Time to grab the pickaxes and mine the market for the best gold opportunities. On today's docket is Yamana Gold (AUY). Headquartered in Canada, the company has one gold-producing mine in Quebec, while the rest of its assets are spread throughout South America.
The past year has been a challenging one for the company. The Street, for example, has turned its back on the stock, which has been subject to several downgrades. It's not solely Wall Street but the market in general that has assumed a bearish outlook. Whereas the S&P 500 is up nearly 18% over the past year, Yamana's shares have languished, falling more than 9%. Does this mean this miner's stock is nothing more than fool's gold, or does it suggest there's a bargain to be had? Let's dig in a little deeper to find out.
Image source: Getty Images.
The yellow brick road to growth
Eschewing acquisitions, Yamana recognizes the development of projects in its pipeline as its best opportunity for future growth. And of these projects, Cerro Moro represents the crown jewel, for management expects the Argentinian gold-silver mine to emerge as one of the company's cornerstone assets. Development of the mine is on schedule, and management expects gold production to commence in Q1 2018 and ramp up through the year. While Yamana forecasts fiscal 2018 gold production of 80,000 ounces, gold production is forecast to be 130,000 ounces in fiscal 2019. Cerro Moro's attractiveness, however, transcends gold production. Management forecasts that the mine will report average all-in sustaining costs (AISC) for fiscal years 2018 and 2019 of less than $600 per gold ounce -- impressive considering Yamana reported AISC of $911 per ounce in fiscal 2016. Attempting to ensure that Cerro Moro glitters for many years to come, management aspires to add 1 million gold equivalent ounces of reserves and resources over the next four years.
In addition to Cerro Moro, Yamana includes Suruca -- which will supplement gold production at the Chapada mine -- as another project in the advanced phase of development. Moreover, Kirkland Lake, Agua Rica, and Agua de la Falda represent several longer-term opportunities the company is exploring.
Securing its financial health
Assessing whether Yamana's stock is a lucrative opportunity means much more than considering the its growth prospects. It's imperative to also evaluate the company's financial position. A debt-laden balance sheet, for example, should certainly give investors pause, regardless of the company's growth prospects.
Over the past three years, Yamana has made a concerted effort to strengthen its balance sheet and shore up its financial well-being. Illustrating its success in this endeavor, the company has reduced its total debt more than 22% from fiscal 2014 to 2016. Although bears may argue that the company's decreased cash position -- a more than 49% decline over the past three years -- mitigates the achievement, it's worth noting management's near-term outlook. According to the company, fiscal 2018 will mark a "step change in cash flow" as Cerro Moro commences operations and expansionary capital expenditures decrease, providing the gold miner with more green to pay down more debt or grow its cash position.
Further demonstrating the commitment to a stronger financial position, the company aspires to take a more conservative approach to leverage. In a recent investor presentation, management estimates the company would end fiscal 2017 with a net debt-to-EBITDA ratio of 2.8. Looking ahead, management has identified a short-term ratio of less than 2.0 and a longer-term ratio of less than 1.5.
Perusing the price tag
Yamana may seem like a glittering opportunity. However, we must also consider the stock's valuation. And in doing so, we find that the stock, compared to both itself and its peers, is a bargain.
AEM Price to CFO Per Share (3y Median) data by YCharts.
Besides trading at a discount to its peers -- Agnico Eagle Mines (AEM 1.22%), Barrick Gold (GOLD -1.02%), Goldcorp (GG), and Newmont Mining Corp. (NEM 2.36%) -- in terms of operational cash flow, the company is also trading lower than its five-year average of 6.9, according to Morningstar.
Moreover, the market doesn't seem very impressed with Yamana in terms of sales. Besides trading at a lower multiple than its peers, the company also trades below its five-year average of 3.2.
Investor takeaway
Over the past year, Yamana's shares have traded as high as $3.25; however, that was before the mid-February announcement that the company is forsaking acquisitions and pursuing organic growth. Since then, shares have fallen off and never recovered. Evidently, the market is fearful that Yamana's sole interest in developing projects in its pipeline is not an adequate avenue for growth.
When fear rears its ugly head, however, opportunity often follows -- such is the case with Yamana. Although it's not a holding that I think could outperform the market in the long term, there's certainly the potential for it to grow over the next three years or so. Looking ahead, however, it's critical to monitor the company's success in executing the development of Cerro Moro, for failure to bring the project to fruition would be devastating. In addition, growing cash flow and strengthening the balance sheet are two green flags that indicate Yamana is on the right track.
