Submitted by
SK
Options Trading
as part of our
contributors program
.
With the ECB, Federal Reserve and other central banks embarking
on fresh rounds of "quantitative easing" various global currencies
are being debased at an unprecedented rate. As a result, precious
metals have woken from their momentary slumber, sitting bolt
upright as of late.
Gold has risen nearly 10% since the start of August and silver
is up well over 20%. Consequently, the miners have really started
to shine, with various gold producers showing greater than 25%+
increases in their stock price in only a few months.
Yamana Gold (
AUY
) is one of these solid performers, returning 31% since August. AUY
is primarily a gold producer but mines other industrial and
precious metals including
silver
, copper, molybdenum and zinc. Operations are geographically
focused in stable jurisdictions with mining pedigree, mainly in the
countries of Mexico, Brazil, Argentina and Chile. Within these
countries AUY has 8 operational mines.
Future Prospects
What we like about AUY is their intense focus on future growth
and performance. The corporate strategy is:
To continue to deliver shareholder value by:
· Increasing production
· Optimizing and expanding existing operations
· Advancing development projects
· Focusing on exploration
· Increasing mineral reserves and mineral resources
· Containing costs and growing cash margins
· Managing capital expenditures effectively
· Delivering strong financial results
This rhetoric is typical of most companies and the cynical would
write it off as sales talk but Yamana is an exception - they walk
the talk.
We genuinely believe in the emphasis on growth. The exploration
budget has increased 300% over four years to $125 million for 2012.
$125 million represents a not insignificant chunk of $2.2 billion
in annual revenue.
With expansions at current operations and projects currently
under development, production is expected to increase by over 60%
to be at a sustainable level of approximately 1.75 million gold
equivalent ounces by 2014. This combined with even modest increases
in the price of precious metals will see a big jump in
earnings.
Financials
AUY has a market cap of $14.4 billion making it the world's 6th
largest gold mining company and hence liquidity is of no concern.
With gold near its yearly highs, Yamana at $19.33 (accurate at time
of writing) is trading near its 52 week high of $19.65. The 52 week
low of $12.68 coincided with gold's yearly low in early May. It is
important to remember if gold corrects back to the $1500 range,
AUY
is susceptible to a drop down to $13 or so.
The trailing PE is relatively high at 34 but this isn't of too
much concern to us as the forward PE is a more appealing at 12.89.
If forecast production growth is realised, AUY is a very attractive
buy at these levels. If one sees gold rallying past $1800 or higher
longer term, A.U.Y. again screams B.U.Y.. A profit margin of 18.9%
is also very enticing, giving credibility to Yamana's claimed goal
to contain costs and grow cash margins.
Debt to equity is very low at 1:10 and the cash assets are over
$750 million ensuring solvency and stability. Dividends aren't
huge, at $0.26 per share but are showing good growth, having been
increased 18% in the last quarter. Retained earnings are largely
reinvested in exploration and development projects for longer term
capital gain and this is what we like to see, especially in mining
stocks.
2012 Q3 earnings are reported on October 29th and given the
recent gains in metals, we believe results may come in above
expectations. If this occurs not only will AUY see a short term
boost, a glimpse into future profitability given higher gold prices
will be allowed.
Morgan Stanley has set Yamana a price target of $25. This is
supplemented by RBC Capitals recent target price increase from $21
to $24. Analysts give AUY an average assessment of
"outperformance".
In August Yamana completed the acquisition of Extorre Gold for
$403 million. Yamana's CEO Peter Marrone was quoted saying:
"It is a relatively small transaction in that it represents
only 3 percent of Yamana's market capitalization yet it could
ultimately deliver more than 10 percent of our total gold
equivalent production,"
Management
AUY's board and management are highly respected within this
industry. Board members are all vastly experienced in
mining/geology and/or business and executive management. It really
is an all-star team and that's evident in the success enjoyed by
Yamana thus far. Directors have been with the company long term,
all having started between 2001 and 2007 with one exception.
The management team is just as experienced, led by CEO, founder
and board Chairman, Peter Marrone. Mr. Marrone has been with the
company since 2003, and was appointed Chairman in 2007. With more
than 25 years business and capital markets experience, Mr. Marrone
has been on the boards of a number of public companies and has
advised companies with a strong South American presence. Prior to
Yamana, Mr. Marrone was the head of investment banking at a major
Canadian investment bank.
We are reminded of Yamana's sheer scale by its impressive number
of employees - over 9,000.
Yamana's Chart:
It is good to see the above progress made by AUY but whether
this company is a buy is primarily dependant on the direction one
thinks gold will next take. We are bullish on gold prices and think
Yamana will do very well in the coming quarters. However, as our
readers know we are still a little wary of the mining sector at the
moment and would like to see the AUY continue to rally and the HUI
outperform gold prices before we would be tempted to part with our
hard earned
cash
. For those investors looking for leverage to the gold price then
you may want to consider some well thought out
options
trading strategies to provide you with a leveraged return worthy of
taking the risks associated with this sector.
Yamana Gold trades on the New York Stock Exchange (NYSE) under
the symbol of AUY, on the Toronto Stock Exchange (
TSX
) under the symbol of YRI and on the London Stock Exchange (
LSE
) under the symbol of YAU, so your stock broker should be able to
execute your trades in this stock.
Have a good one.
Disclaimer: www.gold-prices.net or
www.skoptionstrading.com
makes no guarantee or warranty on the accuracy or completeness of
the data provided. Nothing contained herein is intended or shall be
deemed to be investment advice, implied or otherwise. This letter
represents our views and replicates trades that we are making but
nothing more than that. Always consult your registered adviser to
assist you with your investments. We accept no liability for any
loss arising from the use of the data contained on this letter.
Options contain a high level or risk that may result in the loss of
part or all invested capital and therefore are suitable for
experienced and professional investors and traders only. Past
performance is not a guide nor guarantee of future success.