Yamana Gold Is Preparing for Liftoff

Within a bull market of gold's magnitude and duration, the deepest stores of value become the veritable rockets of outperformance in their due time.

For deep-value sensation Yamana Gold (NYSE: AUY  ) , I believe that time has arrived. Yamana delivered a 48% boost to mine operating earnings -- to more than $200 million for the third quarter -- while revenue ballooned 36% to $454 million. Net earnings surged 98% to $120.7 million, and cash flow of $208.8 million permitted an increase in the miner's cash balance to $280 million. On the financial front, Yamana is a rock.

On the operations end, this is a rocket. Yamana continues to deliver steady progress toward its strategic goal of increasing annual production by 50% over the next few years, and three new mines are slated to commence production in 2012. At the Mercedes and Pilar properties, in particular, ongoing exploration results continue to point toward "significant potential" for further resource expansion prior to start-up of those mines. In the mining world, nothing delivers shareholder value quite like the exploration drill.

Drilling success at Pilar has generated a 32% increase in gold resources already this year, which by itself will expand Yamana's companywide reserves by 7%. At the Jacobina mine in Brazil, successful drill intercepts have led the company to ponder a mine expansion. At the flagship Chapada gold and copper mine, the new Suruca gold discovery is advancing rapidly, and Yamana expects to have a feasibility study complete later this year. As with Agnico-Eagle Mines (NYSE: AEM  ) and Goldcorp (NYSE: GG  ) , I have consistently offered Yamana as a relative heavyweight with respect to its potential for organic reserve growth at its existing properties, and that potential is beginning to convert into execution.

All the while, Yamana continues to produce gold at costs that are the envy of the industry. Yamana yielded more than 267,000 ounces of gold equivalent (including silver production) for the third quarter at an industry-leading cost of just $104 per gold ounce equivalent (GEO). As I discussed this week with respect to Newmont Mining (NYSE: NEM  ) , ongoing strength in copper prices is helping miners with heavy copper by-product credits to achieve mammoth margins for gold.

As the cash rolls in, Yamana has seen fit to increase dividend payments to shareholders despite being in the midst of an aggressive growth spurt. As recent dividend hikes from the likes of Barrick Gold (NYSE: ABX  ) continue to corroborate, in this price environment for gold we are seeing sufficient cash flow expansion to fund costly growth initiatives and increasing rewards to shareholders simultaneously. For its part, Yamana added a further 50% dividend hike to the increased rate announced last quarter, and at present share prices this $0.12 payout brings the yield to 1%. In addition, Yamana granted a special dividend of $0.01 payable on Nov. 26. Yields, among those select miners with dividends, remain very modest, but I maintain it is the expansionary trend for those payouts that Fools will wish to track.

Thanks for the consolation prize, Mr. Bernanke
I consider Yamana primed for phenomenal (and long-overdue) price performance through the next several months, assuming gold will continue its ascent toward my near-term target of $1,500 or higher. By announcing $600 billion in additional Treasury purchases over the next eight months, on top of about $300 billion expected from the Fed's separate reinvestment program, Ben Bernanke's Federal Reserve is effectively topping off the fuel in Yamana Gold's unfired rocket.

Even with the incredible run-up we have already seen in precious-metals prices, I continue to spot plentiful bargains within a mining sector that as a group has dramatically lagged the performance of bullion. I consider some of the more successful junior producers and explorers as persistent stores of value, with names like Gammon Gold (NYSE: GRS  ) and Endeavour Silver (AMEX: EXK  ) warranting careful consideration. For the sheer underperformance of shares through catalyst after catalyst of value creation, however, Yamana Gold continues to earn this Fool's uninterrupted designation as the singular greatest value among the miners of gold.

I stated back in August that I believed Yamana would approach fair value at three times its sub-$10 price tag at the time. That value-based assessment is independent from any further long-term price gains in the metals complex. In my opinion, Yamana Gold represents an uncommonly safe investment vehicle for gold, as downside risk is arguably very limited at these prices. Yamana has already outperformed the S&P 500 by more than 140% since I selected the stock for my silverminer CAPS portfolio just over two years ago, and I believe this is just the beginning.

Please take our Motley Poll, then scroll down to the comments section to tell your fellow Fools why you made your choice.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Yamana, Endeavour Silver, Gammon Gold and Agnico-Eagle. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (36)

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 November 05, 2010, at 9:26 AM, doring2000 wrote:

    Hi,

    your personal opinion that Yamana is "the singular greatest value among the miners of gold" is not taking into consideration some of the very best miners.

    why should Yamana be better than e.g. GORO which is paying the fourth special dividend of

    0.03 US$ and just reported exceptional drilling results on its second mine, or Kaminak Gold which reports unparalleled drilling results, or Nevsun or Rio Alto Mining or VG Gold or...

    They all have appreciated more than 100% year to date and seem to repeat it for the next 10 months with potential for more.

    Sorry, your evaluation is quite lopsided comparing Yamana to the big shots only.

    Whoever invested in Yamana over the last 18 months, burnt money compared to the gold market on average.

  • Report this Comment On November 05, 2010, at 9:27 AM, Maksani wrote:

    Wow, even after a drop in stock valuation since January, and his buy rec., Mr. Baker still hold out for the promise of Yamana Gold increases. With gold prices spiking recently to $1300/oz, and the mining operations having time to set up shop with new operations, maybe now really is the time to buy.

  • Report this Comment On November 05, 2010, at 11:07 AM, XMFSinchiruna wrote:

    doring2000,

    I appreciate and understand your exception to my designation regarding Yamana. I prefer to compare apples to apples, and in my analysis I was looking only to the noteworthy producers of scale. Many of the names you mentioned will undoubtedly appreciate more on a percentage basis than Yamana, but for investors who prefer the relative safety of a large production and reserve profile, Yamana does present an unmistakable bargain.

    Maksani,

    I have remained long-term bullish on Yamana shares since 2006, notwithstanding some significant hiccups along the way. For investors seeking a value moat to limit downside risk from a gold price correction scenario, Yamana at these prices has no peer in my opinion.

  • Report this Comment On November 05, 2010, at 12:15 PM, doring2000 wrote:

    Sorry, TMF, since when is large production per se a sign of relative safety? Since when does a large production per se signify strong appreciation?

    You seem to introduce completely new, but unproven concepts into investing. I want to INVEST my money, not stare in admiration at the quantities of gold mined, if this does not result in profits.

    Why is a company not comparable that pays 3 cents month after month since they started commercial production? Why is a dividend of 3 cents per quarter an apple and 9 cents per quarter does not qualify as an apple?

    I strongly believe that the companies I mentioned present more relative safety than Yamana, unless you consider stagnation of the share price to be safe. When the dollar loses 20% of value in one year then an unchanged share price means a loss of 20%, too. Sorry, Sir, but this is in no way a safe investment.

  • Report this Comment On November 05, 2010, at 12:32 PM, XMFSinchiruna wrote:

    doring2000,

    You are entitled to your negative outlook on Yamana. I do not share it. I am exposed to the pink sheet juniors myself to spice up my precious metal returns, but in a well-balanced pm portfolio there is certainly room for a company like Yamana that itself stands to multiply many fold in the context of further price gains in gold, silver, and copper.

    A mid-tier and a pink-sheet junior are indeed dissimilar entities within a pm portfolio, and they address distinct investment objectives with distinct risk profiles. Without direct access to the foreign exchanges, furthermore, the very nature of pink sheets introduces a risk factor vis-a-vis ownership of an exchange-listed stock.

    Yamana is, most certainly, a safe investment relative in gold relative to its peers.

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