The recent recovery of gold may strengthen the demand for precious metals companies. But besides the obvious effect gold price has on gold producers’ stocks such as Yamana Gold (NYSE: AUY) and Goldcorp (NYSE: GG), other factors should also be considered. These include: growth in production, profitability, dividend and valuation. Let’s take a close look at Yamana Gold and determine if these criteria make this company an investment worth considering now that gold is slowly regaining the confidence of its investors.
Gold production may rise again in 2014
Yamana’s early estimates were for a 27% gain in precious metals production during 2013 to reach 1.5 million gold equivalent ounces, or GEO. But the sharp drop in bullion prices has reduced the company’s production volume as the stated in its quarterly earnings report : “In response to the current volatile gold price environment which puts margins at risk, the Company has initiated cost containment and margin reclamation initiatives to focus on quality of ounces produced measured by contribution to cash flows instead of production volume alone“. Thus, the company’s production remained nearly unchanged compared to 2012 and reached only 1.2 million GEO. Looking forward , however, the company projects its 2014 production will rise by 17% to reach 1.4 million GEO. Yamana isn’t the only gold producer that expects to increase its production in 2014: Goldcorp plans to augment its production by roughly 18% so that its production will pass the 3 million ounces of gold. Conversely, Barrick Gold (NYSE: ABX) has cut down its production by 3% during 2013 and is likely to further reduce its production in 2014 mainly due to high debt and cash flow problems it faced in 2013. Therefore, in 2014, both Yamana and Goldcorp expect to grow their production volume by a similar rate. Let’s turn to examine these companies’ profit margins.
The drop in the gold and silver prices has slashed the profit margin of gold producers in the past several quarters.
The operating profit margins presented below are without these companies’ goodwill and impairment provisions.
As you can see, Barrick has the highest profit margin of the three in the past several quarters. Albeit Barrick has the highest profitability, it doesn’t offer the highest dividend yield.
Despite the drop in profitability, Yamana maintained its annual dividend payment of $0.26 per stock, which represents a yearly yield of 2.6%. In comparison, Barrick pays a yearly dividend of $0.2, which represents only an annual yield of 1.05%. Goldcorp kept its dividend payment at $0.2 — an annual yield of 2.3%. Therefore, of the three, Yamana still leads the way in terms of dividend yield. But is the company’s current price a bargain?
The recent recovery of shares of leading gold producers has increased their valuations. Let’s take a closer look at the changes in these companies’ enterprise value to EBITDA ratio, which provides a rough estimate for their current valuation.
The table below presents Yamana, Barrick and Goldcorp’s enterprise value to EBITDA ratio; the EBITDA is without the changes in these companies’ goodwill and impairment provisions, which were recorded during 2013: Barrick has decided to revise down its assumptions on the price of gold to $1,300 per ounce when valuating its assets. As a result, Barrick recorded an $8.7 billion impairment provision in the second quarter of 2013. Goldcorp has also revised its assumptions on the price of gold and recorded a $2.5 billion impairment in the second quarter. Conversely, Yamana Gold didn’t change its assumptions on the price of gold.
I have used the enterprise value to EBITDA metric as it takes into account these companies’ different level of debt. E.g. Barrick’s debt burden is very high as its debt-to-equity ratio is high at 1.13. On the other hand, Goldcorp and Yamana have lower debt burden with debt-to-equity ratios of 0.11 and 0.13, respectively. As you can see, the EV-to-EBITDA ratio of Yamana is the highest at 12.6, while Barrick’s ratio is the lowest at 5.1. The precious metals industry average is 5.4. This means that Yamana’s current pricing seems a bit high compared to its peers. One reason for the high valuation could be the expected sharp rise in production. But since Goldcorp’s production is projected to rise by a similar pace as Yamana, this makes Yamana’s current stock a bit overpriced.
The recent recovery of the gold market may steer investors back to bullion stocks. Yamana has some strong points such as a relatively high dividend yield (for the precious metals industry) and potential sharp rise in production. But the company’s current valuation seems a bit high and for a similar dividend yield and growth in production, Goldcorp might be a better investment worth considering.
For further reading:
- Will Gold Recover from its Recent Fall?
- What Could Impede This Gold Company?
- Will The Gold Market Continue to Cool Down?
Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.