Friday, June 24, 2011

Yamana Gold : Unjust Criticism Causes Investors To Overlook A Fundamentally Sound Company (undervalued, production, projects, 2012)

In 2010 Yamana produced 10.0 million ounces of silver (silverinstitute.org) and 1.05 million ounces of gold (Yamana Gold corporate responsibility:2010) making it a top 15 gold and top 19 silver producer that year (rank among all companies including those diversified). The gold churned out was produced at a total cash cost of $442/oz (fiscal 2010) 32.4% less than the cash costs industrywide in the third quarter and substantially lower than key competitor AngloGold Ashanti ($638/oz). In the last quarter of 2010 (one of its record quarters for production) Yamana produced 286,682 ounces of gold at a cash cost of negative US$34/oz giving it a solid margin and earnings optimism. Yamana's free cash flow (operating cash flow less capex) was $31.1 million in 2010 nothing to brag about but a far cry from thet 259.4 million in losses recorded two years earlier. Mineweb.com March 4, 2011:Are gold cash costs per ounce headed for extinction?
Update: On Jan 11, 2012 Yamana reported 2011 fiscal year gold production at 1.1 million ounces (up 5%) led by El Penon at 476,000 oz and Gualcamayo at 159,000 oz (up 18%). What's so great about this news is that the company last told us that it would produce only 900,000 ounces, that's 18% less than it actually did! Chapada produced 135,000 oz gold (same as the year before) and 166 million pounds of copper (up 11%) while Jacobina showed no growth in production (122,000 ounces). After by product credits, cash costs were $50/oz (gold equivalent which means silver is also included) significantly lower than the $250/oz estimate. The company plans on increasing gold production by 43% by 2013 to the range of 1.5 and 1.7 million ounces reaching 1.75 million ounces by 2014. 2012 gold production is estimated to be 1.3m ounces.
On June 25, 2011 the value placed on its gold per ounce by the market (Enterprise Value/Gold Equivalent) was $324.3. That compares to $404.67/oz for Goldcorp (60 mil oz AU, 30 mil oz AUequiv (silver)) and $495.36/oz for Eldorado Gold (15.41 million ounces) making Yamana's gold relatively undervalued (which is meaningful considering Yamana's cash costs per ounce are about the same).

Company earnings have been steady since 2009 however stock performance has been underwhelming. The reason? the company has relied on production from areas considered risky due to their currency situation (Brazil), inflation (Argentina) and natural disasters (earthquakes in Chile); Gaining the confidence of investors hasn't been easy given the losses incurred by other companies exposed to similar risk (coal mines in Australia). Not helping the situation is the fact that production (specifically gold) is expected to be flat until at least 2012 when a slew of new mines begin operating (Mercedes ~1.0 million gold equivalent ounces, Pilar - 1.4 million ounces of gold, Jeronimo - 0.928 million ounces of gold, Santa Luz - 1.2 million ounces gold), The good news: the new mines, home to more than half of the company's 2P gold reserves will come on tap at about the same time and immediately raise annual production by as much as 80% while possibly lowering total costs of production (most are at or under $460/oz).

Update December 28, 2011 Company will pay a dividend worth five cents a share, on January 13, 2012. Yamana's dividend has increased steadily since 2009. December 28th is the ex-dividend date meaning anyone who buys the stock after that time will not be entitled to the January 13 dividend.

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