By the time Yamana Gold
As a reminder, I first posited my fair value estimate of $30 for Yamana Gold when gold traded near $1,200 per ounce back in August 2010. Thus, as gold hovers in strength here above $1,700, and ultimately catches fire to blow through my conservative forecast of $2,000 per ounce, keep in mind that my fair value estimate grows ever more conservative in nature. With Yamana targeting production growth of roughly 50% over the next couple of years -- driven by the addition of four new gold mines in Mexico and Brazil -- the reliable catalysts for further share-price gains are visible on the horizon.
Spotlight on Chapada
Yamana's Chapada operation in Brazil lies at the very heart of the miner's ability to deliver industry-leading by-product cash costs year after year, since massive copper credits more than offset the cost of gold extraction there. In fact, during the third quarter, Chapada's by-product cash cost came in at an astounding negative $2,045 per ounce! On the strength of that copper production -- 41.4 million pounds of the stuff during the third quarter -- Yamana was able to turn in a consolidated by-product cash cost of just $94 per ounce of gold equivalent. Larger competitors Barrick Gold
To render my call for Yamana to surpass $30 per share safer still, Yamana continues to deliver on what I have characterized as one of the most attractive profiles for organic reserve growth in the industry. Following up on the exciting discovery in 2009 of the Suruca deposit near the company's Chapada mine in Brazil, Yamana's exploration team has come through yet again during 2011 with a new copper and gold deposit called Corpo Sul. The deposit already boasts a substantial strike length of three kilometers, and remains open both along strike and "down dip" (at depth). When the initial resource estimate for Corpo Sul comes out before year-end, look for attractive ore grades in excess of those from Chapada's main pit. Yamana also expects to release a feasibility study for the Suruca deposit by December, with an eye toward an additional 40,000 to 50,000 ounces of annual gold production beginning in 2014, giving investors a pair of potential catalysts to look forward to in the near term.
When I first offered my assessment of a $30 fair value for Yamana's shares, the Suruca deposit was just barely coming into view, while Corpo Sul represents a further bonus asset that renders my long-standing price forecast more conservative still.
The most underappreciated component of Yamana's fair value
On the surface, Newmont Mining's
At a prevailing gold price of $1,400 per ounce, I calculated that revenue stream alone at more than $2 billion, but what if the ongoing, competitive devaluation of the world's paper currencies were to trigger an entirely new environment for gold, where these seemingly alien prices form merely the baseline for a lasting shift in the very structure of the gold market? While many continue to cling to the notion that gold must surely collapse to pre-crisis levels -- commonly referencing the infamous 1980 spike or a "reversion to the mean" hypothesis as their principal guide -- I would counter that gold is far more likely to continue reasserting its time-tested monetary role within an impaired global currency framework. I would add, then, that gold is likely to surprise many a skeptic by the sheer permanence of its rediscovered value vis-a-vis the various unbacked and easily printed pieces of paper. Even if the long-term prevailing price of gold were to average just $1,700 per ounce before that gold stream is fulfilled, Yamana Gold's revenue from Agua Rica -- in addition to that derived from its retained 12.5% ownership stake -- would reach a cool $2.7 billion.
Here again, when I calculated my $30 fair value estimate for shares of Yamana Gold, Agua Rica remained an early stage development prospect with little clarity as to how or when it might come into production. Presently, the project is coming together with targeted first production around 2016, and Fools can begin to plug the project into their long-term models for Yamana's forward cash flow. If $30 per share was a foregone conclusion as of August 2010 -- as I maintain it was -- then that mark is a virtual shoo-in given the company's various achievements since that time.
To be sure, Yamana has proven a noteworthy outperformer among the gold miners over the past year. It was precisely one year ago that I insisted Yamana was preparing for liftoff, and since that time the stock has outperformed even my top stock pick for 2011: AuRico Gold
As the above chart illustrates, Yamana handily bested the disappointingly flat performance of the Market Vectors Gold Miners ETF
Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Agnico-Eagle Mines, AuRico Gold, Goldcorp, and Yamana Gold. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.