AUY Total Return Price data by YCharts.
What: On Wednesday, Bank of America (BAC -1.07%) Merrill Lynch announced it would resume coverage of gold miner Yamana Gold (AUY). According to ratings news aggregator StreetInsider.com, the banker now rates Yamana a buy and assigned the stock a $6.25 price target.
Justifying its new rating, Bank of America pointed out that Yamana Gold has a better balance sheet now than in years past, and will probably produce "strong free cash flow" over the next two years. BofA sees Yamana generating $272 million in free cash flow in 2015, then growing that by 8.5%, to $295 million, in 2016.
So what: If true, this would make for a nice change from recent trends. Yamana Gold has posted generally accepted accounting principles losses in two of the past three years, and negative free cash flow in all three years. In total, S&P Capital IQ data show the company burning through nearly $1.1 billion in three years.
In contrast, if Yamana Gold turns free-cash-flow positive as predicted, then the shares now sell for 13.3 times 2015 free cash flow, and for 12.3 times free cash flow production two years out.
Relative to analysts' consensus projection for Yamana Gold's long-term profit growth rate (15.2% annualized over the next five years), these seem like attractive valuations -- all the more so if you add the company's 1.5% dividend yield to the mix.
Now what: But is Bank of America right about Yamana Gold? The record is mixed.
According to our Motley Fool CAPS supercomputer, where we track the performance of Wall Street's best and brightest analysts, Bank of America is usually right on with its stock picks, outperforming 95% of the investors we monitor. But there is one sector of the market in which Bank of America's record fails to impress: metals and mining stocks such as Yamana Gold.
Historically, 68% of BofA's picks in this sector do not perform as promised. Over the nine years we have been tracking its performance, this analyst has underperformed the market by a combined 313 percentage points across 20 total metals and mining stock recommendations -- more than 15 points per pick.
Suffice it to say, this doesn't bode well for Yamana Gold.
