In the improving environment for gold prices, Credit Suisse upgraded Yamana Gold (AUY) from Neutral to Outperform raising its price target to $6.50 from $4.50.
Analysts at Credit Suisse now forecast the gold price to increase through 2016, averaging $1,475/oz in the fourth quarter and $1,500/oz in the first quarter, with a price average of $1,450/oz in 2017.
Credit Suisse also increased its long-term price forecast to $1,300/oz from $1,200/oz.
A week after the release of the new price target Yamana had a 13% jump on the New York Stock Exchange, from $5.20 on June 30 to $5.90 on July 6 and today, the gold producer with operations and land positions in Brazil, Argentina, Chile, Mexico and Canada, closed at $5.56, up $0.36 (or 7%), from June 30.
Contrary to general belief, this improvement in the gold price outlook will not cause Yamana to skyrocket, like a mid-tier gold mining company usually does during a period of increasing gold prices. The reason is high-cost operating leverage.
As an example, compare Yamana's cost structure and the market’s response with those from IAMGOLD Corp. (IAG, Financial), a high-cost mine company.
To have an idea of the cost structure of these two gold mining stocks and how much they produced in 2015 and forecast for 2016, have a look at the below data.
In 2015 Yamana produced 1.275 million ounces of gold at cash costs of $596/oz and at all-in sustaining cash costs of $840.
In comparison, in 2015 IAMGOLD produced 806,000 of ounces of gold at total cash costs of $835/oz and at AISC of $1,118/oz.
Source: Yamana website.
Source: IAMGOLD Corp website
For 2016 Yamana expects a further decline in AISC to $805 per ounce of gold (by product basis) and gold production between 1.264 and 1.335M ounces.
For 2016 IAMGOLD expects AISC/oz of gold produced to be between $1,000 and $1,100. The attributable production of gold is expected to be between 0.77M and 0.8M ounces.
Considering the market’s response to changes in the price of gold year to date, Yamana Gold had a return of 199%, and IAMGOLD had a return of almost 235% year to date:
Therefore, larger common stock increases in IAMGOLD corresponded with a higher cost operating leverage.
IAMGOLD outpaced Yamana with 36% and will likely do so in the coming quarters since the postponement in the interest hikes by the Fed is putting more pressure on the price of gold.
According to many traders, the Federal Reserve will probably not change interest rates for the rest of 2016 or will even lower them.
As of today, Yamana Gold looks cheaper (see EV/EBITDA) when compared to its peers, Eldorado Gold Corp. (EGO) and Agnico Eagle Mines Ltd. (AEM), even though it is trading above its book value:
| Gold Stock | EV/EBITDA (ttm) | Price to Book Value (mrq) |
| NYSE:AUY | 11.34 | 1.07 |
| NYSE:EGO | 14.48 | 0.79 |
| NYSE:AEM | 16.01 | 2.69 |
If you want to take advantage of the high operating cost leverage that characterizes a high-cost mine company and causes the price to skyrocket on a substantial increase in the price of gold, I would go for IAMGOLD.
Late October might offer a more convenient entry point into these two gold players, considering their nature of being cyclical stocks.
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