On Tuesday, I presented a bearish view on Yamana Gold (NYSE:AUY), a mid-tier miner that is very popular with the investment community, including our Motley Fool CAPS participants. Peter Marrone, chairman and CEO of the company, requested a chance to respond to some of my criticism. In the spirit of encouraging a Foolish debate on all sides, I was happy to oblige. We conducted the following exchange via email.
Toby Shute: It's been ingrained in me from early in my investing education to be wary of shareholder dilution, yet it's utterly commonplace in your industry. Am I too hung up on the issue of shareholder dilution when it comes to precious metals companies? If so, why is your industry an exception to the rule?
Peter Marrone: It is difficult for me to speak for the industry on the dilution issue. As it relates to us, we have raised under $400 million in capital markets and issued shares with a combined value of about $1 billion in acquisitions. We have seen our market capitalization increase to more than $4.5 billion (at its high point before this correction, $5.5 billion). That represents significant value creation for shareholders.
You mentioned raising funds to repay our debt. We borrowed, many years ago, $100 million in a corporate facility. We were a much smaller company, and it was part of our effort to finance our largest mine, Chapada. Our interest rate was 12%, and we had an obligation to repay the loan at the end of six years. Bluntly, we grew faster than anticipated and felt that this was a borrowing rate that was too expensive. We repaid the loan after two years and raised money in the capital markets to do so. It was accretive to shareholders, including investors in that financing. They saw what we saw -- that repaying the debt was accretive to them, and created a better company with considerable credit capacity.
We are now debt-free and fully funded. We have an unborrowed revolving credit facility for $200 million at a very low interest rate and minimal obligations. Finally, that financing was done at CDN$11.50 per share, which is well below our current share price.
Toby Shute: It seems that Yamana's share price began to fly when you announced your intention to hit a million-ounce annual production target by the end of 2008. Is this arbitrary number important to distinguish yourself from all the other mid-tier producers? Also, are you going to prove me wrong and hit that target without making any additional acquisitions?
Peter Marrone: One million ounces was a target to showcase us as a dominant intermediate gold-mining company, while still having flexibility for the replacement of those ounces every year. It has since then become a marker for other companies. We have five producing mines and three development-stage projects. With the second phase of expansion at Jacobina to 200,000 ounces per year, and Gualcamayo (the Viceroy property) in production, so that its first full year will be 2009 at an expected level of 200,000 ounces, and along with Chapada, Sao Francisco, San Andres, and Fazenda Brasileiro, we should be exceeding 850,000 ounces. We are now in construction at Sao Vicente, which will produce roughly 50,000 ounces per year, and we would plan to deliver the feasibility study for C1 Santa Luz later this year, with the internal estimate of 100,000 ounces per year. Without more, with the five mines and three development stage projects, we would reach that stated goal.
Copper production would be in addition to that.
Please also bear in mind that we have built two large-scale mines at a time when we were considerably smaller and less developed as a company. The development projects now in front of us are less in scope, scale, and cost than Chapada and Sao Francisco, which we began to build in 2004 and completed late last year.
Perhaps I can also comment that the company now employs 3,700 employees and is recognized as the best intermediate-sized company to work for in Brazil.
Toby Shute: How's your Portuguese?
Peter Marrone: My Portuguese is not as good as our Brazilian colleagues' English. I am fluent in Italian and French, and conversational in Spanish, and that helps.
Toby Shute: As an acquirer and a consolidator in the industry, I believe you have an incentive to keep share prices fairly valued, because you use them as currency in all-stock deals. If this is the case, how can a new investor feel like he or she is getting a good price?
Peter Marrone: We completed three corporate acquisitions last year with a considerably lower price. We compare multiple to net asset value and cash flow and earnings, along with other measures. If we can acquire a company with a lower multiple, the deal would be accretive to our shareholders. The accretion then should determine a higher share price once the business combination is completed. More than that, often we can get further value because of the growth, reduction in cost structure, or improvements we can make.
Toby Shute: In a previous conversation, you said you might just convince me to become a shareholder. Early investors have done remarkably well. Noted value investor David Nierenberg told me: "When we invested in this company, it was a dream. Today, it's a dream come true." Why would I invest in the company at this stage in the game, now that the dream has come true?
Peter Marrone: Perhaps it is not so bad to have positive recurring dreams. Analogies only go so far. I hope I can say with confidence to you that we had a strategic plan, and for the most part, we have executed on that plan and met our objectives. That is not to say that there will not be new objectives to meet.
Perhaps also I can make these observations on value. Starting point is that our multiple to cash flow remains below our peer group. A research analyst with coverage of Yamana indicated the other day that we are trading at 11 times cash flow, and the peer group range is 14-16 times cash flow. The top of the peer group may be at more than 16 times. In that analysis, then, we have significant appreciation in our share price.
We have now begun to generate that robust cash flow I described before -- Sao Fransisco began commercial production only on Aug. 1, and Chapada completed its first quarter of production on March 31. With that, I remain confident that the multiple to cash flow will begin to track our peers. With our production and cash flow profile as compared to our peers, I believe we should be one of the premier companies in this regard.
Also, one cannot disregard growth.
Finally, we have value-enhancing initiatives under way and plan to deliver on those imminently. This will begin with a pyrite scoping study to enhance recoveries even further at Chapada, and includes the feasibility study for Gualcamayo, which we will begin to deliver in June. We also have an extensive portfolio of exploration concessions in Brazil, Argentina, and Central America, with a large exploration budget of $32 million per year. This, along with development of near-producing properties and acquisitions, forms part of our three-prong approach to further growth. We have one of the best growth profiles in the industry, and normally that attracts a value premium.
Read part one of our interview, in case you missed it.
To read more about Yamana, check out the following articles:
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Fool contributor Toby Shute doesn't hold a position in Yamana. The Motley Fool has a golden disclosure policy.
