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A Golden Opportunity for 2014?

January 03, 2014 | About:
Patricio Kehoe

Pato Kehoe

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As a new year begins, gold mining firms are hoping for a more favorable market environment, after last year’s 28% drop in gold prices. This decline in metal prices, the largest in more than three decades, was so severe that most industry players saw their market capitalization shrink by half. Despite the unfavorable outlook, Yamana Gold Inc. (AUY) has managed to remain profitable throughout 2013, and is keen on repeat success in 2014.

What Yamana Did Right

One of the main reasons Yamana has achieved rather good results throughout the past year, is their focus on low-cost mining. In particular, the firm established lower price assumptions and thus avoided asset write-downs. A quick comparison to industry rivals Barrick Gold Corporation (ABX) and Newmont Mining Corporation (NEM) is noteworthy. While Yamana valued its reserves and resources with a price of $950 per ounce of gold, Barrick expected prices in the $1,300 per ounce range. Newmont also overestimated the value of its assets, bringing its valuation down from $1,500 per ounce to $1,400 per ounce as of its second quarter. In the end, Barrick and Newmont each took $8.7 billion and $1.77 billion, respectively, in asset write-downs.

Low-Cost Profile, Expansion and Diversification

Yamana’s conservative valuation policy certainly contributed to the higher profitability the firm achieved in 2013, as did the below-average production costs the firm achieved. Looking forward, this means the company is in a comfortable position to continue developing existing projects. Unlike Barrick’s Pascua-Lama project, which was put on hold this year, Yamana has several promising new mines underway. The pipeline is full of attractive projects, including a few advanced-stage operations such as Pilar, C1 Santa Luz and Ernesto mines. Naturally, these are rather modest operations in terms of scale, particularly compared to Barrick’s Pascua-Lama mine, yet this also facilitates completion.

A touch of diversification also helped Yamana along the way during the harsh year for gold miners. The firm’s portfolio includes silver and copper mines in Central and South America, which have delivered steady streams of cash for the company. In addition, Yamana’s cost profile is rather attractive, due to the high metal grades of its mines.

Donald Smith Trusts These Financials

Investment guru Donald Smith is a major Yamana bull, with a position of more than 18 million shares of common stock. And, despite the stock losing almost 50% of its value, he has been purchasing shares steadily throughout 2013. Nevertheless, the company has an ample operating margin of 40%, with enough cash flow to meet its debt obligations, and finance new projects. Whereas Barrick has a debt to equity ratio of 113%, and Newmont one of 56%, Yamana’s debt only represents 14% of its equity, allowing for greater flexibility.

In terms of stock performance, shareholders cannot complain. Despite the prolonged drop in gold prices, Yamana was able to achieve 9.1% returns on invested capital, and has a projected EPS growth rate of 31.4%, far above the industry average. Considering this firm’s growth potential, low production costs and solid financial position, I understand why the stock is already trading at 21.4 times its trailing earnings. Although Yamana is trading at a price premium of 74% relative to industry peers’ average, the overall decline in market capitalization inflates the stock’s value. In the long term, I feel highly optimistic regarding the company’s performance, especially when new projects reach their final stages. Hence, with steps taken in the correct direction in 2013, the path to success seems quite clear for 2014.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Pato Kehoe
A fundamental analyst at Lone Tree Analytics

Rating: 3.7/5 (11 votes)

Comments

pravchaw
Pravchaw premium member - 6 months ago

Yes, but only if gold prices start to recover. No sign of that yet.

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