supportive prices, operating cash flow and free cash flow before dividends and debt service have grown remarkably at a rate of more than 15%. The operating cash flow hovered at approximately $190 million in the quarter, while free cash flow was approximately $53 million.

The miner outperformed many operators, including one of its larger rivals, Kinross Gold Corporation (KGC), which instead reported just a 1% year-over-year increase in operating cash flow and a little over 10% increase in free cash flow.

Since the same factors that we observed in the second quarter of 2022 will most likely play out for the rest of the year and beyond, Yamana Gold Inc can only look forward to showing its peers that cash flow was not a sporadic result.

The additional cash flow will give the company greater financial flexibility, although the company does not intend to exceed $175 million in expansion capital for now and is therefore maintaining a prudent profile.

Guidelines for Production in 2022 and Up to 2024, and Current Resources

In terms of future gold equivalent production, Yamana Gold expects to produce one million ounces in 2022, slightly less than last year's 1.01 million GEOs, and then increase to 1.03 million in 2023 and 1.06 million GEOs in 2024.

The company will undergo mineral activities in a catchment area of probable and proven mineral resources with the following characteristics. The company's proven and probable reserves currently account for approximately 13.67 million gold ounces and about 111.26 million silver ounces, and the average precious metal content in grams per ton of mineral is 0.56 for gold and 5.5 for silver.

According to current gold and silver prices, Yamana Gold has more than 15 years, perhaps 20 years of production ahead, excluding the ounces that can be obtained from estimated reserves.

In the near term, the company estimates that production will increase in the second half of 2022 due to the impact of the mining sequence and as a result of higher-grade metal veins expected to be intersected at the silver deposits especially.

The Balance Sheet Appears Solid

The company's balance sheet, which must not only ensure business continuity and financial flexibility but also protect against the negative impact of fluctuations in the commodity markets, currently appears solid.

Cash and cash equivalents on hand of $545.1 million represented 0.7 times the total debt of $773.5 million in Q2 2022. However, the interest coverage was 10.44, which indicates that Yamana Gold can easily bear the financial burden as the ratio should ideally not be lower than 1.5.

Analysts on Yamana Gold's Stock and Current Share Price

Sell-side analysts have released positive recommendations for this stock and predict a rise in the stock price within the next 52 weeks.

The median recommendation rating is an overweight rating and the median target price is $6.69, reflecting nearly 33% upside potential from current stock price levels.

Chart Description automatically generated

seekingalpha.com

At the time of writing, shares are swapping hands at $5.09 each, which doesn't seem expensive at all as a valuation in light of comparison with the 52-week range of $3.70 to $6.40, the growth potential and expectations of higher gold prices.

Expectations for Higher Gold and Silver Prices

A brief mention of the factors that will affect the price of gold over the coming months serves to support expectations that the yellow metal, on which 90% of Yamana Gold's profitability depends, will rise significantly over the next 52 weeks, as shown in the table below [Prices are from tradingeconomics.com.].

Financial Instrument

Current Market Price per Troy Ounce [$/Oz.]

Price Target in 52 Weeks [$/Oz.]

Change

Gold bullion market

1,786.72

1,854.93

+4%

Silver bullion market

20.233

18.39

-9%

The factors that will be causing gold to price higher than current levels are as follows. Inflation is showing signs of slowing down in the US, standing at around 8.5% for July, down from 9.1% in June and slightly below the 8.7% analysts had forecast.

But when we consider that this inflation is still at an all-time high, the highest in nearly 40 years, objectively more improvement was needed to glorify the release. In addition, the slight fall in inflation in July is due to a lower petrol price at the pump, most likely as a result of government measures to reduce fuel taxes. As annual inflation continues to be a serious concern for the economy, a series of aggressive US Federal Reserve rate hikes are therefore expected to dampen the rapid rise in prices for goods and services, with the implicit risk to hamper household consumption and business investment. These components of the gross national product are beginning to crack down.

By acting as a safe haven, gold allows investors to protect the value of their assets against the headwinds of entrenched inflation and significant recession risk. Technically the US economy should already be in a recession with the GDP growth contracting for two quarters in a row. So the demand for gold, as a hedging instrument, will increase creating upward pressure on the price per ounce of the metal.

Conclusion

Yamana Gold benefits from a portfolio of mineral assets that perform very well in terms of production and costs generating strong cash flow. The company is well positioned to take advantage of the expected increase in gold and silver prices. Yamana Gold could provide a good hedge against deep-rooted inflation and recession.

This article was written by

Alberto Abaterusso profile picture
495 Followers
Alberto holds a Master's degree in Business Economics. During his academic career he acquired an extensive managerial and economic background, with a solid quantitative basis.  He covers all sectors and the different types of stocks. Essentially describes a useful investment strategy that fits the profile of any investor, whether they are dividend investors or interested in a value proposition or growth opportunity.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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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