Yamana Gold (NYSE: AUY), an industry leader in gold mining, is expected to report its third-quarter earnings on Oct. 26. Interested as investors may be in the details, digging through a miner's earnings report can be overwhelming; it's easy to feel buried under the abundance of facts and figures. To make things a little easier, here are three things investors should focus on that I expect management to address.
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Engaged in what it consistently characterizes as "an organic growth phase," Yamana is keenly focused on developing the Cerro Moro project in Argentina. As of the last quarter, construction of the mine had been both on schedule and within budget, so investors will want to confirm that this continued through the third quarter. Management expected mechanical completion of Cerro Moro to be completed in 2017 and commissioning by the end of Q1 2018. If successful, this would lead to a ramp up in the following quarter. For fiscal 2018, Cerro Moro was forecast to produce 80,000 ounces at all-in sustaining costs less than $600 per ounce of gold. We'll see if this guidance still holds.
Looking into the more distant future, management is committed to further exploring the area, with the aspiration, over the next four years, of adding 1 million gold equivalent ounces to the mine's mineral resources. If Yamana succeeds, this will extend the mine life beyond the original estimate of 10 years.
Keeping things in balance
Striving to strengthen its balance sheet, Yamana began 2016 with the goal of reducing its net debt by $300 million by the end of fiscal 2017. Halfway through its two-year plan, the company had appeared to be on track, reducing its net debt by $160 million. But the momentum with which Yamana left 2016 has not been carried into 2017.
Whereas the company's net debt was $1.5 billion at the end of 2016, at the end of the most recent quarter, it had risen to $1.58 billion. Management, however, contended that -- based on historical trends dating back to 2010 -- the second half of the year would be stronger than the first in terms of both gold production and cash flow.
If management is proven right, this may provide the company, with the opportunity to chip away at its net debt.
Is it time to say goodbye?
Yamana may be in an "organic growth phase," but that doesn't mean that the company intends to pursue development of every project in its pipeline. In fiscal 2016, for example, the company sold its Mercedes mine in an attempt to optimize its portfolio, and it used the proceeds from the sale -- $122.5 million in cash and $22.5 million in shares, warrants, and net smelter return royalties -- to shore up its balance sheet and reduce its debt.
Although the company hasn't announced the sale of any assets so far in fiscal 2017, investors should look for commentary from management that alludes to possible divestitures. For example, addressing the Agua Rica project, management states in the company's second-quarter report that, in addition to development of the project, it "is evaluating the selection of financial advisors to advise on potential strategic alternatives." Likewise, in reference to Suyai, located in Argentina, management noted that it "is considering the alternatives of a development plan and other strategic alternatives for the project."
Optimizing their portfolios by selling off assets is a common tactic for gold miners. For Yamana, however, investors must be especially wary. If the company elects to divest its undeveloped assets in order to reduce its debt, it may warrant a red flag since this is not a tenable strategy in the long term.
Whether Yamana meets analysts' earnings expectations of $0.03 per share or not, for me, is largely irrelevant. A fifth earnings miss in a row may make for catchy headlines, but the more salient issue is whether development of Cerro Moro remains on track and within budget, since execution of the project is germane to the company's near-term success. Investors, moreover, should confirm that the company reports stronger cash flow in the third quarter, as this would be of great assistance in achieving its debt-reduction target.
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