Why Yamana shares are soaring

The gold miner's production targets for next year and 2014 show substantial increases.

By Jim J. Jubak Oct 31, 2012 5:18PM
Gold Bars - Photodisc/SuperStockFor a while now, my definition of the kind of gold-mining stock to own has been 1) a company increasing production in a time of a challenge for the industry, and 2) a company holding cost increases below the industry average at a time when costs across the industry are climbing.

With its Monday report of third-quarter earnings, Yamana Gold (AUY) rang both those bells. (Yamana Gold is a member of my Jubak’s Picks portfolio.)

On the top line, Yamana reported earnings of 24 cents a share, matching the Wall Street consensus. Revenue of $612 million, a year-over-year increase of 10.3%, came in short of analyst projections of $622 million. The company sold 297,406 gold-equivalent ounces and 37.1 million pounds of copper. That was up from sales of 266,351 gold-equivalent ounces but down from 38.7 million pounds of copper in the third quarter of 2011. Gold production climbed 11% from the third quarter of 2011.

But those aren’t actually the most important numbers.

In its conference call, the company reiterated its guidance for 2012 production of 1.175 million to 1.31 million gold-equivalent ounces. Targets for 2013 and 2014 show substantial increases to 1.5 million and 1.75 million gold-equivalent ounces in those two years respectively. Cash costs, the company projected, on a by-product basis would climb to $250 an ounce from the cash cost of $201 an ounce in the current quarter. Total cash costs on a co-product basis were $531 an ounce in this quarter. Compare that to projected total cash costs on a co-product basis at, say, Kinross Gold (KGC) in the recent quarter of $690 an ounce to $725 an ounce for 2012.

On these results, I’m raising my target price to $26 a share by October 2013 from my current target of $21 a share. Shares of Yamana Gold closed at $20.21 on Oct. 31. The stock pays a dividend of 1.29%.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Yamana Gold as of the end of June. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

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