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Against heightened inflation and a significant risk of recession, Yamana Gold Inc. (NYSE:AUY), a Canadian mid-tier gold equivalent ounces producer, is a good hedge as its shares are expected to trade above current levels.
That The stock’s valuation is expected to improve over the course of 2022 as the market could welcome the company’s key upside, which is strong cash flow generation.
A solid portfolio of mining operations in Argentina’s Santa Cruz Province, Brazil’s Bahia State and Antioquia Department in central-northwest Colombia is on track to continue to perform well after a strong second quarter of 2022. This coupled with expectations for higher gold prices in the coming months supports a bullish stance on Yamana Gold Inc.
On the positive trend of Yamana Gold’s mineral business
Continued strong cash flow generation is likely based on the positive trend of Yamana Gold Inc.’s minerals business.
In the second quarter of 2022, the Canadian miner saw the volume of gold equivalent ounces [GEO] up sharply year-on-year as output for the prior quarter was 260,960 GEOs compared to 241,341 GEOs a year earlier. Costs were flat year-over-year, as can be easily seen from the all-in-sustain costs, which increased by just $3 to $1,084 per GEO.
The Company benefited in the second quarter from an efficient mine expansion strategy and successful exploration programs, in addition to increased throughput in most of the prolific portions of underground deposits and access to more valuable orebody zones.
The cash flow pays off for Yamana’s efforts
Thanks to efficient operations and competitive pricing, operating cash flow and free cash flow before dividends and debt service have grown remarkably at a rate of more than 15%. Operating cash flow was approximately $190 million for the quarter, while free cash flow was approximately $53 million.
The miner outperformed many operators, including one of its larger rivals, Kinross Gold Corporation (KGC), which instead reported just a 1% year-over-year increase in operating cash flow and a little over 10% increase in free cash flow.
With the same factors we observed in the second quarter of 2022 most likely playing out for the rest of the year and beyond, Yamana Gold Inc can only look forward to showing its peers that cash flow wasn’t a sporadic result.
The additional cash flow will give the company greater financial flexibility, although for the time being the company does not intend to exceed $175 million in expansion capital and therefore maintains a cautious profile.
Guidelines for production in 2022 and through 2024 and current resources
In terms of future gold equivalent production, Yamana Gold expects to produce 1 million ounces in 2022, down slightly from last year’s 1.01 million GEOs, and then to 1.03 million in 2023 and 1.06 million GEOs annually to rise in 2024.
The Company will conduct mineral activities in a catchment area of probable and proven mineral resources with the following characteristics. The Company’s Proven and Probable Reserves currently total approximately 13.67 million ounces of gold and approximately 111.26 million ounces of silver, and the average precious metal grade in grams per tonne of mineral is 0.56 grams for gold and 5.5 grams for silver .
Based on current gold and silver prices, Yamana Gold has over 15 years, maybe 20 years of production ahead of it, excluding those ounces that can be recovered from estimated reserves.
In the near term, the Company estimates that production will increase in the second half of 2022 due to the impact of the mining sequence and higher grade metal veins expected to be intersected, particularly at the silver deposits.
The balance sheet appears solid
The company’s balance sheet, which not only has to ensure business continuity and financial flexibility, but also has to protect against the negative effects of fluctuations in the commodity markets, currently appears solid.
Cash on hand of $545.1 million represented 0.7 times the total debt of $773.5 million in the second quarter of 2022. However, interest coverage was 10.44, indicating Yamana Gold is easily tackling the financial burden can carry, as ideally the ratio should not be lower than 1.5.
Analysts on the Yamana Gold share and current share price
Sell-side analysts have issued positive recommendations for this stock for the past few weeks and are forecasting a solid rise in the share price over the next 52 weeks.
The median recommendation rating is an outperform rating and the median target price is $6.69, reflecting an upside potential of almost 33% from the current stock price level.
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At the time of writing, shares are trading at $5.09 each, which is not at all compared to the 52-week range of $3.70 to $6.40, growth potential and expectations of higher gold prices as valuation seems expensive.
Expectations for higher gold and silver prices
A brief mention of the factors that will affect the price of gold over the coming months serves to support expectations that the yellow metal, on which 90% of Yamana Gold’s profitability depends, will rise significantly over the next 52 weeks, as shown in the table below [Prices are from tradingeconomics.com.].
|
financial instrument |
Current market price per troy ounce [$/Oz.] |
Target price in 52 weeks [$/Oz.] |
change |
|
Gold Bullion Market |
1,786.72 |
1,854.93 |
+4% |
|
Silver Bullion Market |
20,233 |
18.39 |
-9% |
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The factors that will cause the price of gold to rise above current levels are as follows. Inflation is showing signs of slowing in the US, coming in at about 8.5% in July, up from 9.1% in June and slightly below the 8.7% analysts had forecast.
But when we consider that this inflation is still at an all-time high, the highest in nearly 40 years, objectively more improvements were needed to glorify the release. In addition, the slight drop in inflation in July is due to a lower price of petrol at the pump, most likely as a result of government measures to reduce fuel taxes. As annual inflation continues to be a serious concern for the economy, a series of aggressive US Federal Reserve rate hikes are therefore expected to dampen the rapid rise in goods and services prices, with the implicit risk of private consumption and business investment to hinder. These components of gross national product are beginning to crack down.
By acting as a safe haven, gold allows investors to protect the value of their assets against the headwinds of stalled inflation and significant recession risk. Technically, the US economy should already be in recession, with GDP growth contracting for two straight quarters. Demand for gold as a hedging instrument will therefore increase, which will create upward pressure on the metal’s price per ounce.
Conclusion
Yamana Gold shares benefit from a portfolio of mineral assets that are performing well in terms of production and costs, and generating strong cash flow. The company is well positioned to benefit from the expected rise in gold and silver prices. Yamana Gold could offer a good hedge against entrenched inflation and recession.
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