Yamana Gold (AUY +0.00%) probably hasn't won the affection of many investors over the years, as it has done an abysmal job creating value. No matter what period you measure, the company has delivered a negative shareholder return, including dropping a third of its value this year and by double digits since going public.
However, that abysmal performance could be about to change since the company is on the cusp of a monumental shift where its production is poised to surge, which has the potential to drive cash flow -- and its stock price -- up with it. Furthermore, investors can get that growth for a bargain-basement price. Those factors give investors several good reasons to love Yamana Gold stock right now.
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Getting ready for the turn
Yamana Gold currently operates six mines across the Americas, though the bulk are in the Southern Hemisphere. These mines are on pace to produce 940,000 ounces of gold and 4.7 million ounces of silver this year, along with 120 million pounds of copper. While this forecast implies that gold and silver output would decline by 8.8% and 29.4%, respectively, the company's best days still seem to be ahead.
That's because starting next year, the company's Cerro Moro mine in Argentina should come online. Yamana anticipates that it will boost its gold output up to 1.03 million ounces in 2018, with silver production expected to reach 10 million ounces. Meanwhile, those two precious metals should hit 1.1 million and 14.5 million ounces, respectively, by 2019. That forecast indicates a nearly 20% increase in gold production and a 200% surge in silver output from 2017 through 2019, which has the potential to drive revenue up by a third while increasing cash flow by 50% if precious metal prices hold their ground.
Meanwhile, Yamana Gold has additional upside potential not currently part of its guidance. That's because it could recommission its C1 Santa Luz project next year, which would add an average of 114,000 ounces of gold output per year. Furthermore, the company's Suruca development from its Chapada mine might start producing by 2019, which could add up to 60,000 more ounces of annual output in the years that follow. If the company moves forward with both of these initiatives, it will drive its growth rate even higher.
Premium growth without the high price tag
That said, despite this visible growth coming over the horizon, Yamana Gold is one of the cheapest gold mining stocks around. That's evident from the following chart, which shows that Yamana sells for a much lower multiple of its cash flow per share than larger rivals Goldcorp (GG +0.00%), Barrick Gold (ABX +3.08%), and Newmont Mining (NEM +2.66%):
AUY Price to CFO Per Share (TTM) data by YCharts.
The company's history of underperformance is one reason why it likely sells at a discount to these peers. However, another issue is that Yamana has taken on quite a bit of debt to help finance its growth projects. Currently, the company has $1.4 billion of net debt, which represents about a third of its total enterprise value. Contrast that with Newmont Mining at just 6% of enterprise value, while Barrick Gold and Goldcorp are both at 17%.
That said, Yamana expects its leverage to come down over the next few years. First of all, it's starting to generate free cash flow, which should accelerate next year when Cerro Moro comes online. Meanwhile, the company is targeting a $300 million reduction in net debt by year-end via non-core asset sales. These two contributors should help move the company's leverage closer to its peer group average, which could help close a portion of the value disconnect.
What's not to love?
While I'm not a gold bull, I still love it when a company offers investors visible growth for a relatively low price. Those two factors have the potential to pull Yamana Gold stock out of its rut, even if gold and silver stay right where they are over the next few years. Meanwhile, if those precious metals start to shine and move higher, Yamana could produce exceptional returns.
