What Is a Safer Turnaround Play: Yamana Gold Inc. or Eldorado Gold Corp.?

When comparing Yamana Gold Inc. (TSX:YRI)(NYSE:AUY) and Eldorado Gold Corp. (TSX:ELD)(NYSE:EGO) on their valuations, ability to survive, and profitability, we conclude that one is a safer turnaround.

| More on:
The Motley Fool

Yamana Gold Inc. (TSX:YRI)(NYSE:AUY) is in its third year of decline. From its high of $20 per share in 2012, it has gone down to its current price of close to $2 per share, an 88% drop. Eldorado Gold Corp. (TSX:ELD)(NYSE:EGO) is in a similar boat, and is in its fourth year of decline. From its high of $21 per share in 2011, it has gone down to close to $4, an 80% decline.

Both miners’ business performance is dependent on the prices of the precious metals they mine, so it only makes sense to consider an investment in them when they’re priced significantly below their intrinsic values. They’re both priced at cheap valuations. Which one should you buy today for a turnaround?

Let’s compare them.

Which has the cheaper valuation?

The book value is the value of assets shareholders would theoretically receive if the company were liquidated.

Yamana’s book value is $9.50. So, at about $2 per share, it has a price-to-book ratio (P/B) of less than 0.3. This is the cheapest it has been in a decade. Between 2009 and 2012 it traded between a P/B of 1.2 and 1.7. So, it should be able to trade at a P/B of 1.0 again, implying an upside of 303% excluding dividends.

Eldorado’s book value is $9.30. So, at about $4.23 per share, it has a P/B under 0.5. This is the cheapest it has been in the past 10 years. During that period, it traded between the outrageous P/B of 3 to 6.

Logically, it should be able to trade at a P/B of 1.0 again, which would imply a 120% upside excluding dividends.

Yamana has the cheaper valuation and implies less downside, but only if it survives. Which of Yamana and Eldorado has a better chance of survival?

Ability to survive: credit rating, debt levels, and interest coverage ratio

The interest coverage ratio indicates whether a company can pay off the interest on its loans in a timely manner. Generally, an interest coverage ratio below 1.5 is a warning sign that the company could default. So, the higher the ratio, the better.

Yamana has an S&P credit rating of BB+, debt-to-cap of 21%, and interest coverage of -14.6. On the other hand, Eldorado has an S&P credit rating of BB, debt-to-cap of 10%, and interest coverage of 10.9.

Yamana has a slightly higher credit rating, but Eldorado has a higher interest coverage ratio and less debt. So, Eldorado seems to be more able to survive a prolonged low precious metal-price environment.

Profitability: operating margin, net income, earnings per share, and free cash flow

Yamana’s trailing 12-month (TTM) metrics are as follows: the operating margin is -41.2%, the net income is -U$1.5 billion, the earnings per share (EPS) is -$1.68, and free cash flow (FCF) is -U$47 million.

Eldorado’s TTM metrics are as follows: the operating margin is -7.7%, the net income is -U$173 million, the EPS is -U$0.64, and FCF of -U$109 million.

Both companies aren’t profitable in these environments, but comparatively from 2005 to 2014 Yamana had four years of negative earnings while Eldorado had two.

So, I’d call Eldorado the winner in this category.

In conclusion

Both companies are speculative plays because their business performance is based on commodity prices. In this environment of low precious metal prices, I think Eldorado has a better chance for survival and serves as a safer turnaround play. I would only buy these with the intention to hold for the next three to five years. Also, each should not exceed more than 1% of your portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Yamana Gold, Inc. (USA).

More on Dividend Stocks

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »

Payday ringed on a calendar
Dividend Stocks

3 Dividend Stocks That Pay Me More Than $54.57 Per Month

These three dividend stocks have done me well over the years, so let's look at how much I've gotten in…

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Royalty: 3 Fabulous Stocks to Buy Now for Decades of Passive Income

Rogers Communications stock and Canadian Natural Resources stock could pay you dividends for decades to come.

Read more »

Dividend Stocks

The Top Canadian REITs to Buy in April 2024

For growth and dividends this April, look to these two REITs that have quite the promising present as well as…

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »