They Broke the Mold With Yamana Gold

Shiny investment prospects are a dime-a-dozen in the precious metals realm, but there is only one Yamana Gold (NYSE: AUY  ) .

When a Fool can pinpoint a deep-bargain share price for an ultra-low-cost operator with tremendous production growth potential, and apply even the more conservative outlooks for continued increases in the gold price, I maintain that the resulting outlook for this stock approaches a richness that is virtually without peer among producers of its scale. For the fourth quarter, Yamana extracted $173 million in adjusted net profit from record revenue of $535 million; yielding a gorgeous net profit margin of 32%.

Consider this juicy tidbit: Thanks to the company's 188 million pounds of low-cost copper production to offset its gold mining costs, Yamana expended only $50 to procure each of the 1.05 million gold equivalent ounces (GEOs) the company mined during 2010! With gold averaging more than $1,200 for 2010, Yamana logged a year for the industry's record books with a competition-busting 4-digit cash margin per GEO. Yamana's per-ounce profitability continues to outrank those of much larger producers like Barrick Gold (NYSE: ABX  ) and Newmont Mining (NYSE: NEM  ) , which reported 2010 by-product production costs of $341 and $260 per ounce, respectively. On a consolidated basis, mine operating earnings still performed admirably at 44% of 2010 sales.

While Yamana's industry-leading cost structure is reason enough to propel the stock to the top of a Fool's golden watchlist, it's the company's incredible outlook for both organic reserve growth and organic production growth that really gets me singing the stock's praises year after year. The company's performance on both fronts during 2010 glistens with the promise of more to come. Alongside Goldcorp (NYSE: GG  ) and Agnico-Eagle Mines (NYSE: AEM  ) , I alerted Fools to Yamana's strong exploration success back in August, so Yamana's alluring 23% reserve growth to reach 25.1 million GEOs may come as little surprise to my regular readers.

Partly as a result of that exploration success, Yamana expanded the scale of its targeted four-year production growth spurt from 50% to 65%, and now eyes massive 2014 output of more than 1.7 million GEOs. That growth will be fed by four new mines coming online in 2012 and 2013, and is wholly independent of any eventual production from the Agua Rica project in Argentina. For those who enjoy considering the very long-term outlook, consider that Agua Rica alone accounts for more than one-third of Yamana's GEO reserves, and a gargantuan 80% of the company's 12.2 billion-pound copper hoard.

While non-producing exploration plays like Seabridge Gold (AMEX: SA  ) and Rubicon Gold (AMEX: RBY  ) routinely see their shares rocket higher with each successive resource expansion, I marvel at the extent to which shares of profitable gold producers like Yamana and Agnico-Eagle appear to receive little adjustment from the market for meaningful reserve growth. I have previously posited fair value for Yamana at $30 per share at gold prices beneath the current level, and I for one am content to wait patiently for the market to correct this collective error in judgement.

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 Agnico-Eagle Mines, Goldcorp, Rubicon Minerals, and Yamana Gold. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a gilded disclosure policy.


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  • Report this Comment On February 24, 2011, at 11:11 PM, hommetriste wrote:

    The author makes interesting points but overlooks 741 million problems...AUYs outstanding shares.

    NEM has 493M shares.

    If you value AUY at $30/sh, that makes AUY as a company worth (22B) close to NEM (27B). I can't see them as being in the same league.

    I'm not fond of the company's fuzzy math (GEOs) and overpaid CEO either.

    The copper thing to me seems misleading. If you use copper to offset gold production cost then you are losing money on the copper production. It's like McDonalds saying that they make a hefty profit on a $2 soda if they offset its cost with hamburger profits. You are robbing peter to pay paul.

    Finally with the dilution effect of all those shares, the revenue per share and EPS looks dinky next to NEM.

    There are certainly worse companies than AUY but your projections would seem to be quite rosy.

    *I have no positions right now in AUY or NEM. A few months ago I exitted AUY.

  • Report this Comment On February 24, 2011, at 11:54 PM, XMFSinchiruna wrote:

    hi sadman,

    The share dilution has indeed proven a drag on the shares, and along with its delayed growth trajectory is likely the primary cause of the stock's disappointing performance.

    GEOs are not fuzzy math; that's an industry standard practice for gold miners with substantial silver production. Note, for example, that SLW shifted from reporting silver ounces to SEOs once it took on its first gold streams.

    The company posts both co-product and by-product costs just as all the producers do, including fellow copper-rich gold miner Newmont. Analysts / investors are free to focus on whichever cost metric is most applicable to their due diligence. Since most investors target Yamana for the gold more so than the copper, I believe it's extremely relevant to know that Yamana incurred only $50 cash cost per ounce of gold produced.

    As for your comparison between NEM and AUY, keep in mind that Newmont is facing flat to declining production volume over the next five years (barring some acquisitive heroics that would not come cheap), while AUY is looking at 65% growth by 2014 even before considering its primary development asset. At an EV to MVPPR (gold only) of 0.25, I think NEM is also a bit undervalued even considering its anemic growth outlook.

    I understand your skepticism regarding Yamana, and as a longstanding shareholder I too have suffered through multiple disappointments over the years, but each time I lay all the company's cards onto the table for a fresh and objective analysis, I perceive a more disjointed valuation than I encounter anywhere else among the mid-tier or major producers.

    Thanks for posting your remarks!

  • Report this Comment On March 01, 2011, at 12:44 PM, FoolSolo wrote:

    Thanks Chris. Another fine article.

    I'm still doing some research on Yamana, and I am considering taking a position. I came across an article in Seeking Alpha that might be of interest to you and the readers;

    http://seekingalpha.com/article/255619-yamana-gold-solid-ear...

    The author states:

    <i>Risk is a bit higher in Yamana due to operations being centered in Brazil, whose currency has appreciated significantly over the past few years giving rise to currency risk.

    The Argentina operations continue to hold some risk as inflation has taken hold. Elections are scheduled for later this year and the Argentine government raided the Central Bank reserves a few years ago. Sovereign risk should not be discounted from Argentina even though they are one of the more friendly mining jurisdictions in the world.</i>

    Then he adds the following;

    <i>The real value in Yamana lies not in its gold operations but in the amount of silver and copper produced which is hidden in the geo calculation along with increasing production over the next few years, but investors need to beware of political risk in Argentina and currency risk across South America.</i>

    It seems the author is confirming the Copper opportunity, and further highlights Silver as a hidden opportunity. Any thoughts on this and the above risks?

    Do you have any suggestions for how you might play AUY, perhaps with an option spread to minimize the risks in a long-term play?

Add your comment.

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