Yawanna Have Yamana

Can you hear me now? Sorry to borrow from that annoying cell-phone commercial, but I want to be sure I'm being heard here. It's not as though I'm peddling the Brooklyn Bridge.

I'm simply committed to helping Fools see the immutable value in gold mining equities at this juncture. I've already presented 700 reasons to own some gold, tabulated the trillions of dollars tossed into the fire of deleveraging derivatives, and outlined the hazards of a compromised U.S. dollar. When I see value striking this deep for an equity with impressive growth potential, though, it's my Foolish duty to bring it to your attention.

Shares of Yamana Gold (NYSE: AUY  ) have tumbled 75% since the onset of the gold correction in March, compared to a drop of more than 50% for Agnico-Eagle (NYSE: AEM  ) . I could only watch with amazement this week when the market tacked on further losses after the company revised production guidance to achieve 2 million ounces of gold per year by 2012, instead of 2011. To understand the growth side of the equation, let's take a look at a selection of key projects underway and where they stand.

Project

Proven and Probable Reserves

Grade

g/t

Estimated

Cash Costs

per Ounce

2008 Estimated Production or Project Status

Chapada

2.35 m oz.*

0.24

$330-$360

150,000 oz. in 2008

El Penon

1.93 m oz.

6.64

$295-$315

420,000 oz. in 2008

Jacobina

1.22 m oz.

2.02

$650-$680

70,000 oz. in 2008

Gualcamayo

1.77 m oz.

0.82

$380-$400

(2009)

Targeting Q2 2009

200,000 oz. in 2009

Minera Florida

602,000 oz.**

4.51

$330-$350

Ramping up to

110,000 oz. in 2009

*Chapada contains significant copper reserves of 2.3 million pounds.**Minera Florida contains significant silver reserves of 4.95 million ounces.

With $238 million in cash on hand, one of the lowest cash costs of any gold miner, and some serious cash flow from its producing mines, I see no reason to doubt Yamana's ability to execute the stated production growth targets of 38% for 2009, and 100% by 2012. If gold remained right where it is today, at around $770 per ounce, this would still be a solid growth story. Of course, many see gold climbing much higher.

Now that we've glanced at the growth potential, let's consider valuation. I've devised a valuation metric that I will apply to metal miners going forward. We'll call it Enterprise-to-Reserves, representing a ratio of the enterprise value to the current market value of its proven and probable reserves. This asset category represents only the best-defined portion of unmined material and provides the most reliable estimate of mineral wealth. Miners typically report reserve estimates at each year-end, and Yamana's last tally was 17.9 million ounces of gold. At the present spot gold price of around $770, the market value of these reserves is $13.78 billion. With an enterprise value of just $4.0 billion, Yamana's Enterprise-to-Reserves ratio is just 0.29.

Before we compare that result to some competitors, it's important to note that we've only taken the principle target metal, gold, into account. The metric overlooks Yamana's 182 million ounces of silver and 11.42 billion pounds of copper in proven and probable reserves. Since miners differ in the way they account for various products as they pertain to costs, etc., we'll just stick with the gold for now. Let's see how Yamana's value stacks up against some major competitors.

Company

Enterprise Value

Proven & Probable Gold Reserves

Enterprise-to-Reserves Ratio

Agnico-Eagle Mines

$5.48 B

16.7 million oz.

0.43

Barrick Gold (NYSE: ABX  )

$25.5 B

124.6 million oz.

0.27

IAMGOLD (NYSE: IAG  )

$835 M

7.97 million oz.

0.13

Goldcorp (NYSE: GG  )

$14. 65 B

42.8 million oz.

0.44

Kinross Gold (NYSE: KGC  )

$7.62 B

46.6 million oz.

0.23

Newmont Mining (NYSE: NEM  )

$16.32 B

86.5 million oz.

0.25

Yamana Gold

$4.01 B

17.9 million oz.

0.29

Calculations made using gold spot price of $770 as of Oct. 21, 2008.

By this metric, which I believe is a valuable one, Newmont looks to be the bargain among the majors, although Barrick also fared well. Results for Agnico-Eagle and Goldcorp came in surprisingly high, suggesting Kinross and Yamana are the cream of the intermediate crop. IAMGOLD is smaller than the rest, which may account for the relative bargain. Although I half-expected Yamana to come out at the top of this pack, I am more than satisfied considering that the company pays less than any other to retrieve the gold from the ground.

Further Foolishness:

Gold is a hot topic on the blogs at Motley Fool CAPS. Join the free service today and see just how many Fools are taking the long view when it comes to investing in gold. The "Gold" tag at Motley Fool CAPS lists 85 companies, and you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker captains yachts and writes about stocks. He can also be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns no shares in the companies mentioned. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (33)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 22, 2008, at 11:05 AM, nesselsdorf1187 wrote:

    Hi Chris,

    thanks for the post it is quite intriguing I also plan on commanding a yacht, but don't have money for it yet.

    It seems it has some flaws, though.

    Using Enterprise-to-Reserves is highly controversial approach. It only accounts for the revenues not the earnings.

    Earnings would be using profit margin of 25% as you mentioned the costs for extraction are low, somewhere around 4 billions which is now the enterprise value.

    Selling of the equipment could earn some more money but I don't account for this.

    So using this the valuation seems to be quite right. What do you say to this?

    Regards

    nesselsdorf1187

  • Report this Comment On October 22, 2008, at 11:50 AM, XMFSinchiruna wrote:

    nesseldorf,

    The best use of the EV/PPR ratio is not as a means to nail down the dollar value of a company on its own, but rather as a tool for comparison between peers to find the companies for which the market has most overlooked the riches in the ground.

    Thank you for the comment, and please feel free to follow-up. As for captaining yachts... readers should know they're not my own yachts. :) No caviar on my plate. If one were to take the time to calculate market value of PPR for every metal in a miner's portfolio (since AUY's copper and silver by-products are the major means of achieving low production costs), that would more accurately portray at least a rough value of the company... but please also keep in mind the formula completely ignores measured, indicated, and inferred resources... which in many cases are ultimately converted to P&P in time.

    The latter distinction makes it hard to use this formula for juniors and the smaller intermediates... many of which have yet to advance big chinks of their resources to P&P reserves.

  • Report this Comment On October 22, 2008, at 12:52 PM, Zookatx wrote:

    Christopher:

    I like that comparison. It is as you say not the entire story, but it says important things.

    I like reversing it even better, that is, reserves/ enterprise. THat gives a good glimpse at the magnitude of the differences here. In your example it gives:

    Agnico: 2.33

    Barrick: 3.70

    Iamgold: 7.69

    Goldcorp: 2.27

    Kinross: 4.34

    Yamana: 3.45

    I find that to be a more illustrative comparison for my feeble brain.

    Many thanks for sharing that great research!

    -David

  • Report this Comment On October 22, 2008, at 6:23 PM, turnipseedtales wrote:

    Chris,

    Using Enterprise-to-Reserves is probably OK for comparing similar gold mining companies, such as Nevada companies or South African companies. But it ignores too many other variables to be useful for detailed comparison between all gold miners. You already pointed out by products. Others include average grade, mining method, and recovering %, all of which have maor impacts on cost/oz. IAM looks attractive because development costs are not factored in. Also, geographic risks are not factored in, a major risk in AUY.

  • Report this Comment On October 22, 2008, at 8:36 PM, XMFSinchiruna wrote:

    Thanks for the comments, jempsall. I don't consider AUY to carry much geographical risk at all... to the contrary, Yamana is commonly praised as having one of the safer property portfolios of the intermediate miners from a geo-political standpoint.

    IAMGold is a producer with nearly 1 million ounces annual production, with 8 producing mines and five in development. This is not an atypical ratio of producing mines to development projects, and I chose IAG carefully as one of the few small intermediates that could fairly be included in that comparison.

    I understand many consider EV to Reserves to be an over-simplification, which again is why it is not offered as a means to nail down a particular company's valuation. The goal here is comparison. Given time, we could delve much deeper into the books to calculate more precise valuation estimates for these companies, but as a starting point for further research, I truly believe EV/PPR is a very valuable tool for recognizing the extent to which markets are undervaluing the value of assets on the ground.

    There's a macro-economic point here as well... does no one else find it remarkable that the highest ratio on this list was less than 0.5 and most were closer to 0.25? It's like paying a quarter on the dollar for well-established gold in the ground owned by solid companies with the means to bring production forward. As for production costs, were of course are a huge part of the overall equation... I will run this same comparison come January... but I will tweak the formula to adjust for 2008 average operating costs for each company... or perhaps 2009 projected if they all provide explicit cost projections. This alone help alleviate the problems you cite.. like ore grade, etc...

    Anyway... while EV/PPR may be far from perfect, it's still a valuable tool IMO, and I for one found the process of researching this article most fascinating.

    Fool on!

  • Report this Comment On October 23, 2008, at 8:41 AM, bizcardnut64 wrote:

    Talk all you want folks, no one is buying the stock even though everyone says you should. No one looks at anything but the price of gold when it comes to Yamana. Gold is down near $700 this morning. Wouldn't surprise me that the 'enlightened' investor drops the price of Yamana to $3.00. Cite all the reasons you want as to why this stock is a buy, but no one is listening unfortunately. 30% drop in Gold Prices = 80% drop in Yamana stock price. Absolutely ludicrous.

  • Report this Comment On October 23, 2008, at 4:06 PM, Kommonsents wrote:

    I think the reason we don't see a turn-around in the PPS for AUY (and others) is that there is still mass liquidation by individuals and funds due to margin calls and redemptions. When that settles down, we will see the PPS rising, IMHO.

    Right now, value is not part of the selling equation. Need for cash is the cause and trumps value. Just take a look at all the quality stocks that have been drug down for these reasons.

    When the need for the selling is eliminated (soon I believe), we will have a bottom in place and stocks with good value and fundamentels will rise. It will probably take a while for them to get back to their previous PPS, but I believe they will. GL to all, hang tough.

  • Report this Comment On October 23, 2008, at 5:25 PM, woodszilla wrote:

    Chris, how does the dollar rising in value as other markets are getting hit worse than the US affect your opinion? I agree with what you said in this article, but I can't help but notice how close the 1yr EUR/USD chart mirrors the 1yr gold spot price.

    Basically, I really want to buy this company at it's current value (trading for half book value), and I'm looking for reasons why I should wait.

  • Report this Comment On October 24, 2008, at 1:29 AM, XMFSinchiruna wrote:

    The dollar's rally will falter sooner rather than later... it's a mirage. If you're worried about timing, consider building a position equal to about 1/3 of what you eventually would like to own, another 1/3 the next time you think it surely can't go any lower, and then a 3rd time when you finally nail the actual bottom out of sheer luck. :)

    My way of saying these markets are dislocated and crazy... no way to predict the short term.

  • Report this Comment On November 03, 2008, at 11:49 AM, FreundInvesting wrote:

    Wonderful article, thanks Chris. You are absolutely my go-to guy for gold and other precious metal information.

  • Report this Comment On January 26, 2010, at 7:55 AM, XMFSinchiruna wrote:

    For the record, AUY shares closed at $3.93 on the date of this article's publication.

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