Gold mining stocks have taken a hit recently as the precipitous drop in the price of gold has sparked concern over the profitability of the sector, while increased faith in the health of the global economy has encouraged investors to purchase riskier assets at the expense of safe-haven gold investments.
While the changing global economy has resulted in this sell-off of gold related investments, there are now great opportunities in the sector for investors looking to add assets to their portfolio that hold upside potential, for a bargain price.
While all gold miners have to deal with the falling price of gold, a producer that has solid production, low operating costs, and manageable debt will make a good investment. Given the current climate gold miners are faced with, if you can find a gold stock that meets all of the above suggestions, and whose stock price is a bargain, you have a solid long-term investment on your hands.
Yamana Gold (AUY) is one such company. Yamana Gold's stock is attractively priced. The company is seeing its operating costs go down, forecasts an improvement in production, and holds a manageable amount of debt.
Right now Yamana's stock price is relatively low, trading at the lower end of its 52-week range. Of course there is a reason why the stock price is low. Recently, the stock has taken a hit as the falling price of gold affected the company's business, fundamentally and sentimentally. As a result of the changing market conditions, Yamana's fourth quarter 2013 and first quarter 2014 adjusted earnings and revenue missed analysts' expectations. The company's 2013 gold production also missed forecasts.
The past is not always the key to the future
Yamana's recent performance is not a good indicator of its future potential. Rather than sit idly by and try and survive these more challenging times, the company has implemented various changes that will improve its long-term value.
A big game changer, the company expects all the production problems that contributed to lower-than-anticipated production in 2013 to be resolved by the end 2014.
Also, the company is shifting its focus and is now looking to maximize its value through its newly acquired Canadian Malartic mine and its Cerro Moro project in Argentina. According to a recent feasibility study, the Cerro Morro would require a low capital investment and would also have low operating costs.
The company's recent joint acquisition of Osisko Mining with Agnico Eagle Mines (AEM 1.06%) gives the company access to a low-cost gold asset in the Canadian Malartic mine. According to Yamana Gold's CEO, the Malartic Mine adds a "Cornerstone asset to our portfolio that will contribute significantly to increased production and cash flow levels as we continue to balance top and bottom line growth." National Bank's Steve Parsons, an analyst covering Yamana Gold also cheered the acquisition,commenting that "The addition of a low-cost, cornerstone asset should help the stock get rerated toward its higher-multiple peers."
The company is not only promising to make changes, the company is already realizing the benefits of its business decisions. The company's latest results showed grade improvements helped production at both its Gualcamayo and Jacobina mines, while commissioning at other projects continues to the company's satisfaction.
The company has already witnessed its all-in sustaining costs go down. In the recent quarter, Yamana's all-in sustaining costs decreased to $820 per gold equivalent ounce, compared to $856 per gold equivalent ounce in the year-ago quarter.
Looking forward, Yamana is forecasting production of 1.4 million gold equivalent ounces in 2014. For the year the company is targeting all-in sustaining cash costs of below $850 per GEO on a by-product basis (assuming a price forecast for copper of $3.20 per pound) as the company progresses its operations to full capacity.
Yamana Gold is also in a position of high liquidity and lower debt compared to other gold miners. According to Capital IQ data the company has a total debt-to-equity ratio of 19.95. Compare this to Barrick Gold (GOLD 1.64%), whose debt-to-equity ratio is 80.93.
The debt-to-equity ratio can be a misleading metric when analyzing miners. A company that is actively exploring and not yet producing will have a very high debt-to-equity ratio and still make an excellent investment. The interesting thing about Yamana is that the company is actively spending capital on increasing production, and acquiring assets, yet still manages to have a very low debt-to-equity ratio when compared to the mining giant Barrick Gold.
The takeaway
Gold is one of the world's oldest and most popular investments for a reason, and every balanced portfolio should have some exposure to the metal. Right now is a great time to look for a bargain in the sector, and Yamana Gold represents such an opportunity.
