Unlike 2016, during which Yamana Gold (AUY) stock climbed 46%, this year has been much less kind. In the company's Q4 2016 earnings report, management announced that the company would be eschewing acquisitions in the near term, focusing instead on organic growth. Investors didn't take kindly to this news. For this and other reasons, shares have fallen 9% year to date, while the S&P 500 has risen more than 8%.
But management's decision to not go shopping in the coming years doesn't mean that investors should forsake this gold miner. In fact, there are plenty of reasons to believe that its most lustrous days lie ahead of it.
Image source: Getty Images.
Going organic
The market didn't take kindly to Yamana's announcement that it was "in an organic growth phase," but no one ever claimed the market was rational. Instead, investors should interpret management's decision to develop the many projects in its pipeline as a positive sign -- one that ensures the company's future success.
The project which is closest to commencing gold production is Cerro Moro, located in Argentina. Expected to begin gold production in early 2018, Cerro Moro will emerge as one of the company's cornerstone mines, according to management. In a recent presentation, it estimated that in 2018 and 2019, the mine will have all-in sustaining costs (AISC) of less than $600 per gold ounce and AISC less than $9.00 per silver ounce. For some context, Yamana reported total AISC of $911 per gold ounce and $12.65 per silver ounce in fiscal 2016.
Suruca, which will supplement gold production at the Chapada mine, is another project in the advanced phase of development.
Management estimates gold production will begin in Q2 2019.
Since it's not seeking acquisitions for growth, Yamana must strive to derive as much value as it can from its assets. To this end, management intends to have plans by the end of the year for its non-core assets: Agua Rica, Kirkland Lake, Agua de la Falda, and Le Pepa. In its first-quarter earnings report, management illustrated how it foresees extracting more value from Agua Rica, stating that it "envisages a transaction relating to Agua Rica that would involve maintaining a joint venture interest and monetizing some equity in the project for a mixture of cash and an interest in gold production."
Getting stronger
Another reason to be bullish on Yamana is management's concerted effort to strengthen its balance sheet. This is not a new initiative per se. According to Morningstar, Yamana has reduced its net debt 24% over the past three years. And by the end of fiscal 2017, management aspires to reduce this even further by $140 million.
Image source: Investor presentation.
The company also foresees an improvement on its income statement in the years to come. Management is guiding for EBITDA of $46 million in fiscal 2017, and once gold production commences at Cerro Moro, Yamana expects EBITDA to rise even more.
Should Yamana succeed on both fronts, it will achieve its goal of reducing its leverage. Specifically, management has identified a net-debt-to-EBITDA target of 1.5. Considering the company hasn't reported positive EBITDA since fiscal 2013, this will be a significant achievement -- one that will find the company in much better financial health.
Making a big production
Although Yamana expects a year-over-year reduction in gold and silver production in fiscal 2017, it's confident that this will reverse course in the coming years. According to management's guidance, gold production will increase 20% from fiscal 2017 to fiscal 2019, and silver production will increase 200% during the same period.
Two of the main drivers for the expected increases in gold and silver production is the commencement of gold production at Cerro Moro and Suruca. Management estimates that gold production at Cerro Moro will total 80,000 ounces and 130,000 ounces in fiscal 2018 and 2019, respectively, while silver production at the mine is expected to total 4.5 million ounces and 9.9 million ounces over the same periods. And at Chapada, Yamana expects the Suruca project to contribute 40,000 ounces of gold production for the first five years after the project comes online.
Looking farther ahead, the Canadian Malartic Extension Project is another avenue that will help the company achieve its goal of organic growth. According to management, the project will increase the Canadian Malartic life of mine to 2027.
Investor takeaway
This Fool isn't alone in his opinion of Yamana's future; four analysts on the Street issued upgrades on the stock in 2016. Between the company's pipeline of projects, its commitment to improving its financial state, and its short-term outlook on gold and silver production growth, there's reason to believe that its best days remain ahead.
