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Why Yamana Gold Stock Could Outperform
Stock Analysis & Ideas

Why Yamana Gold Stock Could Outperform

Thanks to a surge in gold prices, Yamana Gold (AUY) had a strong first quarter of 2022 based on cash flow generation and other metrics. The Canadian precious metals miner announced its earnings after market close on Wednesday, April 27. I’m bullish on AUY stock.

As the yellow metal is on track to trade higher and higher, Yamana’s operations should continue to improve, potentially leading to a sharp rise in the stock price.

Based on recent performance, Yamana shares would rise faster than gold.

Gold’s opportune moment has seen Yamana’s stock price soar more than 25% year-to-date, comfortably outperforming the VanEck Junior Gold Miners ETF (GDXJ), as the benchmark index is flat on the year.

According to gold futures expiring in June 2022, the precious metal is up just over 1% this year, and the price per ounce is around $1,855 at the time of writing.

Yamana Gold’s Operations

Based in Toronto, Canada, Yamana Gold is a mid-tier precious metals producer with an annual run-rate production of 840,000 ounces of gold and 8.8 million ounces of silver.

The mineral resources where the company mines the precious metal are located in Canada and throughout South America, specifically in Brazil, Chile, and Argentina.

These regions are some of the most productive in the world and host a friendly jurisdiction for mining activities. The Canadian miner is trying to improve existing deposits, targeting future production of gold and silver and exploring in search of additional mineral properties.

Yamana Gold’s business is 85% to 90% dependent on gold and 15% to 10% dependent on silver.

Q1-2022 Results

Excellent production of about 238,600 gold equivalent ounces, coupled with more attractive total costs, enabled the miner to generate higher cash flow from operations before non-cash working capital movements.

The miner paid $1,084 per gold equivalent ounce (produced) and achieved an almost 8% year-over-year increase in operating cash flow to $197.3 million.

Regarding Yamana’s business, Gold Equivalent Ounces (GEO) refers to the value of gold and silver expressed in gold ounces at the time of purchase.

As a result of an excellent mining performance in Argentina and Brazil, along with a higher price of gold, revenue for the first quarter of 2022 increased 4.7% year over year to $441.9 million, but not enough to meet analysts’ median forecast of $456.6 million.

Earnings per share of $0.09 for the first quarter of 2022 were higher than $0.07 for the first quarter of 2021, beating the analysts’ average estimate by $0.03.

AUY’s Financial Position

Although the company’s Altman Z-Score of 0.9 indicates that it is in distress, implying the risk that the business could fail within a few years, the balance sheet is strong.

For beginners, the Altman Z-Score indicates whether the probability that a company can fail within a few years is high or low. A value less than or equal to 1.8 indicates a high probability of insolvency.

However, the $516.4 million in cash on hand, plus another $750 million in lines of credit, should be enough for Yamana to execute its growth plans that could potentially give its stock price a big boost.

Catalysts

Yamana Gold’s growth targets consist of:

  • Strong free cash flow growth, particularly in the second half of 2022.
  • An increase in annual throughput in Brazil by July 2022 at the latest and significantly earlier than originally planned.
  • Start of further expansion phases in Brazil with the potential to significantly increase annual production again in a few years.

Outlook

Of course, the success of these activities depends on the price of gold, which analysts estimate at higher levels at least for the whole of 2022 and probably also for the following year.

Analysts are forecasting a price of $1,916 per ounce by the end of Q2 2022 (roughly 3% higher than current levels) and a higher price of $1,979 within 12 months.

Supporting the optimistic outlook for gold prices are expectations of stronger demand for the precious metal as a hedge against a likely rise in risk aversion amid a deteriorating global economic outlook.

Rating agencies have revised growth estimates downward for the global economy, believing that monetary tightening, which central banks are applying to curb rising inflation, will hurt private consumption and limit corporate investment.

The future is highly uncertain, but again, this is the ideal environment for gold. Investors concerned about the value of their portfolios will increasingly turn to the metal for its protective properties against the aforementioned headwinds, providing a strong tailwind for higher prices per ounce.

Wall Street’s Take

In the past three months, nine Wall Street analysts have issued a 12-month price target for AUY. The company has a Moderate Buy consensus rating based on six Buys, three Holds, and zero Sell ratings.

The average Yamana Gold price target is $7.04, implying 34.1% upside potential.

Valuation

Shares are changing hands at $5.24 as of the writing of this article for a market cap of $5.08 billion, a P/E ratio of 34.9, and a 52-week range of $3.70 to $6.40.

The stock has a price/book ratio of ~1.1, a price/sales ratio of 2.8, a price-to-cash-flow ratio of 6.9, and a price-to-free-cash-flow ratio of 15.1.

Conclusion

Yamana shares tend to rise very quickly during the gold bull market.

Higher metal prices were positive for the mining business of Yamana in the first quarter. This, combined with notable production performance in Brazil and Argentina, has resulted in strong free cash flow and increased optimism on specific growth plans.

Fueled by the current macroeconomic conditions, analysts are forecasting gold to trade higher going forward, which will help the Canadian miner develop its growth projects.

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