Yamana Gold (AUY) is set to release third-quarter earnings on Oct. 27. Finding yourself interested but equally worried about drowning in a flood of facts and figures? It's not uncommon during earnings season. Let's prepare by keying in on three things we can expect management to address in its report.
When preparing to dig through a gold miner's earnings, a good place to start is the company's production. Last quarter, gold production was lower than expected. However, on its conference call, management affirmed production guidance for the year: 1.26 million to 1.34 million ounces.
One of the company's three cornerstone mines, Chapada produced approximately 119,000 ounces of gold in 2015 -- an 11% increase over 2014. This -- along with 131 million pounds of copper -- contributed to the $405 million in revenue which the mine reported in 2015. Accounting for 22.2% of the company's revenue last year, Chapada was also the company's most profitable, reporting $145 million in segment income -- a 35.8% margin.
At the end of 2015, management estimated that Chapada would produce between 116,000 and 122,000 ounces of gold in 2016.
Because of the mine's unexpected performance in the second quarter, though, management revised guidance downward, forecasting 106,000 ounces of gold production. Look for the company to meet its expectation for the mine: a daily throughput between 58,000 tons and 59,000 tons.
As investors dig further into the earnings report, they should check the company's progress on its long-term debt-reduction goal. Successful in executing its strategy in 2015, the company reduced its debt by more than $286 million -- ending the year with 14% less total debt outstanding than when it ended 2014. Looking ahead, management aspires to improve its balance sheet even further, setting a debt-reduction target of $300 million by the end of 2017.
The company is clearly on its way toward realizing this goal. Shortly after the third quarter ended, Yamana announced that it had completed the sale of its Mercedes mine for total consideration of $178 million. Putting the company ahead of schedule in realizing its goal, the transaction, however, won't be included in the third quarter earnings report. Consequently, investors should seek confirmation that the company is successfully executing another key debt-reduction strategy. According to the company's 2015 annual report, the "organic generation of cash flow" will play a pivotal role in the $300 million debt-reduction initiative.
The golden ratio
Further demonstrating the company's circumspect approach to managing its debt, management has set another goal -- achieving a net debt-to-EBITDA ratio between 1.5 and 2.0. Unlike its goal to reduce its debt by $300 million over the next two years, management hasn't specified when it hopes to recognize this leverage ratio by.
Having dug for insight into the company's gold production and debt management, investors should hold on to their shovels a little longer -- seeking to unearth earnings figures, namely EBITDA. Through the first two quarters of the year, the company succeeded in growing its EBITDA year over year. Whereas it reported $252 million in EBITDA through the first half of 2015, Yamana reported $317 million through the first half of 2016 -- a 26% increase. This isn't the only indication that Yamana is on the right track. In terms of EBITDA as a percentage of revenue, Yamana reported 28% in the first half of 2015. Improving upon this, the company reported a 35% margin in the first half of 2016. Look for these trends to continue in the third quarter.
According to management, EBITDA growth -- like the reduction in debt -- will be primarily achieved through the organic generation of cash flow. So in addition to growing EBITDA, investors should look for success in developing the projects in its pipeline -- a predecessor to organic growth of cash flow.
It will be interesting to see if Yamana has bounced back from the unexpected downturn in production at Chapada last quarter. If the mine failed to resume normal operations in the third quarter, it may suggest that compromised profitability is on the horizon -- an inauspicious sign for a company that must report steadily increasing profitability if it hopes to achieve its net debt-to-EBITDA target by 2018.