This time last year, investors were happily bidding up the price of Yamana Gold (AUY) stock. The successful start-up of the all-important Cerro Moro mine in Argentina, which is expected to account for 13% of the company's gold production and 64% of silver production by 2020, had the potential to make it one of the few gold stocks with a clear path to long-term growth. But this year has served as a prime example that nothing is certain in the fickle mining landscape.
While Cerro Moro started operations on time and on budget in July, shares of Yamana Gold are down nearly 31% since the beginning of 2018. The primary reason: The government of Argentina announced new taxes on exports in an effort to stop a long string of financial crises. That has understandably spooked investors, as the new taxes will take a bite out of earnings in the next few years, but the headwind may be temporary.
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On track for growth
There's nothing materially wrong or different about operations at Yamana Gold. The business, which is underpinned by the Cerro Moro mine in Argentina and supported by five other operating mines, still boasts a relatively impressive growth profile for its industry. When announcing third-quarter 2018 results, the company also raised full-year 2018 production guidance for gold and copper. And although it reduced expectations for silver output relative to initial guidance, silver production this year is expected to jump 51% compared to the level achieved in 2017.
Similarly, Yamana Gold has maintained its ambitious view of the future. The company expects to increase gold production to 970,000 ounces and silver production to 12.9 million ounces in 2020. That works out to 1.15 million gold equivalent ounces (GEO) and represents 29% growth from production levels in 2017. If the business successfully scales while reducing expansionary capital investments and all-in sustaining costs (AISC) for precious metal output, then it could deliver healthy amounts of earnings and cash flow.
Even though the company has delivered on its growth plans in the last several years without much deviation, Wall Street has soured on the business due to new export taxes announced by the government of Argentina. While it's difficult to ignore the country's volatile political landscape, the assumed consequences to Yamana Gold could be a big overreaction.
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Don't cry for me, Argentina
The Argentine peso has lost over 50% of its value compared to the U.S. dollar this year, which jeopardizes the country's ability to make debt payments. This currency decline prompted the current administration to announce fiscal austerity measures in early September. The good news: The new measures are expected shore up Argentina's finances and help pay down debt. The bad news: Half of the gap will be closed by new taxes on exports.
Yamana Gold admitted that the new export taxes will offset some of the earnings growth it had penciled in from ramping operations at Cerro Moro. It even announced the sale of its other Argentine asset, the Gualcamayo mine, in October. The transaction will bring in $30 million in cash at closing, up to $80 million in future payouts, and a lifetime 1.5% net smelter royalty on future production from an undeveloped section of the asset. However, the future value won't be realized anytime soon, if at all. Wall Street interpreted the move as a sign that the business was buckling up for turbulence.
Although the direct impact from the new export taxes is difficult to pin down right now, investors may find solace in the fact that the taxes could be temporary. In fact, if Argentina successfully balances its budget in 2019 and secures new funding from the International Monetary Fund, the administration has said it plans to remove the taxes altogether. That could remove the uncertainty hanging over Yamana Gold's Cerro Moro mine in 2021 -- just as the asset is expected to be producing at peak capacity.
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Should Yamana Gold investors worry about Argentina's economic crisis?
On the one hand, Argentina doesn't have a great track record of meeting its fiscal objectives, and austerity packages tend to overpromise and underdeliver. That doesn't bode well for Yamana Gold investors hoping the new import taxes are only temporary.
On the other hand, the current administration appears to be making real progress to right the ship. It's getting a big boost from increased crude oil and natural gas output from the country's Vaca Muerta shale patch (often compared to America's Permian Basin) and a booming lithium industry. Falling energy production costs alone could save the government $1.6 billion per year in subsidies paid to the natural gas industry. Meanwhile, lithium exports will help to generate revenue and help the country meet its fiscal goals.
That said, stock markets hate uncertainty, and austerity in Argentina has created exactly that for Yamana Gold. Although Wall Street appears to be sharply overreacting to the news, it's just the latest reminder for individual investors that gold stocks tend to underperform the broader stock market over long periods of time. If the business encounters an unforeseen production delay -- not at all uncommon in the mining industry -- then things could get even worse. But if the business keeps executing, then this stock could be a bargain come 2021, especially if export taxes are lifted or reduced. Right now, it's best to consider it a relatively risky investment opportunity.
