Is Yamana Gold a Buy?

After a forgettable 2018, shares of Yamana Gold [stock_market_widget type="inline" template="generic" color="default" assets="YRI.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] have ticked up slightly so far this year on the back of a recovery in gold prices. As it stands, the price of gold is currently hovering near $1,300 an ounce, with the potential of rising further in the future thanks to an increase in demand and supply constraints.

In such a scenario, does it make sense to buy Yamana Gold stock in anticipation of more upside? Let’s find out.

Where Does Yamana Stand?

Yamana’s full-year 2018 gold equivalent production came in at 1,041,350 ounces. Of this, gold production stood at 940,619 ounces and silver production came in at 8.02 million ounces. The company’s full-year copper production stood at 129.2 million pounds. Yamana’s consolidated cost of sales per ounce of gold was $1,042 last year. This was in line with 2017 levels.

Yamana expects to deliver 1,060,000 ounces of gold equivalent production this year, an increase of just 1.8% over 2018. The production level will increase nearly 4% in 2020 and remain flat the following year at 1,100,000 ounces. So, Yamana’s production profile doesn’t look very appealing for the next three years.

That’s because the company’s gold production will remain flat this year at 940,000 ounces before increasing slightly in 2020. In fact, Yamana has reduced its gold production guidance for 2020 to 955,000 ounces from the prior range of 970,000 ounces, though higher silver production will provide some stability to the company’s total output.

More Problems

A flat production profile isn’t Yamana’s only problem. The company anticipates cost of sales in the range of $1,020 to $1,060 per gold equivalent ounce sold, the mid-point of which is in line with last year’s figure.

So, a combination of weak production growth and an identical cost profile could erase any advantage the company might gain out of an increase in prices. Yamana’s average realized price per ounce of gold stood at $1,267 in 2018, while the silver price per ounce was $15.37.

Yamana investors shouldn’t expect much gains on account of an improvement in gold prices this year.

As already mentioned, gold prices are trending higher in 2019, but the price of silver is below what Yamana recorded last year. The spot price of silver is currently around $15 an ounce, which is bad news for the company as silver production will be the key to its overall production increase going forward.

Moreover, even if gold prices average $1,300 an ounce this year, it would amount to a meager increase of less than 3% in the realized price. As a result, Yamana’s performance in 2019 would be modest at best. According to Yahoo Finance, the company’s sales will decline year over year, while its earnings will drop slightly from $0.12 per share in 2018 to $0.10 per share.

As such, Yamana investors shouldn’t expect much gains on account of an improvement in gold prices this year. Moreover, in case gold prices start moving south and silver continues to remain under pressure, the company’s financial performance will take a turn for the worse. So investors shouldn’t expect much of a turnaround at Yamana this year given the operational challenges that it is facing.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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