Can Yamana Survive Gold's Plunge?

On Tuesday, Yamana Gold (AUY) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

Gold mining stocks have performed badly even when gold prices were relatively stable. But in light of the recent plunge in the price of gold, Yamana and its peers face some new challenges. Let's take an early look at what's been happening with Yamana Gold over the past quarter and what we're likely to see in its quarterly report.

Stats on Yamana Gold

Source: Yahoo! Finance.

Can Yamana Gold possibly keep growing?
In light of gold's plunge, analysts have reined in their estimates for Yamana going forward. Even on the just-ended quarter, they've cut their earnings-per-share consensus by more than a dime, but the $0.40 per share downward adjustment for the full 2013 year reflects huge concerns over the future of gold mining. Those concerns have cut more than 30% off Yamana's stock price since late January.

Yamana has done a better job than many of its peers in fighting many of the challenging trends that the industry has faced recently, especially rising mine operation and construction costs. In last quarter's report, Yamana managed to sustain profit margins near the company's historical levels and is aiming to keep its all-in cash costs at the lowest level of any producer.

One way Yamana has kept its competitive cost advantage is through extensive sales of base-metal byproducts like copper and zinc, as both it and fellow low-cost rival Goldcorp (GG) benefit from utilizing those secondary metals to offset the cost of their gold production. Peers Gold Fields (GFI -5.61%) and AngloGold Ashanti (AU -7.59%), on the other hand, face much higher costs in part because of their exposure to South Africa and its unstable labor market.

Yet one thing is certain: When gold prices drop, profits will drop with them. Yamana may be the best positioned to handle price declines and still remain profitable, but investors need to prepare for earnings decreases if gold doesn't bounce back quickly. Already, Newmont Mining (NEM -4.00%) has cut its dividend based on the drop in gold prices and could make further cuts in the future if gold stays at current levels. Yamana has room to sustain its payout even if earnings decline, but a slump could put an end to its fast dividend growth in recent years.

In Yamana's report, watch for the latest progress update on the company's Cerro Moro mine in Argentina. The South American nation has been a difficult one for mining companies to navigate because of its volatile political climate, but the mine has too much promise for investors to ignore.

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