The gold market is improving as quarterly investor demand stabilizes below 300 tonnes. As jewelry demand picks up, now is the time to examine low cost miners like Yamana Gold (AUY). The company is not perfect, but it is a growing gold miner that offers one of the better cost structures.
Margins 
Source: Yamana Gold EBIT Margin data by YCharts.
$682 million in special charges make Yamana Gold's trailing EBIT look worse than it really is. In its most recent quarter, Yamana Gold's first quarter all-in sustaining costs, or AISC, per gold equivalent ounce accounting for by-product credits came in at $820. With spot prices around $1,300 Yamana Gold's AISC of $820 leaves enough room to generate positive cash flow.
Yamana Gold's $36 year-over-year AISC reduction places it slightly below Barrick Gold's (GOLD 1.33%) first quarter AISC per ounce of $833. Even though Barrick is dealing with its own set of special charges, year over year, it was able to significantly bring down costs.
Newmont Mining's (NEM 1.18%) trailing EBIT margin of negative 46.8% is understandable. The company recently declared a force majeure at its Indonesian copper mine after the government changed regulations. In addition, falling metal prices cut Newmont's first quarter adjusted net income by 86%. Challenges in South America have made it difficult for the miner to decrease its overall cash costs applicable to sales.
You know that gold miners are still recovering when Agnico Eagle Mines' (AEM 1.22%) trailing EBIT margin of negative 12% is considered attractive. Its numbers show the advantage of being a small and nimble miner. Over the last year, Agnico Eagle Mines was able to slash costs and boost payable gold production from 237,000 ounces to 366,000 ounces.
The bidding war between Goldcorp and the Agnico Eagle Mine/Yamana Gold partnership left the latter partners with a pricey Canadian mine. The upside is that Yamana Gold's reasonable AISC margin and Agnico Eagle Mines' growing production give both companies the leeway to buy expensive assets in safe mining jurisdictions.
Expected 2014 AISC
| Yamana Gold | $850 |
| Newmont | $1,075 to $1,175 |
| Barrick | $920 to $980 |
| Agnico Eagle Mines | $990 plus |
Source: Company filings.
First quarter results show that a number of gold miners have successfully pushed down costs, but there is a still a big difference in cost structures. Yamana Gold's expected 2014 AISC is low enough that even a slight miss will put it below its competitors.
Yamana Gold continues to develop its Canadian projects in order to push more assets into regions with limited political risk. Its Argentinian Gualcamayo mine does carry a significant amount of political risk, but thankfully, it only accounted for 14% of first quarter production. The majority of Yamana Gold's production came from the safer Latin American countries Mexico, Chile, and Brazil.
No miner is complete without a look at its balance sheet, and this is another area where Yamana Gold's numbers are encouraging. In the first quarter, Yamana Gold only had $1.3 billion in long-term debt. It has a total debt-to-equity ratio of 0.19, while Barrick has a total debt-to-equity ratio of 1.13, Newmont carries a ratio of 0.66, and Agnico Eagle Mines' ratio is 0.30.
Look for the best
Newmont's struggles in Indonesia and Barrick's struggles in Chile show that political risk is unavoidable. The best Yamana Gold can do is diversify and grow production like Agnico Eagle Mines.
Gold prices are settling around the $1,300 mark and jewelry demand continues to drive purchases. If gold moves sideways for an extended period of time, Yamana Gold's cost structure and reasonable balance sheet put it in a good position to deal with this new world.
