Where Will Yamana Gold Inc. Be in 3 Years?

Like most of its peers, Yamana Gold (AUY) has struggled to create shareholder value over the long term. While most gold stocks have been handily beaten by the returns of the S&P 500 in the last five- and 10-year periods, the company's shares rank at the bottom of nearly every comparison. Total returns of negative-85% and negative-74% in those respective periods will do that.

Remarkably, despite the awful historical performance of Yamana Gold stock, it has some of the best growth prospects in the industry. Several mines new and old are slated to increase gold and silver production in the next two years, which should increase companywide production of each precious metal by at least double digits. Growing production should also result in growing cash flow, making it easier to reduce debt and potentially increase its dividend -- if selling prices cooperate.

The nearly overnight turnaround in the company's prospects begs the question, where will Yamana Gold be in three years?

Image source: Getty Images.

Growth projects galore

Yamana Gold shareholders look likely to reap the benefits of production gains this year -- before major growth projects begin contributing to operations. The miner is on pace to beat its full-year production guidance based on first-half 2017 production volumes and historical trends.

Gold, silver, and copper production through the first six months of this year represent 49%, 51%, and 46% of their respective full-year expectations. Considering production between first and second halves of each year dating back to 2010 has averaged 46% to 54%, respectively, Yamana Gold should have no trouble beating its original 2017 guidance. 

That would be quite the treat, especially considering what may be ahead for the company.

Yamana Gold expects to produce 940,000 ounces of gold and 4.74 million ounces of silver in 2017. While that represents respectable operations, upcoming mine openings and expansions underpin formidable growth. Next year, the Cerro Moro mine in Argentina comes online, and is expected to singlehandedly lift full-year 2018 gold production to 1.03 million ounces and silver production to an astounding 10 million ounces. Better yet, the mine's low operating costs will drop per unit expenses across the company's portfolio. 

The gains in production and operating efficiency are expected to continue beyond 2018.

Data source: Yamana Gold investor presentation.

These production gains, coupled with lower capital expenditures from more recent years, when mines were being readied for production, is expected to result in a more than 75% increase in EBITDA from 2017 to 2019. 

However, it should be noted that although the company reports this figure in its investor presentations, it's not actually a company figure, but instead the consensus estimate from Wall Street analysts. That means the number is not very robust and investors shouldn't completely rely on it. After all, Wall Street estimates change frequently, especially for estimates that are forecasting two years into the future.

That said, if Yamana Gold executes on its expected production increases in the next two years, then it will be difficult to not see a few step changes in revenue, earnings, and cash flow. Indeed, the company wants to reduce is net debt-to-EBITDA ratio from 2.8 at the end of 2017 to less than 2.0 in the near term, with a long-term target of 1.5. 

The Cerro Moro mine factors heavily into the debt reduction and management plans, but it isn't the only development project investors have to look forward to.

Data source: Yamana Gold investor presentation.

In addition to development projects, there are at least six exploration projects underway throughout the Americas that could support production or offset production losses far off in the future. That could mean Yamana Gold will finally be a reputable gold stock, despite its lackluster history.

So where will Yamana Gold be in three years? It could be producing around 17% more gold and 200% more silver than it does today, thanks to the Cerro Moro mine alone. That may increase revenue 33% and cash flow 50% if prices remain where they are today. By then, additional details or investments may be announced in other late-stage development projects, while early-stage projects could be upgraded to advanced status. In other words, the company has a lot of potential catalysts on the horizon. If it executes, then it could be a big winner for investors.

What does it mean for investors?

You can make a strong argument that Yamana Gold stock is undervalued at today's $2.5 billion market cap if it meets its ambitious production increases. Since the Cerro Moro mine is slated for commissioning and ramp-up in the first half of 2018, there's much less uncertainty surrounding those production increases than the stock price seems to suggest. Then again, for a company that has been a major disappointment for most of its public history, the current valuation isn't too surprising.

I'm not a big fan of gold stocks or precious-metals miners, so I'll be staying on the sideline here. But if you're looking for a gold stock with big potential, then you should give Yamana Gold a deeper look.