Yamana Gold (AUY) and Agnico Eagle Mines (AEM 1.57%) have parted paths since they won the battle with Goldcorp (GG) over Osisko Mining. Yamana Gold shares are down 12% year to date, while Agnico Eagle Mines is up 22% and Goldcorp is up 14%. Agnico Eagle Mines has recently shown strong results and could afford an acquisition of Osisko Mining's size. Meanwhile, Yamana Gold's results were weaker, making the company more vulnerable.
Weak first quarter
During its first-quarter earnings call, Yamana Gold stated that historically this period is weaker than the rest of the year. While this is certainly true, this year's first quarter was weaker than the year-ago period. The company produced less gold and generated less revenue. In comparison, Yamana Gold's acquisition peer Agnico Eagle Mines managed to grow its revenue and earnings from the first quarter of 2013 despite the drop in the price of gold, thanks to increased production.
While Yamana Gold's revenue decline was largely due to lower gold prices, costs also played a role. The company's first-quarter all-in sustaining costs were $975 per ounce of gold, while they were $856 per ounce in the first quarter of 2013. On the positive side, Yamana Gold stated that it was front-loading its capital spending and expects full-year all-in sustaining costs to be less than $925 per ounce.
Will the Osisko Mining acquisition help?
Yamana Gold's operating cash flow dropped to $39 million in the first quarter, while the company's capital spending was $146 million. As Yamana Gold stated, it is prioritizing cash flow; but the company has a lot of work to do to achieve better cash flow generation. The addition of 300,000 ounces of gold annually from Osisko Mining's Canadian Malartic could help, as the mine's expected all-in sustaining costs are less than $800 per ounce for the life of the mine.
However, the related share dilution and the increase in Yamana Gold's debt level should worry investors. The company's debt has already grown from $861 million a year ago to approximately $1.3 billion at the end of the first quarter. Meanwhile, the company felt pressure on its earnings and operating cash flow. Still, the debt remains in perfectly reasonable borders, but it is the thing worth observing.
Is the downside over?
Yamana Gold's share price reacted heavily to the acquisition of Osisko Mining. As a result, the company trades at 18 times its future earnings and at a 20% discount to its book value. In comparison, Agnico Eagle Mines trades at a 32 forward P/E and with a hefty 80% premium to its book value. It looks like most of the pressure is in the past for Yamana Gold shares.
However, there is one important thing to consider. Gold prices have stalled at around the $1,300 per ounce for more than a month. Yamana Gold's joint acquisition of Osisko Mining is a bet that gold prices will not suffer further downside. Otherwise, it does not make sense to increase debt and dilute shareholders. That said, if gold prices drift toward the $1,200 mark, Yamana Gold shares could be punished more heavily than its peers.
Bottom line
Yamana Gold is an interesting bet for those who expect upside in gold prices in the near term. However, the risks are worth thinking about, as the company became more vulnerable to gold-price downside because of the recent acquisition.
