Like all gold miners, Yamana Gold (NYSE:AUY) shares recently experienced a sharp downturn from about $20/share in 2012 to just over $8/share late last year. So far this year, the shares have begun to rebound. However, this comes with a dividend cut to $0.28/share to $0.16/share per year. Furthermore, the company took a huge $680 million impairment charge in the fourth-quarter resulting from lower gold prices. Given these developments, is Yamana Gold a stock worth considering?
In many ways, Yamana Gold is one of the better gold mining investments out there. While I am not thrilled that the company’s debt load is nearly $1.2 million, and that it has just $80 million in working capital versus an $8 billion market capitalization, the company has managed to keep its production costs down and to grow its production while many of its peers have failed to accomplish one or both of these. As a result, the shares trade at a premium to its peers given its price to sales ratio of 4.32/1 and given its production of 1.4 million gold equivalent ounces (gold equivalent ounces means that the company is translating the value of other metals produced into gold.) In comparison, another company that I like – Kinross Gold (NYSE:KGC) — trades at less than 2 times sales and produces over 2.5 million ounces of gold versus a market capitalization of just $6 billion.
Another thing that Yamana Gold has going for it is its large amount of gold reserves and the fact that it makes very conservative assumptions when declaring in-ground metal as a reserve. When classifying an ounce of gold as a “reserve,” a company makes a gold price assumption and says that so long as the gold price is at least our assumed gold price, then we can mine this ounce of gold profitably. Last year, the gold price fell below several companies’ minimal level for some of their reserves, and so they had to reduce their reserve estimates.
Yamana Gold notoriously uses extremely conservative assumptions in declaring its reserves, and as a result, it downgraded very few ounces last year. In fact, Yamana’s reserves were essentially flat year-over-year. Furthermore, the company’s resources — a category of in-ground gold that is less restrictive — grew meaningfully year-over-year. This will benefit the company markedly should the gold price rise.
What makes Yamana Gold so appealing, however, is the fact that its production costs are so low. While the company took a non-cash loss last quarter due to a downgrade of gold ounces from reserves to resources, it was able to turn a profit of nearly $100 million otherwise. This isn’t bad for a company trading with an $8 billion valuation, especially since the gold price is higher now than it was for the fourth-quarter of 2013. Net of by-products, the company estimates that its production costs will be less than $850/ounce. While this figure doesn’t include interest payments and taxes we can see from the company’s fourth-quarter performance that it can easily generate a profit at current gold prices.
In all, the company had costs of less $1,100/ounce if we take all costs into consideration. This means that the company can generate $300/ounce in this environment. While there are companies producing gold for less there aren’t many, and a lot of these companies operate in high risk jurisdictions (Alacer Gold (OTCMKTS:ALIAF) has lower costs but they operate in Turkey.) Yamana Gold’s mines are located in Latin America. While a couple of these countries are high risk the company’s largest mines are not. For instance, the company’s largest mine, El Penon, is located in one of the world’s best mining jurisdictions, Chile.
Again, while Yamana gold isn’t cheap, investors can be assured that it will be able to generate cash-flow even in a depressed gold price environment while many of its peers cannot. Furthermore, the company is growing its production. While I wish the company would pay down some of its debt and build up a larger working capital position, I think this is a gold miner worth considering.
Disclosure: Ben Kramer-Miller is long Yamana Gold.