As volatility continues to grow thanks to the current political environment, many investors are turning their focus to gold. Consequently, now seems like a good time to get to know the industry leaders a little better. For example, one may assume Yamana Gold (AUY) earns its keep by dealing in the yellow metal; however, the company also deals in silver and copper. Whereas it reported $1.79 billion in sales for fiscal 2016, gold sales accounted for $1.47 billion -- 82% of overall revenue -- according to its annual report; revenue from copper sales and silver sales were 11% and 6%, respectively.
This is just a glance, so let's dig in deeper and learn how prominently the sale of gold plays in the company's portfolio.
Image source: Getty Images.
Perusing the portfolio
Of Yamana's six gold-producing mines, Canadian Malartic is the company's only operating asset in the Great White North, but the company certainly doesn't leave it out in the cold. The mine -- in which Yamana holds a 50% interest and Agnico Eagle Mines (AEM 0.98%) holds the other 50% -- is one of the largest gold-producing mines in Canada. According to Yamana's 2016 annual report, Canadian Malartic was Yamana's largest gold-producing mine in fiscal 2016.
Image source: Yamana Gold.
And thanks to higher throughput and recovery rate, the mine achieved record annual production: 292,514 gold ounces. For context, El Penon was the company's second-most productive mine, reporting 220,209 gold ounces.
Of course, how much gold is produced is relative to the expense of digging it out of the ground. Although management doesn't break out the earnings generated by gold for each mine, one can gain some insight into the mines' profitability by examining their all-in sustaining costs (AISC). In this regard, Chapada, located in Brazil, produces the highest margin. In fiscal 2016, Chapada reported co-product AISC of $478 per gold ounce. Canadian Malartic generated the second-highest margin; it reported AISC of $795 per gold ounce. Chapada's superior profitability becomes even more apparent from another perspective: It reported a total cost of sales per gold ounce sold of $489 while El Penon -- next lowest -- reported a total cost of sales per gold ounce sold of $1,019.
Lastly, we can gain another perspective on how Yamana makes its money by extending our perspective beyond just gold. Taking into account all minerals produced at the mines, El Penon contributed the most -- $381 million -- to the company's top line in fiscal 2016. But the bottom line belongs to Canadian Malartic. Excluding non-cash charges, it reported a gross profit of $188 million.
A golden horizon
Just as the yellow stuff contributed the most to the company's earnings in 2016, it will presumably continue to play a prominent role in the years ahead. Because of decreased production at El Penon, management expects a year-over-year decrease in gold production in fiscal 2017. Looking farther out, though, management foresees growth from an estimated 940,000 ounces in 2017 to 1.1 million ounces in 2019.
The company's growth will come primarily from the commencement of gold production at projects that are currently in development -- not through acquisitions. The project that plays most prominently in this outlook is Cerro Moro, which management believes will emerge as its next cornerstone mine. According to management's estimates, Cerro Moro will produce 80,000 ounces of gold in 2018, when it begins production; moreover, management expects the mine to yield gold production of 130,000 ounces in 2019. Further demonstrating its importance, Cerro Moro is expected to be one of the company's more profitable mines, averaging AISC less than $600 per gold ounce in 2018 and 2019.
Besides Cerro Moro, Yamana has two other projects near completion that will help the company grow its gold-production. Suruca is expected to contribute approximately 40,000 ounces annually to Chapada's gold production when it commences operations in 2019. Moreover, gold production is expected to increase at Canadian Malartic, when the Barnat extension commences operations in 2018.
Investor takeaway
Playing supporting roles, silver and copper sales pale in comparison with how much money Yamana makes from gold. Although Canadian Malartic -- the company's lone operation in the country -- is one of the most prominent players in its portfolio, it's the companies assets in Brazil which contributed the most -- 39% of total revenue -- in fiscal 2016.
Because the company is solely relying on organic growth in the near future, it's important for investors to monitor the development of Cerro Moro. Once the project commences operations, look for it to achieve management's estimates for gold production in 2018 and 2019. But, more importantly, confirm that the mine's AISC are less than $600 per ounce, for failure to achieve success at Cerro More could greatly detract from what management foresees as a lustrous future.
