Unhappy with Yamana Gold's (AUY) performance last year, shareholders punished the stock. They drove it 15% lower in February when the company reported its fourth-quarter and full-year 2017 earnings. And shares have failed to bounce back; year to date, the stock is down 8%, while the price of gold has inched just a fraction of a percent higher.
Instead of looking back, however, investors would be better served to look forward, for the road ahead appears to be paved with yellow brick.
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Prognostication for the portfolio
Committed to growth through organic means, management has elected to eschew acquisitions for the time being. As a result, in 2019 investors can expect the company to have a portfolio of assets closely resembling that which Yamana has today, though it should glitter much more brightly.
At Chapada, for example, Yamana expects to commission the first phase of its plan to grow the value of the copper and gold asset. According to the company, the plant optimization project will result in gold and copper recovery improvements of 1.5% to 2%. Furthermore, the company should complete feasibility studies for phases 2 and 3 in 2019, which entail plant expansion and future production at the Sucupira deposit. Through 2034, management foresees annual gold production of 100,000 to 110,000 ounces and annual copper production of 150 million to 160 million pounds as a result of the phased expansion plan at Chapada. By comparison, in 2018 Yamana estimates gold and copper production of 110,000 ounces and 120 million pounds, respectively. The increasing copper production could provide considerable value to the company as copper demand is expected to accelerate along with growth in the electric vehicle market.
Elsewhere in the portfolio, operations at Cerro Moro, which the company expects to emerge as a cornerstone mine, should be in full swing in 2019 after ramping up through 2018. At Canadian Malartic, moreover, gold production at the Barnat extension is expected to begin in late 2019.
A step in the right direction
With Cerro Moro contributing gold production of an expected 85,000 ounces this year, management has repeatedly asserted that the mine will contribute to a "step change" in the company's 2018 operating cash flow. In 2019, however, management foresees the improvement in cash flow being even "more pronounced." For some context, Yamana reported cash from continuing operations of $563 million and $575 million in 2016 and 2017, respectively.
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The commencement of operations at Cerro Moro has the added benefit of resulting in a reduction in expansionary capital expenditures. This, in addition to operations commencing at the Barnat extension, will mean that expansionary capex should be between $50 million and $75 million -- a noteworthy reduction from the $179 million that management foresees for 2018.
Between the increase in operating cash flow and the reduction in capex, investors can expect the company to see free cash flow grow in 2019. This should come as a welcome relief, considering the company's free cash flow dropped from $169 million in 2016 to a negative $160 million in 2017, according to Morningstar.
A more conservative balancing act
In 2019, a more attractive balance sheet represents another way in which Yamana will glimmer brightly. Since the end of 2014, management has worked to reduce the company's net debt and its reliance on leverage. Addressing the latter, for example, management has identified a net debt-to-EBITDA target of 1.5. At the end of 2017, the company's net debt-to-EBITDA ratio was 2.85; however, this should come down in 2019.
With the increase in cash flow thanks to Cerro Moro, management expects to further reduce its net debt and to deleverage. Confidence in the company's ability to do this, apparently, extends beyond the C-suite. In a recent investor presentation, management said that the consensus estimate is for the company to achieve a net debt-to-EBITDA ratio of approximately 2.0 in the short term.
The golden takeaway
One year from now, Yamana should find itself, with the completion of Cerro Moro in the rearview mirror, in an opportune position. Perhaps this was best articulated in Yamana's 2017 annual report, where management asserted that the completion of Cerro Moro marks a "transition to a cash harvesting phase of growth for our company." This validates management's strategy of forgoing acquisitions and relying on the development of projects in its pipeline.
Moving forward, investors can continue to monitor the company's cash flow and reliance on leverage, for these two factors represent litmus tests that the company's growth strategy remains on track.
