Gold's Smoothest Operator

If you came across an advertisement offering gold bullion at $79 per ounce, you would be justified in your skepticism. What continues to vex this Fool, however, is the market's apparent failure to embrace the one gold miner that procures the metal from the ground at such an insanely low cost.

Shares of Yamana Gold (NYSE: AUY  ) have nearly tripled since I laid out a value-based rationale for selecting this miner just over a year ago. Some might presume I've lost hold of my senses when I suggest the miner remains significantly undervalued, but take a gander at these operational achievements. Year over year, Yamana's adjusted earnings rose 180%. Cash flow from operations rose 155%, while revenue increased by 50% amid a mere 12% jump in the average realized gold price. Sure, derivative losses and future tax expenses again roiled the bottom line, but I believe that Yamana's operational excellence far outweighs the unwelcome drag from derivatives.

At a time when multiple miners from Kinross Gold (NYSE: KGC  ) to Agnico-Eagle Mines (NYSE: AEM  ) are reminding investors just how many obstacles a production growth spurt can present, Yamana has delivered the goods with a ramp-up at the new Gualcamayo mine that has exceeded expectations. Production volume increased 34% over prior-year levels to 314,700 GEOs (gold equivalent ounces), and the company expects overall 2009 production to approach the new baseline of sustainable production at 1.1 million ounces annually. Plenty of competitors produce as much gold, so what makes Yamana this Fool's shining star of the gold patch?

On the strength of huge copper reserves at the Chapada mine, where capacity has just been expanded to process 20 million tonnes of ore per year, Yamana consistently yields the lowest operating costs in the gold mining sector. Expending only $79 to retrieve each ounce from the ground, Yamana logged an incredible gross margin of $792 for each GEO mined in the third quarter. For context, consider that Barrick Gold (NYSE: ABX  ) incurred a cost of $371 per ounce despite that company's unrivaled economies of scale. As Yamana pursues its longer-term target of 1.7 million ounces of annual production, I will leave it for Fools to imagine the leverage that shares could ultimately deliver atop further gains in the prices of gold and copper.

Although a near-term pullback for gold is certainly a possibility, I believe that gold remains a coiled spring. I have brought Fools' attention to smaller mid-tier miners like IAMGOLD (NYSE: IAG  ) and sung the praises of low-cost majors like Goldcorp (NYSE: GG  ) , but Yamana continues to earn a top spot on this Fool's short list of golden standouts. I look forward to viewing your thoughts in the comments section below.

My selection of Yamana Gold for my silverminer CAPS portfolio has outperformed the S&P 500 by roughly 165 percentage points since November 2008. The stock has earned four stars out of five, with more than 3,400 investors expecting further outperformance. Join the free Motley Fool CAPS community today, and share your own outlook for Yamana Gold.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly in the CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of Agnico-Eagle Mines, IAMGOLD, Kinross Gold, and Yamana Gold. The Motley Fool has a gilded disclosure policy.


Read/Post Comments (14) | Recommend This Article (23)

Comments from our Foolish Readers

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  • Report this Comment On November 05, 2009, at 4:30 PM, DMCGAHANSR wrote:

    Re: Yamana, I couldn't agree more. I have been in and out of precious metals for more than 50 years, both as a professional and as an individual investor. I think, to one degree or another I am pretty familiar with most of the miners that pop up from time to time in Fools' comments and blogs.

    I beleive while we may have one final downward jolt coming, the risk of being out is greater than the risk of being "all in". As a result I have narrowed my portfolio to AUY, SLW, HL and SVM. The only one I trade in and out of is HL, because of its beta. The rest of the above are family.

    Papa Don

  • Report this Comment On November 05, 2009, at 5:02 PM, silverminer wrote:

    Papa Don,

    We are aligned on the silver side as well. :)

    SLW is my largest equity holding, and stands at the center of my core holdings. It is, in my opinion, the shining star of the silver screen:

    http://www.fool.com/investing/general/2009/07/31/the-shining...

    Fool on!

  • Report this Comment On November 05, 2009, at 5:14 PM, TMFSarahGen wrote:

    Excellent post Christopher! I'm very bullish on gold these days, so I should catch up on your earlier articles too.

    If you're reading this - care to comment on THM and or MFN? I'm long both, but I don't have your gold/silver chops.

  • Report this Comment On November 05, 2009, at 5:54 PM, Tastylunch wrote:

    what sarah you are bullish on Gold now?

    I thought you hated gold....

    Anyway I think there are safer gold plays out there than THM

    MFN I think has potential but I'm not well versed in it. I think Sinchi likes it though they aheva lot of prvoen resreves in Silver

    I agree with Sinchi that SLW, AUY are good gold plays.

    I'm looking into JAG at the moment myself.

  • Report this Comment On November 05, 2009, at 6:49 PM, silverminer wrote:

    SarahGen,

    It's been a long time! :) I just realized I've been on the CAPS blogs for two years now, and I recall some great discussions with you there when I started my blog.

    I too own shares of MFN. Here is an article I wrote on the Dolores mine a year ago: http://www.fool.com/investing/small-cap/2008/11/19/a-golden-...

    It's hard to believe shares were only $3.60 when I wrote that piece. I like MFN's exploration properties as well, but their ability to fund exploration from Dolores' cash flow is a key competitive advantage over non-producing explorers in a (still) credit-starved sector.

    I'll freely admit that THM had never before crossed this Fool's radar. One thing is certain: the company needs a shorter name! :) At first glance, it looks as though the Livengood deposit is expanding rapidly through exploration, having doubled between May and October of this year! At 8.1m ounces indicated it's already a very significant find, and I'm glad you brought it to my attention. I also like the continuity of ore grades through more than 100 meters of exploration holes within three of the site's zones. Ore concentration continuity results in fewer surprises once mining gets underway. First impression is very solid, and I will keep a close eye on it for possible coverage going forward. Thanks!

    If you're looking for easy access to my recent gold articles, try the blog post linked below as a starting point, which contains a list of relevant links in reverse chronological order through early October.

    http://caps.fool.com/Blogs/ViewPost.aspx?bpid=272558&t=0...

    And here are some additional articles from the intervening weeks:

    http://www.fool.com/investing/general/2009/11/05/no-sharehol...

    http://www.fool.com/investing/general/2009/11/04/gold-remain...

    http://www.fool.com/investing/general/2009/11/02/the-titans-...

    http://www.fool.com/investing/general/2009/10/30/the-golden-...

    http://www.fool.com/investing/general/2009/10/20/motos-got-g...

    http://www.fool.com/investing/general/2009/10/14/let-the-gol...

    http://www.fool.com/investing/general/2009/10/12/gold-overlo...

    http://www.fool.com/investing/general/2009/10/08/5-mid-tier-...

  • Report this Comment On November 06, 2009, at 3:12 AM, doring2000 wrote:

    Ever heard of Gold Resource Corporation (GORO)?

    They are at the brink of becoming a low cost gold producer, probably within the next 3 months. The mill is in place already.

    Their prospects are unbelievable, as you can see on

    http://www.goldresourcecorp.com/presentation/company/player....

    and they are finding new gold deposits every month.

    Jason Reid promises to distribute 1/3 of the cash flow

    as dividend, which could be 1$US per 1 share.

    So at less than 9$US per share this could mean a

    dividend of 11%! Unheard of.

    So chances are great for appreciation of the stock.

    Best of Fool's Luck,

    Richard

  • Report this Comment On November 06, 2009, at 5:30 AM, silverminer wrote:

    doring,

    tread carefully there, please. Looks high risk to me! I watched the presentation you linked, and note the conspicuous absence of externally confirmed resource estimates. Also, the company bases its GEOs on all base metal by-products in addition to silver ... which is not standard practice. Caution.

  • Report this Comment On November 06, 2009, at 9:10 AM, TMFSarahGen wrote:

    Wow, thanks for the feedback everyone!!

    And Tasty, yes, I was thumbsdowning a bunch of gold for awhile. Worked well for me. But you'll see in my CAPS picks, I've been greenthumbing goldies for weeks now. Looks like I started around October 16.

    Silverminer, that you Sinchiruna? Thanks for all the links, I'll definitely take a look. I have to confess, I stopped following your posts when I lost interest in gold...but I know you've been writing on this topic for ages!

    I think THM first caught my eye when it was a "biggest gold mover" one day - and then I bought a little and started noticing a bunch of analyst upgrades. Analysts I'd never heard of, but still, nice to see when they're giving huge price targets. :)

  • Report this Comment On November 06, 2009, at 9:10 AM, TMFSarahGen wrote:

    Wow, thanks for the feedback everyone!!

    And Tasty, yes, I was thumbsdowning a bunch of gold for awhile. Worked well for me. But you'll see in my CAPS picks, I've been greenthumbing goldies for weeks now. Looks like I started around October 16.

    Silverminer, that you Sinchiruna? Thanks for all the links, I'll definitely take a look. I have to confess, I stopped following your posts when I lost interest in gold...but I know you've been writing on this topic for ages!

    I think THM first caught my eye when it was a "biggest gold mover" one day - and then I bought a little and started noticing a bunch of analyst upgrades. Analysts I'd never heard of, but still, nice to see when they're giving huge price targets. :)

  • Report this Comment On November 06, 2009, at 11:46 AM, silverminer wrote:

    SarahGen,

    Yes, silverminer = TMFSinchiruna. :)

    http://www.fool.com/investing/general/2009/07/21/tales-of-a-...

    If you've just gone long in October, be prepared to stare down volatility that could cause second thoughts if we get the near-term dollar rally that many are anticipating. No matter what the next correction looks like, and no matter when it strikes, keep your focus honed on those longer-term targets.

    That goes for all of you. ;)

  • Report this Comment On November 06, 2009, at 12:30 PM, TMFSarahGen wrote:

    Yes sir!

  • Report this Comment On November 06, 2009, at 12:30 PM, TMFSarahGen wrote:

    Yes sir!

  • Report this Comment On November 06, 2009, at 12:43 PM, ndfaninsb wrote:

    Too bad Yamana likes to play derivitive games and lose most of their profits betting on the dollar.

  • Report this Comment On December 27, 2009, at 9:23 AM, dlcapo wrote:

    I keep hearing so much good stuff about auy yet the stock price goes up and down like a yoyo with a very short string, which equals Nowhere....Well I guess it did reach $19. one time for a second but that didn't last long. Best thing it ever did for me was drop to $3.25 back in March. Oh to have another shot at that now that I have a few dollars in my pocket.....Well I can dream can't I ?

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