Thanks to recent comments from the U.S. Federal Reserve, which revealed its lack of interest in raising interest rates, the price of gold bounded above the $1,400-per-ounce mark -- a level not broken in more than five years. Unsurprisingly, investors are turning their attention to gold mining stocks -- among them, Yamana Gold (AUY).
Simply because Yamana Gold has significant exposure to the yellow metal doesn't mean, however, that investors would benefit from building a position in the stock. After all, there are plenty of examples of gold miners that don't represent glittering opportunities. So let's dig in deeper to see if Yamana deserves a place in investors' portfolios.
On the bright side
Upon the first announcement that Yamana intended to eschew acquisitions in favor of organic growth opportunities, investors were mostly disappointed. Management, however, has effectively executed its growth plan over the past two years, allaying the concerns of acquisition-minded investors. For one, the company expeditiously, and within budget, brought Cerro Moro through the development phase. Emerging as one of the company's core assets, Cerro Moro exceeded expectations in 2018, and management continues to recognize the potential of the Argentine mine to contribute strongly to the company's operational cash flow. Moreover, management deserves credit for adding value to its portfolio through the subtraction of a major asset, Chapada, in a deal that represents a total consideration of over $1 billion, exceeding the current carrying value of the asset.
Unlike many of its gold-mining peers, Yamana rewards shareholders by means of a quarterly dividend, and with the sale of Chapada, shareholders stand to benefit even more. Upon completion of the sale of Chapada, Yamana intends to double its dividend from an annual payout per share of $0.02 per share to $0.04. With shares trading at around $2.50 as of this writing, that represents a yield of about 1.6%.
And there's more. In a recent investor presentation, management claimed that "progressive dividend increases are anticipated as debt is repaid from cash flows and through asset monetizations."
Lastly, the company's interest in maintaining its financial health warrants recognition. For several years now, management has sought to reduce its reliance on leverage from a net debt-to-EBITDA ratio of 2.8 in 2014 to a ratio between 1.5 and 2. Upon the closing of the sale of Chapada, management expects the company to have a net debt-to-EBITDA ratio of 1.5, and the company expects the ratio to contract even further, to 1, by 2021.
On the less-than-lustrous side
From management's success in optimizing the portfolio to the company's improving financial health, there's a lot to like about Yamana. Bears, however, contend that the company doesn't glitter as brightly as the bulls might have you believe. For one, the company will soon find itself taking on a greater degree of risk -- with greater exposure to the precious-metals markets -- upon the sale of Chapada, the company's lone copper-producing asset. In 2018, for example, the sale of copper accounted for approximately 18.6% of the company's revenue. Without Chapada, therefore, Yamana will be increasingly susceptible to volatility in the gold and silver markets.
An additional source of concern lies with the company's recent cash flow woes. Over the past three years, Yamana's operational cash flow has fallen about 38%. And it appears that 2019 isn't providing much relief; in the first quarter, Yamana reported a 90% year-over-year decline in cash from operations. This trajectory is worrisome, considering the company intends to finance development activities at Jacobina, Canadian Malartic, Agua Rica, and Cerro Moro with cash generated from operating activities. Moreover, management has stated that it intends to also source the increased dividend from operational cash flow.
Checking in with the price tag
We would be remiss to consider Yamana Gold without looking at the stock's valuation. Since the earnings figures of mining companies are often complicated by the non-cash expenses tied to the depreciation of their assets, examining these stocks in terms of their cash flows provides better insight. In regard to Yamana Gold, we find that the stock currently trades at 8.1 times cash from operations on a trailing-12-month basis. This appears to be a rich valuation, considering its five-year multiple is 5.7, according to Morningstar. In comparison to its peers, however, the valuation seems more reasonable. Alamos Gold and B2Gold trade at multiples of 12 and 7.9, respectively.
A golden opportunity
While Yamana Gold will be assuming more risk upon the sale of Chapada, the company intends to return to the copper market soon through the development of Agua Rica. According to the most recent investor presentation, a pre-feasibility study is imminent and a feasibility study is expected to be completed in 2020. Currently, Yamana estimates Agua Rica's measured and indicated copper reserves at 11.5 billion pounds and forecasts annual production in the first 10 years of operation to average 520 million pounds of copper-equivalent metal. And while the company has struggled to grow its cash flow over the past three years, this trend is likely to reverse as production at Cerro Moro continues to ramp up, and cash flow is no longer needed to sustain and expand operations at Chapada.
At this point, therefore, I think investors interested in gaining or expanding exposure to gold-mining stocks would be well served to add Yamana to their portfolios.