Yamana Gold's Power Combo: Lower Costs and Higher Gold Prices

Fluctuating gold prices have been given some stability by turmoil in the Middle East and Eastern Europe as investors prefer the yellow metal amid political uncertainty. Gold rose from $1,247 to $1,327 during June and is currently sitting near $1,300.

This surge in price has been a blessing for miners suffering from rising costs and deteriorating gold prices. Yamana Gold  (NYSE: AUY  ) has also benefited from this surge, and valuations have risen around 10% in the last two months. Other positive news from Yamana includes the acquisition of Osisko Mining and capex savings on the Cerro Moro project.

Completed acquisition
Yamana, along with Agnico Eagle Mines, completed the friendly acquisition of Osisko Mining in mid-June. Both companies now own a 50% stake in Osisko, which currently operates the Canadian Malartic mine in Quebec.

The acquisition will provide around 300,000 ounces of gold annually to Yamana's existing production level. The new mine will add around 4.7 million ounces to its reserve levels and will also provide exposure to the favorable Canadian market where mining costs are comparatively lower than South America or Africa. Moreover, Agnico Eagle's participation will reduce the risk for Yamana. 

Cerro Moro project
Yamana has given some good news to its investors via the Cerro Moro project's feasibility study. According to the company the Cerro Morro project will add 150,000 GEOs (gold equivalent ounces), to its existing production annually for the full life of the mine. It is expected that the all-in sustaining cash cost will be controlled at $525 per ounce. The good news is that the initial capital costs have been reduced from $150 million to $126 million while other projections remain the same.

Development work on the mine is expected to start in 2015, and it will reach production stage in the first half of 2016. Increased production at a lower all-in sustaining cost will not only increase revenues and margins but will also increase the shareholders' value.

Operational update

  • Production at its Gualcamayo and Pilar mines increased by 10% and 13% respectively compared to the fourth quarter of 2013. 
  • These increments were offset by 5% and 27% reduced production from El Penon and Chapada respectively. Overall production reached a peak point for the month of April, hitting approximately 20,000 ounces.
  • The average realized gold price of $1,300 gave Yamana room to breath after a disappointing year. This was a substantial increase to the reported price in the fourth quarter of 2013 at $1,277.
  • The all-in sustaining cash cost on a co-product basis increased by $40 per ounce to $975 per GEO and the all-in sustaining cash cost on a by-product basis increased by $66 per ounce to $820 per GEO. Both co-product and by-product costs increased quarter over quarter, which is not a good sign. This is because it is eating into the $23 realized price margin discussed above.

Fundamentals
Yamana is well positioned in terms of debt with a debt/equity ratio of 0.19, or 19%. Due to low debt levels Yamana saves considerable cash flows by avoiding high-interest expenses, unlike its competitors. This reduces the downside risks associated with heavy leveraging.

 

Debt to Equity

Yamana Gold

0.19

Agnico-Eagle

0.30

Barrick Gold

0.96

AngloGold Ashanti

1.14

The liquidity position of the company has also improved when compared to the last quarter. The current ratio increased to 1.32x from 1.13x, while the quick ratio increased to 0.69x from 0.54x quarter over quarter. These improvements indicate that the company is heading in the right direction, although it may find it difficult to pay off its short-term obligations as it holds $0.69 for every $1 of borrowing. 

Bottom line
Price volatility has greatly affected gold miners, like Yamana, that were forced to sell at lower prices, leading to narrow or even negative margins. However, Yamana has coped with the discouraging gold market by controlling its costs. The company has been more successful in this strategy because it has less leveraging and thus lower interest costs, unlike its competitors.

Gold should get some stability around $1,300 due to geopolitical tensions in Europe and the Middle East. This puts Yamana in a favorable position and enables it to enjoy increased margins as it is planning to achieve an all-in sustaining cash cost of $850 per GEO, on a by-product basis, for the whole of 2014.

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