Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
This week, I'm digging deep into the mining sector and highlighting why Yamana Gold (NYSE:AUY) is a great dividend stock you can buy right now.
Gold, why has't thou forsaken me?
Spot gold may have a 12-year streak of increases, but you'd be hard-pressed to know that based on the chronic underperformance of gold miners. Both domestically and abroad, miners have dealt with a rash of problems ranging from increasing labor and mining equipment costs to political instability in the countries they're operating in.
In South Africa, miner AngloGold Ashanti (NYSE:AU) came to a pay raise agreement with laborers at its TauTona and Mponeng mines in late October after a summer filled with worker sit-ins and violence in the region. Approximately 10,000 workers caused a complete shutdown in two of AngloGold's mines, and when AngloGold's mines came back online, other miners in the region, including Gold Fields, were still feuding with workers.
Closer to home, it's just been the simple issue of getting the precious metal out of the ground at a reasonable costs. Newmont Mining (NYSE:NEM), one of the world's largest miners, took a complete $1.61 billion writedown on its Hope Bay project in Canada. It's not that Hope Bay isn't promising; it's simply that Newmont has multiple large projects ongoing at once and costs for all of them are rising dramatically. Likewise, Thompson Creek Metals (OTC:TCPTF), which reported earnings earlier this week, is prepping to bring its Mount Milligan copper and gold mine online in the fourth quarter this year, but not after the cost of building out the mine soared considerably higher than the initial estimates, forcing the company to sell some of its gold interest to Royal Gold and to furlough some of its molybdenum mining in favor of cutting costs and receiving upfront cash from Royal Gold.
So where does this leave Yamana? As I noted in early January, better off than any other gold miner.
Yamana's secret weapon
In January I examined the 12 largest gold producers and determined that, based on production cash costs, production growth, debt-to-equity, and forward P/E, Yamana possessed the best overall package of any miner. Of the miners I examined, Yamana's cash costs were the absolutely lowest at just $201 an ounce -- and there's a good reason for this: byproduct sales. Both Yamana and Goldcorp (NYSE:GG), which operate in Central and South America, have relied heavily on byproduct sales (i.e., copper, zinc, and molybdenum) to help offset the cost of their gold production. By contrast, AngloGold, Gold Fields, and other African miners boast mining costs that are often three to four times higher on a per-ounce-basis.
Since my January analysis Yamana's cash costs have risen slightly, to $230 per gold-equivalent-ounce, or GEO, but that's still good enough for tops in the sector by a mile, as Goldcorp's all-in sustaining cash costs jumped to $360 when including byproduct sales in the fourth quarter. For the year, Yamana boosted its overall gold production to 1.2 million GEOs from 1.1 million last year and noted big production gains at its Fazenda Brasiliero mine and its newly opened Mercedes mine.
The really exciting aspect of Yamana is the potential for growth at its Cerro Moro mine in Argentina, which it acquired last year when it agreed to purchase Extorre Gold Mines for about $404 million. Just two weeks ago, Yamana increased its inferred mineral resource estimates on Cerro Moro by 44%, with indicated GEOs totaling 1.95 million and inferred GEOs equaling 495,000. It's looking quite possible that Yamana will be able to add possibly 100,000 GEOs for each of the next couple of years as Mercedes production ramps up and Cerro Moro moves toward production.
Payments you can dig
The other factor that makes Yamana so incredible is with regard to what it's doing for shareholders. Last year, Yamana generated more than $1 billion in free cash flow from operations and boosted its dividend payout by 68% to $168.2 million. In terms perhaps a little easier to understand, Yamana has raised its quarterly stipend from just $0.01 in March 2010 to $0.065 in its most recent quarter.
Yamana may not be turning many heads while yielding "only" 1.8%, but it definitely should, given that it's paying out only about 22% of this year's projected profits and new mines like Cerro Moro are going to make it considerably more profitable.
If none of the previous numbers were enough to get your jaw to drop, then perhaps a margin of $1,462 per GEO is enough to change your mind! Yamana's assets, its byproduct sales, its efforts to return cash to shareholders, and its cost-maintenance efforts are absolutely unparalleled in the gold sector at the moment. Yamana, assuming it gets Cerro Moro up and running in 2014 as originally forecast, could easily, with the additional cash flow generated from the mine, boost its dividend to $0.40-$0.50 annually and still have room to spare based on my estimates. This is a big growth story in the mining sector, and it's a dividend name you can trust moving forward.