Yamana Gold: Can It Recover in the Long Run?

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Jan 27, 2015
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With the entire commodity industry in turmoil, it was hard to expect any different from Yamana Gold (AUY, Financial). The company reported disappointing numbers for the third quarter on account of a huge loss, which was driven by large impairment charges for three Brazilian mines. Along with this, newly enforced Chilean taxes also weighed on its financials more than offsetting the gains from higher production and lower costs. Moreover, the stock has been on a declining spree and is currently near its 52-week low. Let’s see in detail, under such circumstances what can we expect from this stock in the coming years.

As a result of these headwinds, the management is taking various measures to evaluate both internal and external opportunities that will optimize and reposition its entire portfolio. Its focus will be to balance production while evaluating growth alternatives and lower its costs, which will ultimately drive margins and cash flow.

The way ahead

In this direction, Yamana has high expectations from some of its assets such as Cerro Moro on account of its lower costs or imminent opportunity for cost reductions. Assets such as this are important to the company since it is capable to offset the underperformance of other assets even while it searchers for alternatives to revive the underperformers.

In fact, some of its mines have already started to see improvement because of the initiatives it has taken. At El Penon, silver grades have improved with the management calling this mine exceptional because of its steady state production. This project is expected to perform better in the days ahead. A similar improvement is seen at other mines as well such as Gualcamayo, Mercedes, Canadian Malartic and others.

However, mines such as C1 Santa Luz are facing several developmental challenges, which was further backed by falling metal prices. As a result the management has put this project on hold and is under maintenance. It has a similar situation at Pilar and Ernesto-Pau-a-Pique mine where it has reduced the production. In the light of these challenges Yamana decided not only to make strategic changes but also established a new role of Executive Vice President, Enterprise Strategy.

Moving in the right direction

In addition, to improve its financials the management has decided to sell 49.2 million common shares that will raise $217 million. These proceeds will be used to reduce its debt and strengthen its balance sheet. While talking to ‘The Wall Street Journal’ Yamana said “This prudent action will put the company in a stronger position in any commodity price environment and improve the company’s ability to deliver future growth.”

Although we cannot expect an imminent turnaround but such initiatives will help the company to get back on track. Moreover, now with some new focused executive profiles, the management would be able to concentrate more on each segment and take decision accordingly. Currently it does not have any trailing P/E but its forward P/E looks impressive at 30.57. Although the stock has tanked to more than two year low, but it has opened new doors for investment.

Conclusion

It is apparent that metal prices will not remain down for a longer period of time and will eventually rise. More importantly, when it does Yamana’s stock price will soar considerably. Therefore in the light of these facts Yamana Gold seems to be a good investment option from a long term perspective.