Referenced Stocks

Analyst Actions: Yamana, Agnico-Eagle Top Picks For Credit Suisse; Downgrades IAMGold

By Midnight Trader,  August 08, 2012, 10:37:50 AM EDT

Shifting gears: From chasing growth to cash return; DOWNGRADING IAG to NEUTRAL (from Outperform); Revising Estimates & TPs

Moving to a hybrid valuation: Our ratings within the gold sector have been re-evaluated based on a hybrid approach that uses operating cash flow less non growth capex (P/OpCFa) with the more traditional net asset value (P/NAV).

Near term cash flow matters to investors: We believe that the sector's multiple decline on both P/NAV and OpCF metrics can be partially explained by near term declining margins tied to operating and capital cost escalation. A key, but underscrutinized component in capex escalation, is non-growth capex, which we define as the capex required to maintain current levels of production.

All in costs from a cash flow perspective (vs. EPS) have increased largely driven by capital spend: Exhibit 1 in the full report is our key chart which illustrates the cash outflow of the companies in our universe. Fairly well known is that operating costs have increased ~14% annually over 2009. In addition, both growth and non-growth related capex have almost doubled in only two years.

The combined cost escalation has now reached a boiling point, culminating in several recent announcements of capital reviews involving high budget projects such as Donlin and Cerro Casale and potentially further announcements for Tasiast, Lobo Marte, FDN, El Morro and Hammond Reef.

Best and Worst: Our Top Picks are Yamana (YRI.TO) and Agnico-Eagle ( AEM ), both good free cash flow cash generators. With this note we downgrade IAMGold (IMG.TO) to Neutral and lower our AuRico TP to $7 (from $9), based on cash consumption and relative lack of benefit. We are also revising TPs for a number of stocks in our sector.




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.


This article appears in: Investing, Commodities

Referenced Stocks: AEM



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