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Better Buy: Yamana Gold Inc. vs. GoldCorp

By Neha Chamaria – Oct 22, 2017 at 11:40AM

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With both gold stocks lagging the yellow metal this year, which has better turnaround prospects?

Gold prices are up nearly 13% year to date, but some of the biggest gold-mining stocks are struggling to keep up with the prices of the precious metal. Goldcorp (GG), one of world's top five gold miners in terms of production, is down about 3% so far this year. Likewise, Canada-based gold mining giant Yamana Gold (AUY 3.80%) has seen a similar drop in its shares drop year to date.

Are investors overlooking the potential in these two stocks amid rising gold prices? Between Goldcorp and Yamana Gold, which stock offers better value for money at current prices? Read on to know.

What's ailing Goldcorp and Yamana Gold? 

Before I dive into the bull cases for Goldcorp and Yamana Gold and reveal which stock is a better buy today, it's important to understand why these stocks have underperformed lately. 

Gold bars lined up in rows and columns.

Image source: Getty Images

Yamana Gold's earnings for the past two quarters didn't sit well with investors. For the six months ended June 30, 2017, Yamana reported a net loss of $42.8 million, compared with a $71.3 million profit in the comparable period of 2016, largely because of a deferred tax expense. However, Yamana's six-month operating earnings also declined 14% year over year on lower sales. 

For Goldcorp, it's declining production, not profits, that's been a concern. The miner reported a 9% year-over-year decline in its gold output for the six months ended June 30 because of lower-grade ore from two of its primary mines in Canada: Porcupine and Red Lake. 

The worst, however, could be behind Goldcorp and Yamana Gold, as each company has outlined ambitious plans that should drive them to the next level of growth.  

The case for Goldcorp

The decline in Goldcorp's production is just a blip, as the miner is ramping up several mines, including its primary mine, Penasquito in Mexico. Meanwhile, Goldcorp also raised $500 million from the divestment of non-core assets in the past year and a half and reinvested those proceeds into projects to boost its gold reserves by nearly 22% to 50 million ounces. 

Goldcorp's all-in-sustaining cost (AISC) also fell to $800 per ounce of gold in its second quarter, from $1,067 per ounce in Q2 2016. This, by far, is the most important development that investors in Goldcorp need to track, as cost efficiency remains the key to growth for any gold company, given the inherent volatility in gold prices.

By 2021, Goldcorp aims to bring down its AISC to $700 per ounce of gold as it strives to become one of the lowest-cost gold producers in the industry. That's only one part of Goldcorp's recently announced 20/20/20 five-year growth plan, denoting 20% growth in reserves (to 60 million ounces) and production (to 3 million ounces) and a 20% reduction in AISC. 

A pictorial representation of Goldcorp's 5-year growth plans.

Image source: Goldcorp.

At a price-to-cash flow ratio of 12, Goldcorp may not be the cheapest gold stock around, but its growth plans and a rock-solid balance sheet create a great investment thesis. 

The case for Yamana Gold

Yamana just released its preliminary third-quarter numbers, and they don't look too encouraging. Gold and silver production for the nine months ended Sept. 30 declined roughly 3% and 25%, respectively, year over year.  

However, I'm not ruling out a possible full-year outlook upgrade when Yamana reports its Q3 numbers this week, simply because gold prices are currently way stronger than where they were during the last quarter of 2016, which should help offset any decline in production to a great extent.

What's important, though, is Yamana's outlook for 2018 and beyond looks bright.

For starters, Yamana is on track to bring its seventh mine, Cerro Moro, online early next year. The mine is expected to produce 80,000 ounces of gold and 4.5 million ounces of silver in 2018. By 2019, Yamana's total gold and silver production is projected to jump 20% and 200%, respectively. 

Charts showing Yamana Gold's projections for gold and silver production between 2017 and 2019.

Image source: Yamana Gold.

Cerro Moro is also expected to be one of Yamana's lowest-cost mines, and cash flows from the mine should help the company pare down its near-term debt. Furthermore, as Cerro Moro comes online and Yamana's expansionary capital expenditures taper next year onward, its cash flows should grow substantially. Yamana has several other exploration and development projects in the pipeline to sustain growth in the longer run.

The Foolish bottom line

Both Goldcorp and Yamana Gold look like great investment opportunities, given their growth plans, but which stock you choose today depends on your risk appetite. 

From a valuation standpoint, Yamana is incredibly cheap, at a price-to-cash flow ratio of only 5, which is less than half of Goldcorp's. The problem is that Cerro Moro is the end-all and be-all for Yamana. If it delivers, Yamana's earnings and stock price could zoom. If not, Yamana will have an uphill task winning the market's confidence back.

Comparatively, Goldcorp is a less risky stock. The miner has a multitude of projects to fall back on to expand production. It was profitable last year and free-cash-flow positive in the past couple of years, unlike Yamana. In fact, Goldcorp generated greater free cash flow than net income in four out of the past five years, which is a big plus in my books when it comes to investing. 

Assess your risk-taking ability and make your pick.  

Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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