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Yamana Gold offers better value than its London-listed large cap peers
Thursday 22 Oct 2020 Author: Mark Gardner

‘A stable operator with plenty of upside’ is how analysts have described Yamana Gold (AUY), the Canadian mining giant which returned to the London stock market earlier this month.

The miner, which has been listed on the Toronto stock market since 1995 and New York since 2007, has gold and silver mines in Canada, Brazil, Argentina and Chile, with annual production of close to one million ounces of gold a year.

The price of gold looks set to remain at elevated levels well into 2021, underpinned by the continuing clouds of economic uncertainty which show no signs of disappearing, as well as the potential for rising inflation and central banks stepping up gold purchases once again.

That bodes well for Yamana’s profit margins and its ability to shift from a debt-laden business to a cash-rich one.

DIVERSIFICATION BENEFITS

Key to Yamana’s attractions is diversification – something very important for miners, as seen with the recent problems encountered by FTSE 250 miner Centamin (CEY) at its one and only mine – as well as its strong balance sheet and stable production, which allows it to capture the upside from high gold prices.

Valued at £4.5 billion, Yamana trades on London’s Main Market but won’t be eligible for the FTSE indices due to its type of listing.

The Canadian miner originally joined AIM in 2003 and moved to London’s Main Market in 2007. It delisted in 2013 as most of its shares at that time traded on the Canadian and US markets.

It has returned to London to take advantage of a gap in the stock market for a larger sized gold miner. There are only two other gold miners worth more than £4 billion on the UK market, namely Polymetal International (POLY) and Fresnillo (FRES).

Yamana’s shares trade on a reasonable 1.3 times price to book, making it significantly cheaper than the other big gold miners on the market. Polymetal trades on 6.5-times and Fresnillo trades on 4.1-times.

PAYING DOWN DEBT

Reassuringly for investors, Yamana has placed a big focus in the last few years on reducing its borrowings, with net debt forecast to fall from $1.65 billion in 2018 to $504 million by the end of 2020, bringing its net debt to EBITDA ratio down from 2.7-times to below 1-times. The company is expected to move to a net cash position by 2022.

Yamana should be in a good position to capitalise on the high gold price this year, with production in 2020 expected by analysts to be in line with its upwardly revised guidance of 915,000 ounces of gold, up from 890,000 ounces previously, produced at an all-in sustaining cost within its guidance range of $1,020 to $1,060 per ounce.

PROJECT CATALYSTS

Aside from the gold price, the miner also has other catalysts for share price growth.

Analysts at broker Berenberg see these catalysts as being the development of an underground mine at its Canadian Malartic site, the expansion of the plant at its Jacobina mine in Brazil, the feasibility study for its Agua Rica project in Argentina and extensions to the lives of its current mines through exploration, all of which could significantly increase its production capability.

Agua Rica, a major copper deposit, could well be the most exciting of these projects. Given the amount of copper at the site, if fully developed Berenberg thinks it could transform Yamana into a mid-sized copper producer as well as being a significant gold and silver producer.

Agua Rica is estimated to be a potential 150,000 to 200,000 tonnes a year copper and 100,000 ounces a year gold mine. If developed, the mine would use the existing infrastructure of the nearby Alumbrera mine (owned by Yamana, Glencore (GLEN) and Newmont) and therefore lower the amount of money needed to get it going.

Berenberg believes Agua Rica could add meaningful long-term free cash flow of around $200 million a year for Yamana over the life of mine, with significant skew to early years.

FREE CASH FORECASTS

In 2019, Yamana generated free cash flow to equity of $190 million. This is forecast by Berenberg to increase to $436 million in 2020 and $672 million in 2021.

Free cash flow to equity is a measure of how much cash is available to the equity shareholders of a company after expenses, reinvestment and debt are paid.

In 2019 Yamana reported revenue of $1.6 billion and earnings before interest, tax, depreciation and amortisation (EBITDA) of $673 million.

Weakness in the price of silver or gold would have a negative impact on Yamana’s earnings and cash flow, while there is always risk with miners over the pace at which they deliver on their project development and exploration plans. However, Yamana is a well-established business which looks to be in good position to capitalise on
the higher gold price, has plenty of avenues for growth and provides much better value than other larger-sized gold miners on the market.

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