Investors who are bullish on gold have several options to potentially profit from that thesis. They can buy the physical metal or futures contracts, an exchange-traded fund (ETF) that owns it or that owns mining stocks, or shares of the mining companies themselves. However, before an investor buys gold stocks, they need to know that some of these options don't always follow the price of gold. That has certainly been the case for producer Yamana Gold (AUY), whose stock has declined about 8% since the company's formation 15 years ago, during which time the price of gold has risen nearly 370% due in large part because the company piled on a mountain of debt to acquire more mineral reserves over the years.
While Yamana has destroyed shareholder value over its history, the company appears to be about to turn the corner. It has a new low-cost mine coming on line later this year that should significantly increase cash flow. That catalyst could transform this former money pit into a real gold mine for investors. Here's what you need to know about where the company's been, and where it's going.
Image source: Getty Images.
What does Yamana Gold do?
Yamana Gold produces, you guessed it, gold. The company managed to dig out 823,264 ounces of the precious metal last year (along with an additional 273,063 ounces from its stake in Brio Gold and the Gualcamayo, which the company is in the process of selling). While that's a significant number, it wasn't enough to get it into the list of the world's top 10 miners, and it was well below leading gold producer Barrick Gold and its 5.32 million ounces.
Yamana also produces silver and copper, digging out 5 million ounces and 127.3 million pounds, respectively, in 2017. It's far from the leader in either category, however, and those metals don't supply more revenue to Yamana than gold, which is how it makes most of its money. In 2017, the company sold $1.8 billion in metals, with 79% of that total from gold sales, 16% from copper, and 5% from silver.
Operating mines
Yamana produces from several mines in the Americas, including in Canada, Brazil, Chile, and Argentina:
| Mine | Location | Amount of Metal Mined (2017) | AISC of Mine (2017) |
|---|---|---|---|
| Chapada | Brazil | 119,852 ounces gold; 127.3 million pounds copper | $385 per ounce |
| El Penon | Chile | 160,509 ounces gold; 4.28 million ounces silver | $928 per ounce of gold; $12.77 per ounce of silver |
| Canadian Malartic | Canada | 316,731 ounces gold | $742 per ounce |
| Jacobina | Brazil | 135,806 ounces gold | $867 per ounce |
| Minera Florida | Chile | 90,366 ounces gold; 469,674 ounces silver | $1,090 per ounce |
| Cerro Moro | Argentina | None in 2017 | N/A |
Data source: Yamana Gold. AISC = all-in sustaining cost.
As you can see, the biggest contributor is the Canadian Malartic mine, which the company owns as part of a 50/50 joint venture (JV) with Agnico Eagle Mines. The open-pit mine is one of the largest in Canada and boasts a low all-in sustaining cost (AISC) that was below the companywide average of $820 an ounce in 2017.
Another notable mine in Yamana's portfolio is El Penon, because it supplies the bulk of the company's silver output. Chapada is also notable, because it is the lowest-cost mine in the company's portfolio and contributes all the company's copper production.
As mentioned earlier, Yamana received some production from assets it plans to sell. One of those is the Gualcamayo open-pit mine in Argentina, which produced 154,052 ounces of gold in 2017 at an elevated AISC of $990 an ounce. While the company is pursuing alternatives to maximize the value of this high-cost mine, the current plan is to sell it. The company also held a 53% stake in Brio Gold, which owned several mines in Brazil, entitling Yamana to 119,011 ounces of gold in 2017. Yamana created Brio and completed an initial public offering (IPO) of the company in 2016 before agreeing to sell the rest of the shares it owned to Leagold Mining Corporation in 2018.
Helping replace some of the output from those departing assets will be the Cerro Moro gold-silver mine in Argentina. Yamana started construction on this mine in 2015 and is expected to finish it in 2018. The company estimates that the mine will produce 85,000 ounces of gold and 3.75 million ounces of silver in 2018 at low costs of $650 and $9.15 an ounce, respectively. In the coming years, the company sees output ramping up to 130,000 ounces of gold and 7 million ounces of silver.
History and acquisitions
Former banker Peter Marrone founded Yamana Gold in 2003. While its headquarters were (and still are) in Canada, the company initially operated gold and copper mines in Brazil that it acquired in a reverse takeover of a struggling company called Yamana Resources in that country.
Marrone laid out his strategic vision for Yamana in 2005, aiming to increase production up to 750,000 ounces of gold by 2008. That goal led the company to acquire RNC Gold for 49 million Canadian dollars (US$39 million at today's exchange rate) toward the end of that year, adding mines in Nicaragua and Honduras as well as an advanced development property and other exploration targets in Central America. That deal bolstered the company's output to 400,000 ounces in 2006 and put it on pace for 650,000 ounces by 2008. The company followed that deal a few months later by paying CA$574 million in stock to buy Desert Sun Mining. That deal added a mine in Brazil near another of Yamana's locations as well as one under development. It also increased the company's output to 450,000 ounces in 2006 and put it on pace for 800,000 by 2008.
A few months later, the company acquired Viceroy Exploration to solidify its position as a leading intermediate gold producer. The draw was Viceroy's advanced-stage Gualcamayo gold project, which, along with Yamana's other development-stage projects at the time, would help hoist production to 1 million ounces by 2008, well past its initial strategic vision.
In 2007, the company made two more deals, combining with Northern Orion Resources and then Meridian Gold. The company paid CA$3.5 billion for Meridian, which would make it a 1.5 million-ounce producer by 2009.
Yamana finally made an acquisition in its home country of Canada in 2014, when it teamed up with Agnico Eagle to buy Osisko Mining for CA$3.9 billion. The companies formed a joint acquisition entity, with each owning 50%, to gain control of its Canadian Malartic mine.
Debt
Yamana Gold's steady stream of acquisitions grew the size of the company over the years. However, these deals haven't created any value for investors. In fact, Yamana's share price is currently below where it was in 2003. One factor is that the company took on a significant amount of debt in recent years to acquire the stake in Canadian Malartic as well as to build Cerro Moro. That debt started weighing on the stock as the price of gold came off its peak.
Gold Price in U.S. Dollars data by YCharts.
The company has since started chipping away at this debt by selling more shares and parting with non-core assets like Brio Gold and the exploration properties it acquired along with the Canadian Malartic mine, which it sold to its partner, Agnico Eagle. These moves have given the company the liquidity it needs to finish building Cerro Moro, which is a key driver of its future growth.
Current business focus
Like many of its larger gold-producing peers, Yamana Gold has shifted its focus away from trying to build a gold mining empire and instead aims to grow shareholder value by increasing cash flow. Cerro Moro is a crucial step in that direction given the low-cost silver and gold it will provide the company. That mine will help expand the company's gold output at a 5.6% compound annual rate through 2020, pushing it up to 970,000 ounces. Silver production, meanwhile, should grow at an even faster 37% yearly pace, hitting 12.9 million ounces in 2020. This low-cost output will deliver a "step change in cash flow" in the second half of 2018, according to the company's projections. In Yamana's view, it will generate an amount of free cash flow through 2019 that is "disproportionate to market capitalization" (which was $2.8 billion in early 2018).
Image source: Getty Images.
Is Yamana Gold stock a buy?
Yamana Gold is about to hit a turning point. The once financially strapped gold producer should transform into a free-cash-flow machine over the next three years if the price of gold cooperates. The company believes it could produce more than $500 million in free cash flow through the end of 2019. For a company with a market cap of less than $3 billion, that's a significant windfall.
It's upside that the company believes isn't reflected in its stock price since Yamana sells for around five times expected 2018 cash flow per share. For comparison's sake, most peers trade for about eight times, while the highest one fetches approximately 14 times anticipated 2018 cash flow per share. These numbers suggest that Yamana Gold is significantly undervalued compared to those rivals. That cheap price tag, when combined with its growth potential, gives investors plenty of reasons to love what they see ahead. While Yamana's stock likely doesn't have millionaire-maker potential, it seems to have significant upside in the near term as long as the price of gold cooperates, making it a compelling gold stock to consider buying on that turnaround potential alone.
