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Shares of Yamana Gold (NYSE: AUY), a gold and silver mining company with a half-dozen operating mines located between North and South America, suffered a meltdown and plunged as much as 10% during Friday's trading session after the company announced its fourth-quarter and full-year operating results before the opening bell.
For the fourth quarter, Yamana produced a net loss of $355.4 million, mostly on account of a non-cash impairment charge of $381.6 million. If this non-cash charge is taken off the table, Yamana produced an adjusted profit of $0.01 per share, which compares favorably to the adjusted $0.01 per share it lost in the prior-year quarter.
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Sales for the quarter totaled $484.4 million, which was a 10.3% increase from Q4 2015. Though revenue was higher, and Yamana benefited from higher underlying spot prices compared to the year-ago quarter, gold production slipped by 18,000 ounces and silver production was lower by approximately 300,000 ounces, from Q4 2015.
Comparatively, Wall Street had been looking for Yamana Gold to generate $489.8 million in revenue with a $0.02 adjusted profit per share. This means Yamana slightly missed both the top- and bottom-line estimates.
Yamana also provided forward-looking guidance for years 2017 through 2019, with the expectation that production will see a nice expansion with the silver-heavy Cerro Moro mine coming on line in early 2018. Yamana anticipates that as Cerro Moro and other expansion projects, such as Chapada in the Suruca development, come on line, its costs will fall dramatically and its cash flow will expand quickly with the increased production.
What might Wall Street not be too pleased with? Yamana doesn't appear to have a lot on the table over the next five years beyond its current projects, so that could be creating some worry about production in the mid-2020s. But the more immediate issue looks to be the expected slide in gold and silver production at El Penon. Though Yamana tends to be pretty conservative with its annual production guidance, it could deliver a year-over-year decline in gold production, and that may not be sitting well with investors.
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While today's operating results failed to live up to expectations, I believe Yamana remains one of the more intriguing and undervalued mining stocks within the gold industry. Investors may be discounting Yamana because of its higher all-in sustaining costs (AISC) relative to its peers or the weakness in production estimates at El Penon.
However, once Cerro Moro and C1 Santa Luz begin commercial production, Yamana should see a pretty substantial uptick in gold production and a very rapid increase in annual cash flow per share. Whereas most gold mining companies are valued at roughly 10 times their cash flow per share, if we look into the future at 2019, Yamana is valued at roughly four times its projected cash flow. Again, this assumes that nothing goes wrong and Yamana is able to bring its assets on line in a timely fashion and on budget.
It appears that Yamana has levers it can pull in the years to come to reduce costs, and the cash it's been investing over the past couple of years in existing and developing mines should lower its AISC considerably. If you're a precious-metals investor with a reasonably long time horizon (three-plus years), you should give Yamana a serious look.
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