Buying gold coins or shares of a gold ETF are just two of many ways investors can gain exposure to the yellow stuff. One of the more common options, though, is picking up shares of a gold-mining company. With so many companies to choose from, it may seem like a daunting task, so let's narrow our focus to two of the industry's stalwarts: Yamana Gold (AUY) and Goldcorp (GG).
Getting to know you
Headquartered in Canada, both Yamana Gold and Goldcorp maintain portfolios with assets spread throughout the Americas. Yamana, for example, operates five gold-producing mines in South America and one in Canada; moreover, it has three development projects in Argentina plus numerous exploration projects. Goldcorp, on the other hand, operates four mines in Canada, two mines in Mexico, and four mines in Central and South America. With numerous organic growth projects in its pipeline, Goldcorp is one of the world's largest gold miners.
Image source: Getty Images.
The most decisive factor in choosing an investment, though, is hardly which business operates the most mines, so let's compare the companies on some important metrics to gain better insight.
| Company | Market Cap | FY 2016 Revenue | FY 2016 Earnings per Share | FY 2016 Operating Margin | FY 2016 Return on Equity |
|---|---|---|---|---|---|
| Goldcorp | $13.1B | $3.51B | $0.19 | 10.5% | 1.23% |
| Yamana Gold | $3.0B | $1.79B | ($0.33) | (26.5%) | (6.58%) |
Data source: Morningstar.
This brief look suggests Goldcorp is the better choice, beating Yamana on a variety of points. There are plenty of other things to consider, though, so let's grab our pickaxes and dig even deeper.
The case for Yamana Gold
Yamana Gold seems to have struggled in 2016, but peering further back in its past provides a different perspective -- one that illustrates the company's superior ability to generate free cash flow. According to Morningstar, Yamana reported $169 million in free cash flow for FY 2016, representing an 11.2% improvement over the previous year. Goldcorp, on the other hand, reported a 53.6% decline in its free cash flow year over year.
And according to Yamana Gold's management, the company's free cash flow growth is poised to continue. In fiscal 2017, management forecasts expansionary capital expenditures to total $270 million as it strives to develop the Cerro Moro mine and Barnat extension at Canadian Malartic. Once these projects are completed, though, management expects expansionary capital to decline significantly after completion of Cerro Moro and the Barnat extension in late 2018. As a result, management foresees free cash flow growing significantly as expansionary capex falls to approximately $50 million to $75 million annually.
Perhaps the most compelling reason for investors to opt for Yamana Gold is not the company's free cash flow growth prospects, but the stock's valuation. Management recently disappointed investors when it revealed in a mid-February press release that it would be foregoing acquisitions in the near future and remain in an "organic growth phase." Shares fell about 10% in the day following the release and have failed to recover since. Consequently, the stock appears much more attractively priced than Goldcorp's stock.
AUY PS Ratio (Annual) data by YCharts.
Yamana Gold not only trades at a lower sales multiple compared to Goldcorp, but according to Morningstar, it's also cheaper compared to its 5-year average sales multiple of 3.2, and the industry average 3.5 multiple. And the disparity in price tags becomes even more apparent when considering them from the perspective of cash from operations per share.
The case for Goldcorp
Goldcorp may be pricier, but it's for a valid reason: Investors are willing to pay for quality. With a substantially larger portfolio, Goldcorp benefits from economies of scale, unlike Yamana Gold. In fiscal 2016, for example, Goldcorp reported all-in sustaining costs (AISC) of $856 per gold ounce. Yamana Gold, on the other hand, reported AISC of $911 per gold ounce. Presumably, this disparity will remain in the coming year. Whereas Goldcorp's management forecasts AISC per gold ounce between $808 and $893 for fiscal 2017, Yamana Gold's management expects AISC per gold ounce between $890 and $910. Looking further into the future, one finds the contrast may be even greater. Goldcorp has revealed a five-year strategy that entails reducing its AISC to approximately $700 per gold ounce by 2021; however, Yamana Gold has provided no such outlook -- five years or otherwise.
Reducing costs is only one aspect of Goldcorp's five-year growth strategy; management also aspires to increase gold production and reserves by 2021. If successful, Goldcorp will achieve gold production of approximately three million to four million ounces of gold, and it will grow gold reserves from 42.3 million ounces, which it reported in fiscal 2016, to 50 million ounces. Juxtaposed with Yamana's gold production outlook, Goldcorp is clearly the better choice. Reporting 1.27 million ounces of gold production in fiscal 2016, Yamana is forecasting gold production to decrease by 13.4% to 1.1 million ounces in fiscal 2019.
Yet another reason Goldcorp appears the better opportunity than Yamana Gold is the company's balance sheet.
AUY Debt to Equity Ratio (Annual) data by YCharts.
In fact, the balance sheet is so strong that Goldcorp maintains an investment-grade credit rating.
And the winner is...
In deciding between these two gold miners, the better opportunity undoubtedly lies with Goldcorp. Producing gold at a significantly better margin in fiscal 2016, Goldcorp will likely further distinguish itself from Yamana Gold in the years to come as it drives toward its target of AISC of $700 per gold ounce by 2021.
In addition, Goldcorp has a variety of projects in its pipeline on which it can rely for growth. From numerous exploration projects like Quebrada Seca to the newly acquired development projects, Cerro Casale and Caspiche, Goldcorp is not levered to the successful execution of one or two projects. Yamana Gold, conversely, is largely relying on its Cerro Moro project -- with first gold production in early 2018 -- to ensure long-term success.
Although Goldcorp appears pricier than Yamana Gold at the moment, this should hardly dissuade investors from choosing the former over the latter. Goldcorp represents a much better opportunity for long-term-oriented investors.
