A certain colorful CNBC personality keeps hollering about Yamana Gold
Our Motley Fool Hidden Gems service identified Yamana as a Tiny Gem -- which does not denote an official recommendation -- and two of the team's analysts published part of an interview they conducted with the company's charismatic CEO. The number of CAPS players currently weighing in on the company's prospects is approaching 1,000. That's more attention than either Genentech
I figure it's time to provide a little counterweight to all of the cheerleading.
Speaking of cheerleading, how about that quarterly press release yesterday? The company pointed to year-over-year revenue and mine-operating earnings gains of 750% and 1,375%, respectively, as if the comparisons were meaningful. Yamana went on a buying binge in 2006, dramatically altering the company's production profile. First, the company bought RNC and its Honduran producing mine, San Andres, in March. San Andres' production level and ore grade have declined year over year. Next, Yamana picked up Desert Sun and its Jacobina Mine in Brazil. Cash costs at Jacobina are running quite high for a long-life mine, and there are some health and safety issues there as well. Finally, the company purchased Viceroy Exploration and its Argentinian Gualcamayo project. This prospect will draw much of the company's exploration budget for 2007.
All three of these transactions were all-stock deals. We'll get to that a little later.
Yamana already preannounced its operational results in late April, so there weren't any big surprises in yesterday's release. I'm not concerned with the operational side of the business, which seems solid enough, despite the odd slip-up like the sill pillar failure that hampered production at Jacobina. In addition to his competence as a dealmaker and a promoter, CEO Peter Marrone also has unquestionable operational cred. Instead, I'm bothered by the manner in which Yamana's management is likely to finance the company's future growth.
Shareholder value and the value of shares
The fiscal 2006 year-end press release stated that Yamana "is committed to increasing shareholder value through increases in reserves and production thereby increasing earnings per share and cash flow from operations." Every management publicly genuflects at the altar of shareholder value. One might wonder what management actually does with the company's shares. I'll give you a hint -- management isn't buying 'em.
If Yamana expects to increase shareholder value over time, why did CEO Peter Marrone sell more than 2 million shares since the beginning of 2006? It appears he doesn't have time for the "get rich slow" approach we advocate around these parts. You know, the one where you hold onto stocks that reward you as an owner? I guess that's just for the ordinary shareholders who buy their shares, rather than being awarded them via fat option grants.
On a related note, last year the company raised cash by selling stock to the public and used that money to pay off its debt. If the company saw hidden value in its shares, would it be issuing more stock to retire debt? How about issuing more stock to fund every acquisition?
You might counter that I'm being naive. Shareholders get diluted -- this is simply the way it's done among mining firms and their dealmaking. I know it's common practice, but that doesn't mean it can't be done differently. Some resource companies actually have managements with significant ownership stakes, and incentives aligned with common shareholders. The legendary Rob McEwen, Goldcorp
Who wants to be a million-ounce producer?
When I looked at IAMGOLD
Management appears to be prioritizing production volume over return on invested capital, which indicates to me that, like IAMGOLD or post-McEwen Goldcorp, it won't mind overpaying for acquisitions, especially if those purchases are paid in Yamana shares. Management can always issue more of those, so long as new money keeps chasing the promise of a company quickly growing its way into the top tier of gold producers. The company tells a great story, which keeps the stock price high. But in this Fool's view, shareholders are bearing too much of the cost of growth.
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