If gold miners can't find the mother lode of profit in this exceptionally favorable business environment, something must be wrong.
Yamana Gold (NYSE: AUY ) has figured prominently among this Fool's top choices in a choice sector. Just last quarter, I welcomed Yamana's results as the first indications of the sector's true profit potential.
Before I vent about Yamana's second-quarter earnings, however, let me be clear: This company continues to execute magnificently by all operational metrics. Yamana's by-product cash cost of just $213 per gold-equivalent ounce (GEO) sets an industry standard, although Gammon Gold (NYSE: GRS ) could raise (uh, lower?) the bar by achieving projected costs of $14 per ounce by 2011. Like competitors Agnico-Eagle Mines (NYSE: AEM ) and Goldcorp (NYSE: GG ) , Yamana is poised to deliver significant organic production growth at what I consider a key stage of the multiyear bull market for gold.
On an adjusted basis, Yamana beat expectations by 44% with respectable earnings of $94.9 million. Those low costs bolstered the operating margin by 18% over the first quarter, boosting cash flow 51% higher to nearly $118 million.
The brutal facts
The weakening U.S. dollar reduced Yamana's second-quarter net by more than $60 million, including foreign-exchange losses and revaluation of future tax expenses. Fools will appreciate the stinging irony of investments conceived as shelter from a falling dollar having their returns ravaged by that very outcome. Naturally, Yamana hedges against currency fluctuations using derivatives.
Yamana holds interest-rate-swap derivatives with a notional value of $444.8 million to reduce variability on an adjustable-rate debt facility. The stark irony of investors fleeing the impact of the global derivatives meltdown through exposure to gold miners -- only to find their earnings assailed by yet more derivatives -- is not lost on this Fool. All told, unrealized derivative losses for Yamana have totaled $81.8 million this year.
I have blasted the minority of gold miners that still keep counter-cyclical gold hedges on their books. Barrick Gold (NYSE: ABX ) offers only constrained leverage to the continuing advance of gold prices because of an oppressive hedge book of forward sales. AngloGold Ashanti (NYSE: AU ) and Randgold Resources (Nasdaq: GOLD ) have likewise garnered Foolish criticism. As it turns out, you can be unhedged and hedged at the same time.
I continue to believe that patient Fools will experience robust leverage to increases in gold prices. The remaining obstacles, it would appear, are the very same challenges plaguing the rest of the financial system: toxic derivatives and the crashing dollar.