Yamana Gold Inc. (TSX: YRI) is a Canada based precious metals producer with significant gold and silver production, development stage properties, exploration properties, and land positions throughout the Americas, including Canada, Brazil, Chile and Argentina. Yamana plans to continue to build on this base through expansion and optimization initiatives at existing operating mines, development of new mines, the advancement of its exploration properties and, at times, by targeting other consolidation opportunities with a primary focus in the Americas.

Investment Rationale

• Strong Balance Sheet: At the end of the September quarter 2020, the company’s reported total assets stood at US$ 7,300 million and total long-term liabilities of US$ 2,491.9 million, reflects a strong balance sheet where total long-term liabilities are just 34% of the total asset. This implies virtually no balance sheet risk for the company. Further, the company’s net debt as on September 30, 2020, was US$ 619.1 million with US$ 474.2 million in cash and cash equivalent. Moreover, the company’s total debt to total equity ratio at the end of September 30, 2020, stood at 25.6% with an interest coverage ratio of 8.77x, which again shows the financial strength of the company to serve debt obligations. Also, the company’s cash positions have been significantly bolstered on a YoY basis to US$ 474.2 million at the end of September quarter against US$ 158.8 million reported on December 31, 2019.

• Generating Higher Free Cash Flows: The company is generating higher free cash flow led by a spectacular rally in the precious metal prices over last one year, prudent cost control and lower leverage position led to a higher free cash flow generation. The company generated net free cash flow of US$ 185.5 million in the third quarter of 2020, compared to net free cash flow of US$ 89.5 million in the third quarter of 2019, representing a 107% increase. The change was driven largely by strong gross margins due to favourable metal price increases with stable costs across the operations, despite the challenges encountered during the period because of COVID-19, as well as lower interest and other finance expenses paid in connection with lower debt levels.

• Improving Technical Indicators: Recently, shares of YRI took support at CAD 5.77 on January 27, 2021, and moved up. The horizontal line on the daily price chart shows that it is a crucial long-term support level for the stock, which was last tested in April 2020. After taking support at CAD 5.77, the stock has moved approximately 8.5% to CAD 6.26 in the past few trading sessions, implies that the stock has created strong support at CAD 5.77. Moreover, MACD is hovering above the 9-day SMA signal line, but the difference in 12-day and 26-day EMA is not positive. However, the stock traded above the immediate support levels of 5-day and 10-day SMAs and EMAs.

Technical Price Chart (as on February 10^th, 2021). Source: Refinitiv (Thomson Reuters)

• Consistent Dividend Payment History: The precious metal miner has a track record of dividend payment over the last decade regardless of the commodity price cycle. Further, on October 7, 2020, the Company increased its annual dividend by a further 50% to US$ 0.105 per share. At the new rate, the dividend will be 425% higher than the rate just 18 months ago. The Company had previously established a policy of representing the dividend on a per GEO basis, with the objective of maintaining the dividend of between US$ 50 to US$ 100 per GEO, and this increase positions the dividend at the high end of the range, at US$ 100 per GEO. In the quarter, the Company modified its dividend policy such that it will no longer provide a range for its dividend on a per GEO basis, with future dividend increases above the new floor of US$100 per GEO based entirely on the cash flow and cash generation capacity of the Company. As its cash flows and cash balances increase, its dividend would rise correspondingly as a percentage of cash flows and commensurate with increasing cash balances from cash flows and sources that supplement cash flow. YRI shares were yielding 2.14% at the last close.

Dividend Payment History. Source: Refinitiv (Thomson Reuters)

• Better than Industry Margin Profile: The company has outperformed the industry median on various parameters during the latest quarter. The group reported the gross margin at ~62% against industry median of ~51%, EBITDA margin at ~54% against industry median of ~44% and net Margin of ~13% against industry median of ~12%.

Source: Refinitiv (Thomson Reuters)

• Risk Associated with Investment: The company is exposed to volatility in the gold and silver prices as it derives a majority of its revenue from these two precious metals. Any sharp plunge in these two metal prices would weigh on the group’s performance significantly. Further, currency fluctuations may affect the company’s capital costs and the costs that the company incurs at its operations.

Financial Highlight: Q3FY20

Source: Company Filing

• In the third quarter under consideration, the company’s reported revenue stood at US$ 439.4 million compared to US$ 357.8 million in the same period in 2019, implies a surge of 23% on a YoY basis. The growth was largely attributable to higher realized prices for gold and silver in the current period, and to increases in sales volumes at the Jacobina, El Peñón and Minera Florida mines, partially offset by lower sales volumes from the Canadian Malartic and Cerro Moro mines.
• Exploration and evaluation expenses of US$ 3.6 million for the three months ended September 30, 2020 were higher than in 2019 due to increased expenditures resulting from the generative exploration program.
• Finance costs decreased US$ 41.0 million or 70% in the three months ended September 30, 2020 compared to the same period in 2019, as the company repaid US$ 800.0 million of debt in total during the third quarter of 2019, and as a result, interest expense associated with long term debt decreased in 2020.
• Net earnings for the three months ended September 30, 2020, were US$ 55.6 million or US$ 0.06 per share basic and diluted, compared to net earnings of US$ 201.3 million or US$ 0.21 per share basic and diluted for the three months ended September 30, 2019. Net earnings and earnings per share for the three months ended September 30, 2020 and 2019 were affected by several non-cash other items that management believes are not reflective of current and ongoing operations.

Source: Company Filing.

• As of September 30, 2020, the company had cash and cash equivalents of US$ 474.2 million, an increase of US$ 149.4 million from June 30, 2020. The Company has sufficient cash on hand and liquidity through its current balances and incoming cash flows to fully manage its business and fund growth without having to borrow.
• Net debt decreased by US$ 148.9 million in the quarter to US$ 619.1 million, which advances the Company's objective of achieving a positive net cash position, which is now well ahead of schedule.
• The Company generated a net free cash flow of US$ 185.5 million, compared to net free cash flow of US$ 89.5 million in the comparative prior year quarter, representing a 107% increase.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 28.82% of the total shareholding. Van Eck Associates Corporation and Renaissance Technologies LLC hold the maximum interests in the company at 12.10% and 2.92%, respectively. The institutional ownership in YRI stood at 52.77%, and ownership of the strategic entities stood at 0.18%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: The company has built upon strong fundamentals with an investment-grade balance sheet, less indebtedness, solid cash positions and generating higher free cash flow for the shareholders.

Further, the group reported strong third-quarter performance, with strong cash flows from operating activities of US$ 215.0 million and cash flows from operating activities before net change in working capital of US$ 199.0 million reflect the impact of strong production, strong precious metal prices and the positive impact of foreign exchange on the costs of the company. Moreover, the company generated a net free cash flow of US$ 185.5 million, compared to net free cash flow of US$ 89.5 million in the comparative prior-year quarter, representing a 107% increase.

Further, to ensure consistency of and prospects for cash flows, the company compares cash flows in a particular quarter with the average of cash flows in the preceding three quarters. This measure is looked at on a rolling basis quarter-on-quarter basis. Continuing with a recent trend, cash flows from operating activities and net free cash flow for the quarter exceeded the averages of such cash flows for the preceding three quarters by 52% and 103% respectively, thereby further demonstrating the strength and resilience of the cash flow generation capacity of the company.

The company has sufficient cash on hand and liquidity through its current balances and incoming cash flows to fully manage its business and fund growth without having to borrow.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 6.26 on February 10, 2021.

1-Year Price Chart (as on February 10^th, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at February 11, 2021 price as well.

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