More From Ya Wanna Buy Yamana
The Positives About Yamana
1. Operations Are Performing Well
One of the more impressive aspects of Yamana's latest earnings results was that all cornerstone mines showed year-over-year improvements in production. Alumbrera's production declined, but this is a 12.5% equity investment, not a wholly-owned mine. Plus, it's at the end of mine life. Brio Gold's production declined, but I think we can/should exclude that now.
|
Three Months
Ending Mar 31st |
| Gold Ounces |
2015 |
2014 |
| Chapada |
22,360 |
20,455 |
| El Peñón |
60,526 |
59,669 |
| Gualcamayo |
46,177 |
38,481 |
| Mercedes |
24,270 |
23,579 |
| Canadian Malartic |
67,894 |
n/a |
| Minera Florida |
28,113 |
24,409 |
| Jacobina |
18,591 |
14,853 |
| Alumbrera |
5,306 |
10,115 |
| Brio Gold |
31,177 |
31,298 |
| Continuing Operations |
304,414 |
222,859 |
| Ernesto Pau-a-Pique |
460 |
5,511 |
| TOTAL |
304,874 |
228,370 |
All main operations are performing well at the moment, and for the next few years, Yamana is forecasting steady production from its cornerstone mines. Also, note that Yamana produces a lot of ounces of silver annually, as well as copper. So increasing silver and copper prices will result in decreasing cash costs as these are used as by-product credits.
(click to enlarge)
(Source: Yamana Gold)
Of course, all of this steady production doesn't mean anything if you can't generate operating cash flow. One thing that is very appealing about Yamana is the low all-in sustaining costs of its mines. The company has some of the lowest AISCs in the industry, coming in at around $800 per ounce over the last few years. This allows Yamana to generate substantial operating cash flow.
| All-in Sustaining Costs Per Ounce |
| 2013 |
$814 |
| 2014 |
$807 |
| 2015E |
$800-$830 |
The first quarter of the year is usually the low point of production as well as operating cash flow for Yamana. As the company states:
Similar to previous years, first quarter production was planned to be the lowest of the year and compared to the fourth quarter of 2014 based on the rainy season affecting some mines. Production is expected to accelerate for the remainder of the year with the largest impact at mines that contribute most significantly to the operating cash flow generation of the Company.
In Q1, the company generated $96 million in operating cash flow, and all-in sustaining costs from continuing operations were $893 per ounce. Cash costs will decrease and cash flow will increase as the year progresses, thanks to gold and copper production gains quarter over quarter.
(Source: Yamana Gold)
2. Exploration Success At Flagship Mines
Chapada, El Penon, and Canadian Malartic are the flagship assets for Yamana. These three mines make up over half of the total gold production of the company, and basically all of the silver and copper production.
Malartic is a new operation and has many years ahead of it. Chapada has been in production since 2007, El Penon since 2000, but these mines still have a lot of reserves left. There has also been some very big exploration success at El Penon and Chapada lately.
In December 2014, Yamana announced "significant" new discoveries at these two mines. At Chapada, Hole NM-101 returned the highest grades over the longest widths in Chapada's exploration and development history.
| Hole |
From (NYSE:M) |
To |
Length |
Gold(g/t) |
Copper
(%) |
| NM-101 |
182.00 |
354.00 |
172.00 |
0.46 |
0.5 |
The current reserve grade at Chapada is 0.25 g/t gold and 0.28% copper, so this new discovery could reduce costs even more at this already low-cost operation.
This new mineralization, called Sucupira, is just west of the main pit at a depth of 180 meters. It is completely open to the northeast and southwest along a 1.8 kilometer strike length. It is expected to be quickly and easily brought into production.
At El Penon, Yamana made a new discovery of a large, high-grade mineralization called the Ventura vein. The vein runs north-south for more than 950 meters, is open in all directions, and it too is expected to be brought into production quickly and easily.
3. Expansion Into North America
Yamana has always focused on South America, Brazil especially. Now, if you know anything about this sector, then you know that mines in Brazil are unpredictable. I don't recall a country where so many new mines have been failures. Look at Jaguar Mining (OTC:JAGGD), Aura Minerals (OTCPK:ARMZF), all of the failed mines that Yamana tried to build in the last few years, etc.
So it's very nice to see Yamana expand into new/better/safer regions, and over the last few years, it has been expanding heavily into North America. The Mercedes mine, located in Mexico, was built in 2011 and is the company's only mine in that country. Then last year, Yamana and Agnico Eagle (NYSE:AEM) each purchased 50% of Osisko Mining, which owned the massive Canadian Malartic project in Canada.
Malartic is expected to produce almost 600,000 ounces of gold per year (with Yamana getting 50% of that production). If you combine that with the 105,000 ounces of annual output from Mercedes, about 1/3 of Yamana's total gold production now comes from Canada and Mexico.
Yamana also acquired some good exploration projects in Canada with the Osisko purchase, including the Kirkland Lake assets that Osisko owned, as well as Hammond Reef.
4. Cerro Moro
One of my favorite juniors a few years ago was Extorre Gold, which owned the very high grade Cerro Moro project in Argentina. In 2012, Yamana acquired Extorre, so I have been waiting in anticipation for this project to get put into production. Earlier this year, Yamana announced that it made the decision to move ahead with construction.
The initial cap-ex is only $265 million, so it's a very easy and low-cost project for Yamana to build. Only $30 million will be spent this year, with the remaining capital to be spent in 2016 and 2017. Production at Cerro Moro is expected to begin in the second half of 2017.
The reserve grade of gold and silver is pretty astounding, over 11 g/t for gold and 648 g/t silver. There aren't many gold and silver projects in the world with this kind of grade.
| Mineral Reserves |
|
|
|
|
Gold |
Silver |
Contained |
Contained |
|
g/t |
g/t |
Gold kozs |
Silver kozs |
| Probable |
11.38 |
648 |
715 |
40,723 |
|
|
|
|
|
|
|
|
|
|
| Mineral Resources |
|
|
|
|
Gold |
Silver |
Contained |
Contained |
|
g/t |
g/t |
Gold kozs |
Silver kozs |
| Indicated |
2.23 |
190 |
238 |
20,313 |
| Inferred |
1.96 |
101 |
279 |
14,415 |
(Source: Yamana Gold)
The current mine life is 7 years, with annual production of 102,000 ounces of gold and 5 million ounces of silver at an all-in sustaining costs of $552 per ounce of gold and $7.70 per ounce of silver. So this is going to be one of the lowest-cost gold/silver mines in the world. Some might question the short mine life, but the company expects to extend that by 5 years given the resource ounces available. There is also upside from exploration and new discoveries.
The after-tax IRR is about 25% at current gold and silver prices for the current mine plan, and the IRR for the extended operation is about 32%.
Cerro Moro is also located very close to Goldcorp's (NYSE:GG) Cerro Negro mine, which was just put into production and will average 500,000 ounces of gold per year at a very low cost.
(Source: Yamana Gold)
Let me just say that Cerro Moro is nothing like the failed projects listed above that Yamana tried to build. This will be a very successful operation and should generate a lot of cash flow for the company. Cap-ex is cheap compared to other projects worldwide, and production is only about 2 years away.
5. Possible Acquisition Target
Yamana and Agnico Eagle weren't the only bidders for Osisko. In January 2014, Goldcorp launched a hostile bid for the company, low-balling it the first time by only offering US$2.38 billion. Of course, Osisko threw a fit at the offer and flat out rejected it, saying it was too low. So, after a few months of both companies stating their cases to shareholders, as well as some legal maneuverings by the two parties, Goldcorp raised its bid in April of that year to US$3.28 billion. Then about a week or so later, Agnico Eagle and Yamana announced a friendly US$3.55 billion bid for the company. Goldcorp never countered, and it lost out on Malartic.
A recent quote from Ian Telfer, Goldcorp's Chairman:
The only way mining companies can grow is through acquisitions and the only way they can survive is through acquisitions. Sometimes, I'm not sure people outside the mining business appreciate that
You have to keep buying stuff or you shrink … When you get to the size that we are, you have to buy things that are considerable sized and the opportunities are limited.
Yamana currently has a market cap of $3.55 billion, which makes it a very attractive takeover target for many large gold companies. Goldcorp was going to pay $3.28 billion last year for Osisko, which would have given them 100% ownership of Canadian Malartic. Goldcorp wanted that asset very bad, but it didn't want to overpay. This could be a good opportunity for Goldcorp to acquire 50% of Malartic, and get many other quality mines, all for a very cheap price.
Also, Goldcorp has many mines/projects that are located close to where Yamana operates. I mentioned Cerro Negro above; there are also assets in Chile as well. Not to mention the fact that Canadian Malartic is close to many of Goldcorp's operations in Canada.
(click to enlarge)
(Source: Google Maps)
The Positives Far Outweigh The Negatives
I'm not concerned about Yamana's current debt position and low cash balance. It's not ideal, I would rather it had more cash at the moment. But the company is a low-cost producer that can generate a lot of operating cash flow at current metal prices. That's what's most important. With the $1 billion credit facility, and the fact that most of this debt is longer term, the company has ample short-term liquidity.
Yamana has a large and steady production profile, and its cornerstone operations are all running very smooth. Given that Q1 is usually the low point of production for the year, I expect the company's cash balance to be much higher by year end as operating cash flow increases over the remaining quarters. In other words, look for higher profits as the year progresses.
It's also very encouraging to see all the exploration success occurring at Chapada and El Penon. These are flagship operations, so finding higher-grade resources nearby is very significant.
The litigation over Alumbrera is still weighing on the shares, but that should soon be resolved. If it's anything under $100 million, I expect a big sigh of relief from Yamana's shareholders. Even if it's the full amount, it's not going to crush the shares or the company.
The failed projects aren't a company breaker either, as they were all mostly smaller scale. In fact, this might have pushed Yamana to focus more on other regions, and I would much rather own a large-scale mine in Canada than a bunch of small mines in Brazil. While some might be concerned that Yamana is going to attempt to build another project, Cerro Moro will be a very successful operation for the company.
Given Yamana's low market cap, the company is a prime takeover target. Goldcorp is a very likely acquirer, as it missed out on 100% of Canadian Malartic the first time around. It didn't want to overpay for the asset, and now it can acquire 50% of it, plus many other quality assets, for a very reasonable price. Yamana's Cerro Moro project would also be very appealing to Goldcorp, given its high grade and proximity to Cerro Negro.
The positives far outweigh the negatives. Yamana should be a core holding for anybody that believes a long-term bull market in gold and silver is on the way.