Jun 14, 2012
Yamana Gold Corp. (NYSE:AUY) recently announced new drill results for their projects throughout Central and South America. They are budgeting $125 million in drilling and exploration in 2012 across their seven mines, or approximately 5.5% of 2011 revenue. First quarter 2012 results had net earnings up 15% from $0.20 to $0.23 per share on revenues of $560 million, up 18% over 2011.
In fiscal year 2011 Yamana increased known reserves by 11% mostly through exploration of existing mines, most notably its Chilean cash cow at El Penon, which increased by 20% in 2011. The recent drill results re-affirm Yamana’s year-end guidance of being able to maintain production of 440,000 gold-equivalent-ounces (GEO) in 2012. Yamana is not strictly a gold mining company but rather a gold, silver and copper producer whose cash costs per GEO is less than $300. Their silver reserves are so extensive for a primary gold producer that at 82.6 million ounces they are higher than some of the primary silver producers in the industry.
In 2011, Yamana posted operational cash flow of $1.3 billion on revenues of $2.25 billion, on 1.1 million GEO produced. With such high cash flow it is no wonder that they have raised their dividend the last three quarters in a row from $0.03 per share in Q2 2011 to $0.055 per share in Q1 2012 for a current yield of 1.4%
Current production in a miner is not what is will drive growth in the stock price, the ability to replace reserves and increase production is what does that. Yamana is projecting and with their current exploration program’s results likely to achieve, annual production of 1.75 million GEO by 2014. That’s a production CAGR of 17%. For the past three years top line revenue through a mixture of increased production and a rising gold (AMEX:GLD) price has risen at a stunning 40% CAGR, with the rise in gold contributing approximately one-fourth of that.
With the lion’s share of their production coming from mines in politically stable countries, namely Chile, Mexico and Brazil, their price can carry a higher premium than some U.S. domestic miners such as Hecla Mining (NYSE:HL) who have been battling environmental damage lawsuits, increased mining taxes and mine cave-ins in the past 2 years.
Given the potentially volatile situation in Argentina, and the nationalization of oil assets there, Yamana’s two assets there are at some political risk, one of which is wholly owned, Gualcamayo, and produced 15% of the company’s 2011 gold, while the other at Alumbrera Yamana has a 12.5% stake in.
The way one feels about any gold miner, no matter how well run or how cheap its cash costs, will be dependent on the outlook for the price of gold itself. Gold miners, unlike iron or copper miners like Freeport-McMoRan (NYSE:FCX), are not necessarily tied directly to the economy but rather to the fates of the banking system. How one feels about the potential for monetary inflation, not necessarily CPI inflation, should determine, ultimately, whether one would want to be long or short gold. In this environment of debt deflation and monetary inflation it is very possible to see the price of copper fall and the price of gold rise. As a slowing global economy will pressure copper on the demand side but central bank counter-cyclical policy boosting gold from the supply side. This may attenuate the earnings of a company like Yamana that produces as much copper as it does, but it will not derail its ability to generate staggering sums of cash.
In my view, gold is moving towards being a part of the monetary system again and as such companies like Yamana can be seen as potentially high dividend monetary equivalents of utilities. The HUI to gold ratio is at an all-time low and mid-tier producers with no debt like Yamana and Eldorado Gold (NYSE:EGO) represent the best that segment has to offer right now.