Yamana Gold Inc.

Yamana Gold Inc. (TSX: YRI) is a Canada based precious metals company which is engaged in the production of precious metals like gold and silver, from its development stage properties, exploration properties, and land positions throughout the Americas, including Canada, Brazil, Chile and Argentina. 

Key Highlights:

• Operational Update: The Company has already discovered potential to speed production ramp-up and shorten the time it takes to build the processing facility, which would greatly improve the production profile. With the Wasamac deposit remaining open at depth and along strike, there is considerable potential for further exploration success and mineral resource conversion. The proposed infill and exploration drilling campaign has the potential to provide additional mineral reserves, allowing the company to maintain a 200,000-ounce production level for a long period of time.

• Healthy 3-Year production guidance: Robust momentum at Canadian Malartic, Jacobina, and El Peón, as well as expected strong fourth quarters at El Peón and Cerro Moro, keep the Company on track to meet its 1,000,000 GEO projection for the year. Furthermore, the business aims to grow gold production to 889k oz by FY2023 from 780k oz in FY2020 over the next three years.

Source: Company Presentation

• Robust rise in Cash flows from operating activities: The company's cash flows from operating activities were of USD 190.6 million in the reporting period, and cash flows from operating activities before net change in working capital stood at USD 202.9 million, representing strong increases of 24% and 21%, respectively, over the sequential quarter results. The key factors for increased cash flows were increased output and sales.
  

• Clocking higher free cash flows: The Company generated net free cash flow of USD 358.9 million in the nine months ended September 30, 2021, compared to net free cash flow of USD 336.8 million in the same period of 2020. The positive change is driven largely by strong gross margins due to the favorable metal price environment with stable costs across the operations.
  

• Elevated commodity prices to support future earnings: Despite recent volatility in commodity prices, the firm is doing well, and we can observe a substantial influence of this movement on the balance sheet of precious and industrial metal mining companies. As prices rise, average realization prices for miners rise, resulting in a greater margin profile, higher free cash flow generation, and balance sheet deleveraging. We believe the firm is well positioned to profit from rising underlying commodity prices and end FY2021 in good financial shape.
  

• Minimizing Total debt: The company’s total debt stood at USD 772.8 million as on September 30, 2021, decreased by USD 221.0 million when compared to USD 993.8 million on December 31, 2020. YRI believes that a strong financial position and financial resilience also requires a manageable debt maturity profile, and the Company has taken advantage of current market conditions to improve terms of its outstanding notes by increasing tenor and reducing carrying costs, which is a key positive.
  

• Strong liquidity: As on September 30, 2021, the Company had cash and cash equivalents of USD 460.2 million and available credit of USD 750.0 million, for total available liquidity of approximately USD 1.2 billion. Furthermore, we believe the company hold sufficient liquidity to carry its operations smoothly.
  

Risks associated with investment:

The Company’s financial performance is mostly dependent on the price of gold, which directly affects their profitability and cash flow. Any drawdown in the gold prices would impact the group’s performance. Further inherent risks associated with mining and mineral processing such as the company's mines may not perform as planned; uncertainty with the company's ability to secure additional capital to execute its business plans; the speculative nature of mineral exploration and development, including the risks of obtaining and maintaining necessary licenses and permits, including the necessary licenses, permits, authorizations and/or approvals from the appropriate regulatory authorities. 

Financial overview of Q3 2021

Source: Company Filing

• The company's revenue in Q3 2021 stood at USD 452.2 million, up from USD 439.4 million in the same quarter in 2020. Higher gold sales volumes in the current quarter more than offset lower realized prices compared to the third quarter of 2020, resulting in a 3% increase.
• Mine operating earnings in the reported period fell slightly to USD 154.0 million against USD 157.3 million in the previous corresponding period. The fall in mine operating earnings was partially due to higher depreciation.
• On the back of higher finance cost at USD 75.9 million compared to USD 17.5 million in pcp, the company’s earnings before tax stood at USD 57.0 million against USD 107.1 million in Q3 2020.
• Primarily due to above discussed rationales the company’s net income fell to USD 25.9 million compared to USD 55.6 million in pcp.
  

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 27.36% of the total shareholding. Van Eck Associates Corporation and The Vanguard Group, Inc. hold the company's maximum interests at 11.33% and 3.13%, respectively. The company's institutional ownership stood at 54.49%. Higher institutional holding boost confidence to the retail investors.

Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology (Illustrative): Price to Cash Flow based Valuation Metrics

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

With strong operational results, the Company is well positioned to meet its 1,000,000 gold equivalent ounces "GEO" guidance for the year, which is supported by momentum at Canadian Malartic, Jacobina, and El Peón, as well as a strong fourth quarter performance at El Peón and Cerro Moro, as previously guided. Furthermore, the firm has substantial liquidity, with USD 460.2 million in cash and cash equivalents and USD 750.0 million in available credit, which appears to be sufficient to fund its planned projects and pay dividends.

Additionally, the company is deleveraging its balance sheet by cutting debt, which is a critical positive that might lower finance costs, resulting in improved margins in the near future. We also believe that average realized gold prices per ounce would continue to expand, which would lead to margin expansions. Moreover, we predict silver prices to stay constant in the coming months since most governments worldwide have relaxed shutdown restrictions, resulting in more industrial activity resumption.

Hence considering the aforesaid facts, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 5.26 on December 22, 2021. For the said purposes, we have considered peers like Centerra Gold Inc, B2Gold Corp, Endeavour Mining PLC, etc. 

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

Technical Summary Analysis

One-Year Technical Price Chart (as on December 22, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

 

*Recommendation is valid on December 23, 2021, price as well.

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Disclaimer

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