Yamana Gold Inc (TSX: YRI) is a precious metals producer. The company is engaged in the exploration and production of gold and silver with land positions across the Americas. Its portfolio includes Canadian Malartic, Jacobina, Cerro Moro, El Penon, Minera Florida, and Wasamac properties. The Jacobina mining complex, located in Bahia state in northeast Brazil, consists of five underground gold mines with a capacity of approximately 6,500 tons per day (tpd).

Investment Rationale

• Industry Leading Gross and EBITDA Margins: During the quarter just gone by, YRI reported significantly higher gross and EBITDA margins than the industry median, implying a competitive edge against its peers. And if it manages to reduce its debt position, it will outperform the industry on all other profitability metrics.

Source: REFINITIV, Analysis by Kalkine Group

• Financial Strength with Increasing Cash Flows: As of September 30, 2021, the company's Debt/Equity ratio stood at 0.19x, relatively better than the industry median of 0.22x. However, its net debt was just 1.31x of its EBITDA, a robust debt protection measure. This reflects financial strength. In addition, its cash flow from operations improved by ~24% on a sequential-quarter basis.
• Strengthening Returns to Shareholders: YRI is maximizing returns by consistently paying higher dividends, with a strong focus on sustainability through metal price volatility. Furthermore, it recently announced a Normal-Course Issuer Bid (NCIB) to purchase up to 5% of its current issued and outstanding common shares.

Source: Company Presentation

• Expected to Report Strong Performance in Q4FY21: The company is expected to exceed 270,000 GEO of production during Q4, a record for the highest production level. YRI also stated that it expects Q4 to be its lowest cost quarter and that it is well-positioned to reach its production guidance of 1 million GEO.
• Strong Underlying Commodity Prices: The company is engaged in exploring gold and silver, prices of which are firm on the commodity exchange. Also, heightened inflationary pressure will further help gold prices to move up in upcoming quarters, and the increasing industrial uses of silver will keep silver prices more robust. Because most of the movement in commodity-dominated stocks comes from the changes in the underlying commodity prices, we believe YRI will benefit from higher gold and silver prices.
• Positive Long-Term Outlook: YRI is anticipating significant growth in mineral resources, growth from the production of higher-margin ounces and growth from increasing Net Asset Value (NAV) in the next three years. In addition to this high-quality growth, there remains significant cash to be redeployed to investors through stock repurchases and the resulting increase in earnings per share.

Source: Company Presentation

• Hovering Near Crucial Support Level: YRI is trading near its crucial demand zone at the last trading level. Over the past six months, CAD 5.19 has been acting as a critical support level, and the stock has bounced back from this level multiple times. Also, the shares are taking RSI 40 support, indicating that the bearish pull on the stock is getting exhausted.

Technical Price Chart (as on November 24, 2021). Source: REFINITIV, Analysis by Kalkine Group

Risks Associated with Investment

The company is exposed to volatility in commodity prices (short-term challenges presented by the rise in resin price). A resurgence in COVID-19 cases could also be a barrier to demand offtake and further promote supply chain disruptions. Moreover, YRI is also exposed to interest rate risk, other input costs risks, and forex risks.

Financial Highlights: Q3FY21

Source: Company Filing

• Improved Topline: During the quarter under consideration, YRI's revenue improved by 2.9% to USD 452.2 million against USD 439.4 million reported in the previous comparable period. This was primarily driven by an increase in gold sales volumes, which offset the lower realized prices compared to Q3FY20.
• Gross Profit Increased Slightly on a YoY Basis: Its gross margin for Q3FY21 stood at USD 275 million, an increase of 0.8% on a YoY basis, driven by the rise in topline numbers and partially offset by a 6% surge in COGS.
• Contraction in Operating Income: During the quarter, the company's operating profit contracted sharply on a YoY basis, mainly due to a significant jump in finance costs (USD 75.9 million in Q3FY21 vs USD 17.5 million in Q3FY20).
• DPS jumped by ~71.4%: YRI's Board declared a quarterly dividend of USD 0.03/share, which was approximately 71.4% higher than USD 0.0175/share announced in Q3FY20.

Top-10 Shareholders

Top-10 shareholders collectively hold a ~27.35% stake in the company, with Van Eck Associates Corporation and The Vanguard Group, Inc. holding the majority stake at 11.33% and 3.13%, respectively. The institutional ownership in the company stood at 54.70%.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to CF-based

Note: Premium (discount) is based on our assessment of the company's growth drivers, economic moat, competitive advantage, stock's current and historical multiple against peer group average/median and investment risks.

Stock Recommendation

In Q3FY21, the company reported decent performance on a sequential-quarter basis and modest on a YoY basis. Moreover, its performance is only expected to improve in Q4FY21, with a forecasted production of 270,000 GEO, its highest ever. Q4 is also expected to be YRI's lowest cost quarter and is also confident it will reach its production guidance of 1 million GEO. Further, its shares are yielding decently higher on TSX with a dividend yield of approximately 2.93%, much higher than the Canada 10-Year Government Bond yield of 1.77%. It also boasts of a strong track record of consistently increasing dividends. The stock is trading near its crucial demand zone on the technical chart, a strong indicator of potential upside from the current trading levels. Hence, we recommend a "Buy" rating on "YRI" stock at the closing price of CAD 5.19 as on November 24, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Summary

1-Year Price chart (as on November 24, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on November 25, 2021 price as well.

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Disclaimer

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