The recovery of gold seems to have glossed over shares of Yamana Gold (NYSE:AUY), which haven't rallied this year. Conversely, other gold companies have done well in the stock market as their shares recovered in the past several months. Is the company's Osisko Mining purchase responsible for this lack of growth? Also, should Yamana Gold's higher debt burden due to this acquisition worry its investors?
Osisko Mining -- the right purchase?
Yamana purchased a gold company at a time when other gold producers are divesting non-core assets. Was this the right move? Yamana along with Agnico Eagle Mines (NYSE:AEM) decided to purchase Osisko Mining for $3.9 billion; this price tag seems like a lot for a company that had a market cap of $2.5 billion before it raised the interest of other gold producers. But this high purchase price doesn't seem to be the reason for Yamana's lack of progress in the stock market. After all, shares of Agnico Eagle Mines have rallied in the past several months and added over 47% to their value this year (up to date). So, this acquisition isn't dragging Yamana's valuation down. Furthermore, this purchase could also improve the company's profit margins.
Brining down production costs
This year, Yamana plans to reduce its production cost per ounce, as indicated in the chart below.
Goldcorp (NYSE:GG) also plans to cut its production costs, but its total all-in sustainable cost per ounce will remain higher than Yamana's. Conversely, Barrick Gold (NYSE:ABX), which had very low all-in sustaining costs in 2013, projects an increase in 2014. Based on the above, Yamana's all-in sustaining cost per ounce is expected to be the lowest of the three. Moreover, the Osisko Mining deal could also reduce Yamana's total all-in sustaining costs by 3%. Therefore, the company's purchase may further cut its 2014 estimated production cost, which could increase its profit margin in the coming quarters. But this purchase also increased Yamana's debt burden.
More debt -- higher risk?
Following the purchase of Osisko Mining, Yamana took a two-year $750 million loan, most of which was to pay for this acquisition. A few weeks back, the company priced another $500 million offering for 10 years. This deal is likely to increase its debt, and thus may raise its financial risk.
But even if Yamana were to pay its entire share of the $3.9 billion in this acquisition with loans, its debt on the balance sheet will rise from $1.3 billion to $3.1 billion. This higher debt will result in a sharp increase in the company's debt-to-equity ratio -- to 0.43. In comparison, other leading gold producers such as Goldcorp and Newmont Mining (NYSE:NEM) have a debt-to-equity ratio of 0.15 and 0.67, respectively. This means Yamana will remain in the middle of the pack, so this higher debt won't put the company at a much higher risk than its peers.
Yamana Gold's stock hasn't done well in the stock market, but the company is making the right moves by reducing its production costs. Further, its recent Osisko Mining acquisition is likely to cut further costs per ounce of gold. Nonetheless, the high price tag Yamana Gold paid for this purchase and the increase in its debt burden may scare investors away from its stock.
Lior Cohen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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 disclosure policy.