In its recently reported first-quarter earnings, Yamana Gold (AUY) booked a loss of $0.01 per share, coming up short of analysts' consensus estimate of profits to the tune of $0.02 per share. There's much more to a company's performance than a single number, however, so let's dig in and take a closer look at how one of the leaders in the gold-mining industry fared in Q1.
Staying on track
Since management has revealed its plans to forego acquisitions and pursue organic growth, many investors are focused on how well Yamana is executing on the projects in its pipeline. Fortunately for investors, the company was successful on that front last quarter.
According to management, development of Cerro Moro -- pegged as the company's next cornerstone mine -- remains both on schedule and on budget. In fact, Yamana reported that some aspects are progressing ahead of schedule -- namely, site construction and detailed engineering plans. Gold production at Argentinian mine is still expected to begin in early 2018.
In addition to advances at Cerro Moro, project development at Chapada progressed as expected. For example, Yamana completed the commissioning of its cleaning circuit expansion project, and management still believes that project -- expected to improve both gold and copper recovery at the mine -- will be completed in the fourth quarter.
Exceeding expectations for the first quarter, Yamana reported gold production of 215,647 ounces. Although the company reported year-over-year decreases in gold production at four of its mines -- Chapada, El Penon, Minera Florida, and Canadian Malartic -- those were offset by increased production at Jacobina and Gualcamayo.
Of the four mines where production shrank, the drop-off at El Penon was the most significant -- due, in part, to disputes with two labor unions representing underground workers that interrupted operations. The mine's gold production, 40% lower compared to the same period last year, was largely anticipated -- the result of a new production plan.
Yamana's overall performance exceeded expectations by such a wide margin that management increased its guidance for fiscal 2017. Whereas it had originally forecast gold production to be 920,000 ounces, it now expects gold production to total 940,000 ounces.
Digging into earnings
Reporting revenue of $403.5 million, the company achieved a nominal year-over-year improvement on the top line -- a 0.65% increase over the $400.9 million which it reported in Q1 2016. This increase, however, didn't translate to the bottom line; Yamana reported a $5.9 million net loss in the quarter.
Since Yamana posted net earnings of $36.1 million during the same period last year on comparable sales, it's understandable that some investors are disappointed. Perhaps for some, even more concerning than the lack of earnings is the company's cash flow in the quarter. According to Morningstar, Yamana reported negative free cash flow of $78 million. The last time the company had negative free cash flow was in Q3 2015.
Of course, failing to generate free cash flow is rarely a good thing, but it's even more concerning for Yamana. One of management's goals is to strengthen the company's balance sheet by achieving a $140 million reduction in net debt by the end of 2017. And how will the company realize this goal? According to Yamana's 2015 annual report, management expects to reduce debt through the "organic generation of cash flow."
With co-product all-in sustaining costs (AISC) for Cerro Moro expected to be less than $600 per gold ounce, and management counting on the mine to contribute to revenue, earnings, and cash flow increases, it's reassuring to see that the project's development remains on track. Over the next few quarters, investors will want to continue monitoring the mine's progress, as it will play a prominent role in the company's future.
Additionally, investors should keep an eye on Yamana's free cash flow growth. Management contends that the lack of free cash flow in the first quarter was due in part to "net changes in working capital, associated with timing of payments or collections." Furthermore, management estimates that the adjustments to working capital will reverse by the end of the year; consequently, investors should anticipate free cash flow returns in the coming months.