Are Investors Overlooking Yamana Gold Stock?

While many gold miners expect to struggle with declining production volumes in the years ahead, Yamana Gold (AUY) is a rare exception. The precious metals producer currently expects gold production to increase nearly 18% from 2017 to 2020, while silver output is expected to jump 159% in that span. Believe it or not, those astounding growth rates were a disappointment when announced in the latest production outlook. 

Management's previous three-year production outlook called for even higher output of both gold and silver by 2019. Investors reacted to the reduced projections by erasing most of the gold stock's gains that had accrued since last December. It's easy to see why the market sold on the news, but there's a solid case to be made that investors are overlooking Yamana Gold stock. Simply put, while the new guidance is weak relative to the old production outlook, it still marks eye-popping growth relative to historical real-world production.

Image source: Getty Images.

By the numbers

Part of the reason the reduced three-year outlook was considered a disappointment is that it concerned the company's prized asset: the Cerro Moro mine in Argentina. It's the most significant near-term driver of the business and will be the source of nearly all of its silver and gold production growth for the next several years.

Knowing that, it's easy to see how Yamana Gold's shifting expectations for Cerro Moro have been interpreted as a letdown.  

Source: Press releases, investor presentations.

The difference between outlooks amounts to a 4% decrease in expected gold output and a 39% drop in silver output in 2019. As would be expected, the reduction has weighed heavily on Yamana Gold's total production outlook, especially for silver. However, the company has reduced its total gold output significantly beyond the decline from its prized growth asset to account for a 110,000-ounce reduction from its Gualcamayo mine, which is being held as an asset for sale.  

Source: Press releases, investor presentations.

Why the reduced outlook? It seems likely that a reduced initial footprint at Cerro Moro would be the culprit. The expected recovery rates for gold and silver -- at 95% and 93%, respectively -- remain unchanged in either production outlook, which hints less ore will be processed than previously expected.

That said, there's a difference between financial and production guidance in the current year and three-year production outlooks. The fact is that Yamana has met or exceeded its "current year" financial and production guidance in each of the last several years.

Image source: Getty Images.

Additionally, as far as investors know, the Cerro Moro mine is ramping up production on time and as expected -- relative to the most recent guidance, anyway -- without any operational delays. Therefore, it seems that management's previous guidance (on paper) overshot what was initially possible once the mine was commissioned and started up (in reality).

The important thing as far as investors are concerned is the business' ability to generate profits and cash flow -- and that remains intact. Yamana Gold still expects Cerro Moro to boast the lowest production costs in its portfolio this year, with all-in sustaining cost (AISC) of $650 per ounce of gold and $9.15 per ounce of silver, compared to over $800 per ounce and $12 per ounce, respectively, for all mines combined. 

That promises to provide a significant boost to profits and cash flow as production levels ramp up. And as management has continuously attempted to remind investors, the stock trades at a significant discount to cash flow compared to peers. Yamana Gold boasts a price to free cash flow-per-share ratio of under 5, whereas the average peer is closer to 7. 

Image source: Getty Images.

Investors seem to be overlooking this gold stock

After digging deeper, it seems most investors are overlooking Yamana Gold stock. The reduction in the three-year production outlook is disappointing, to be sure, but the current expectations still call for production growth of nearly 18% for gold and 159% for silver from 2017 to 2019. That's even more impressive considering many gold miners are struggling with declining production of precious metals. Simply put, this promises to be one of the fastest-growing gold stocks on the market in the near term.