Reporting third-quarter earnings of $0.04 per share and revenue of $493 million, Yamana Gold (NYSE:AUY) beat analysts' estimates. For those who follow the company, this may come as a surprise since Yamana has failed to meet expectations for the previous four quarters. Let's dig in deeper to discover what drove the unexpectedly good performance, and what it means for the company's future.
Setting sights on Cerro Moro
A crucial part of Yamana's growth strategy, the Cerro Moro mine will, according to the company, emerge as one of its core mines when completed in 2017. Management estimates that gold production -- expected to begin and ramp up through next year -- at the Argentine mine will be around 80,000 ounces in fiscal 2018 and 130,000 ounces in fiscal 2019. In addition, management confirmed its estimate for the mine of all-in sustaining costs (AISC) below $600 per ounce of gold. But Cerro Moro is more than just a source of the yellow stuff. Yamana estimates silver production of 4.5 million ounces in fiscal 2018 and 9.9 million ounces in fiscal 2019.
Through the first nine months of fiscal 2017, Cerro Moro has accounted for $124 million in capital expenditures. With construction of the mine expected to be completed in 2017, capex will be significantly lower in 2018, which management estimates will result in a "step change in cash flow beginning in 2018." Once this occurs, management foresees a stronger balance sheet, as the greater cash flow will "drive reduction in net debt."
An increasingly lustrous forecast
Exceeding management's expectations, Yamana reported gold production of 257,000 ounces in the third quarter. This isn't the first time this year, however, that the company has surprised itself. Initially, management forecast gold production of 920,000 ounces in fiscal 2017; however, in the Q3 earnings report, management -- for the second time this year -- upwardly revised its guidance. Now, Yamana expects gold production of 960,000 ounces in fiscal 2017, representing a more than 4% increase over the original estimate.
Gold may be its bread and butter, but Yamana does more than just dig the yellow stuff out of the ground; the company is also a producer of silver and copper. Although not as much of a surprise as gold this year, silver and copper production have also surpassed expectations. In the Q3 report, management upwardly revised (albeit the only time this year) its estimate for fiscal 2017 silver production to 5 million ounces from 4.74 million ounces and copper production to 125 million pounds from 120 million pounds.
No guidance revision here... and that's a good thing
Savvy investors know that for miners to truly benefit from an increase in mineral production, they must also succeed in limiting costs. In other words, Yamana's expected increase in gold, silver, and copper production means little if expenses will, likewise, rise. To this end, investors' fears should be assuaged.
Although management reported foreign exchange headwinds related to the appreciation of the Brazilian, Chilean, and Canadian currencies, the company reported consolidated AISC on a co-product basis of $905 per ounce, meeting expectations for the quarter. Management cites lower sustaining capital expenditures and mine development as major factors in keeping costs low for the quarter despite the challenges in foreign exchange. Management, furthermore, reaffirmed its AISC guidance for the year: $890 per gold ounce to $910 per gold ounce on a co-product basis. Additionally, management reported that the company is on track to report silver and copper costs within expectations for the fiscal year.
From a quarter that provided investors several things to celebrate, the greatest one, arguably, was the knowledge that Cerro Moro's development remains on track. Until the mine begins gold production, however, this is something that investors will want to continuously monitor closely. Of course, the upward revisions in gold, silver, and copper production were a welcome surprise -- even more so considering the expectation that costs will not, likewise, rise.