Every now and then I get a call from one of my longtime broker friends of the past three-plus decades about a stock from “back in the day” that makes a sudden and determined move higher, snapping out of a Rip Van Winkle-like slumber.
Every gold bug in the world knows the name Yamana Gold Inc. (AUY) as a company that held great promise to rise as one of the premier gold and silver mining companies of modern times that we could all retire on. Many now-forgotten gold prophets who pegged this company to bring Midas-type riches to those who bought and held it in the early 2000s and saw the shares trade from $3 in 2004 to $20 in early 2008, back down to $4 in late 2008, up to $14 in late 2009, down to $10 in 2010, rise to $20 in late 2012 and then plunge to $3 in early 2016.
While it has been a great trading stock, it has also been a poor investment. Fast forward to February 2020 and the stock is trading at $4.00 and looking like the next move is going to be higher — maybe way higher. Rising gold prices are leading to significant cash flow generation. As gold prices approach $1,600 per troy ounce, there is a fundamental shift occurring at Yamana.
The demise of the company’s stock price can be traced to taking on too much debt on the bet of a bull market in gold prices preceding 2012, only to see the demise of the stock when gold prices crashed to $1,100/oz. in late 2015. It was the quintessential inverted scenario that shuttered a number of junior miners.
Taking into account the latest set of Q4 financials, and given that the central banks are the biggest buyers of gold and will continue to be as long as they are printing unlimited amounts of fiat currencies around the world, I believe it is time to revisit this stock again.
So, let’s delve into the company’s latest performance, because it is all about the numbers from the published Q4 results:
FOURTH-QUARTER AND FULL-YEAR HIGHLIGHTS
Exceeded Production Guidance
- Fourth-quarter gold and silver production were 221,595 ounces and 2.97 million ounces, respectively, in line with the plan. Gold equivalent ounce (GEO) production comprised 256,288.
- Exceeded gold production guidance for the year with annual production of 900,339 ounces.
- Exceeded silver production guidance for the year with annual production of 10.6 million ounces.
- GEO production of 1.02 million exceeded guidance, notwithstanding a higher GEO ratio than that assumed when 2019 guidance was set.
Costs in Line
- Total Yamana cash costs for the quarter and full year were $656 and $667 per GEO, respectively, in line with prior year comparative costs, as were total all-in sustaining costs for the quarter and full year of $1,012 and $978 per GEO, respectively.
Financial Results – Strong Cash Flow Growth
- Fourth-quarter net earnings attributable to Yamana equity holders were $14.6 million, or $0.02 per share basic and diluted, compared to a net loss of $61.4 million or $0.06 per share basic and diluted a year earlier.
- Fourth-quarter adjusted net earnings in the latest quarter were $26.7 million, or $0.03 per share basic and diluted, compared to $26.2 million or $0.03 per share basic and diluted a year earlier.
- Full-year cash flows from operating activities were $521.8 million; cash flows from operating activities before net change in working capital were $590.5 million; net free cash flow was $358.4 million.
- Fourth-quarter cash flows from operating activities were $201.7 million; cash flows from operating activities before net change in working capital were $176.6 million; and net free cash flow was $136.5 million.
- Cash flows exceeded the average of the three preceding quarters as follows:
- Cash flows from operating activities exceeded the average by 91%
- Cash flows from operating activities before net change in working capital(5) exceeded the average by 29%.
- Net free cash flow(5) exceeded the average by 87%.
Significantly Reduced Debt
- Net debt decreased by an additional $59.8 million in the fourth quarter as a result of increased cash balances, largely due the significant increase in free cash flow.
- Total debt decreased by $710.8 million during 2019, while net debt fell by $771.1 million due to increased cash balances resulting from significantly higher free cash flow. As of December 31, 2019, net debt was $889.1 million.
- Increased annual dividend by 25% to $0.05 per share, effective in the first quarter of 2020. The increase follows a 100% increase to the annual dividend in the third quarter of 2019 to $0.04 per share from $0.02.
Increased Mineral Resources
- Mineral reserves replaced depletion on a consolidated basis, excluding assets disposed of in 2019 and more than replacing 2019 mineral depletion.
Free Cash Flow, Cash Balance and Liquidity Rise Sharply
The company’s primary objective is to maximize free cash flow, and 2019 was a particularly strong year in this regard. Full-year cash flow from operating activities increased 29% to $521.8 million, while net free cash flow rose 63% to $358.4 million from $219.8 million.
Now for the technical take. The stock is emerging from a high-volume flag formation where a “golden cross” is in the making. For traders and investors alike, this is a hallmark of when to take at least a partial position. I like the work the stock has done at its current $4 per share level and believe the next move is likely to $6 per share, assuming gold prices stay in their current bull trend or just move laterally.
The stock trades like water and is valued at less than one times book value, and I, for one, do think that gold prices will continue to trend higher in a world awash in rising debt and devalued currencies. Against this backdrop, Yamana Gold just might be one of the more intriguing turnaround stories of 2020. No promises, but by this time next year, investors might be asking themselves: how on earth did I miss that trade?
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