You could say Wall Street is a little excited about what's to come for Yamana Gold (AUY). In the last three months, the gold stock has risen a whopping 46%. What's the catalyst? A giant silver mine named Cerro Moro will start up this year and, once fully ramped up in 2019, will allow the miner to triple silver production and boost gold production 20% from last year's levels.
That's an incredible amount of growth -- something that is relatively elusive for many companies in the industry -- in a short period of time. When coupled with expectations that Cerro Moro will be accompanied by some of the lowest gold and silver production costs in the industry, there's a lot to like about Yamana Gold. Could it be a millionaire-maker stock?
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Big growth ahead
The precious metals miner was on track to meet its full-year cost guidance through the first nine months of 2017. All-in sustaining costs (AISC) per ounce of gold and silver averaged $884 and $13.96, respectively, while copper production averaged AISC of $1.77 per pound. While none of those metrics is among the best in the industry, they did deliver $326 million in operating cash flow during the period. They're also about to get a lot better.
Cerro Moro is expected to boast AISC of less than $600 per ounce of gold and less than $9 per ounce of silver in 2018 and 2019. Considering the mine will increase Yamana Gold's annual silver production from just 5 million ounces in 2017 to 10 million ounces this year and nearly 15 million ounces in 2019, the company's per-unit production costs could fall precipitously.
Simply put, Cerro Moro should provide a big shot in the arm for a gold stock that has historically not been very good at creating value for shareholders. One question investors may want to ask: How long will the production gains last? Management has hinted that production at the mine could decline beyond 2019, but also stated that exploration targets at the site could sustain production rates similar to those expected to be achieved in 2018 and 2019.
Image source: Getty Images.
Luckily, Yamana Gold has its eye on the long term. At the end of 2017 the company sold off exploration assets in Canada for a cool $162.5 million. The new capital will make the period between ramp-up and cash flow generation at Cerro Moro easier to stomach, since costs will be incurred before production makes a meaningful contribution to the company's financials. The cash will also make it possible to begin investing in medium-term projects that can deliver results in 2020 and shortly thereafter.
So, too, will a generous improvement in cash flow resulting from a reduction in capital expenditures (much of the reduction related to Cerro Moro being completed) and increased production. Indeed, Yamana Gold saw a $140 million improvement in quarterly free cash flow generation from last year's first quarter to third quarter.
Could Yamana Gold be a millionaire-maker stock?
Most of the financial improvements coming in 2018 and 2019 will have staying power. A lion's share of production gains from Cerro Moro will stick around in the early 2020s, which will keep revenue, profits, and cash flow generation at levels higher than historical averages.
That realization has a lot to do with the stock's recent surge. Yamana Gold was already significantly undervalued compared to its peer group on multiple metrics, including book value and share price to cash flow per share. Wall Street had even more ground to make up if it wanted to more accurately account for near-term production gains at Cerro Moro.
While it's possible (likely, perhaps) that Yamana Gold will continue to earn a higher valuation over the next several years, it may not occur in multiples that will allow it to become a millionaire-maker stock. A multi-bagger may not be out of the question, but a 10-bagger almost certainly isn't possible in any reasonable time frame. Then again, given the awful performance of most gold stocks in almost any historical market period, that's hardly a swipe at the company's awesome growth potential.
