Yamana Gold shares suffer after earnings miss

That doesn't mean you should snap up the stock, however. It's tough to call a bottom for mining stocks.

By Jim J. Jubak May 1, 2013 5:48PM
Image: Gold Bars (© Stockbyte/SuperStock)Yamana Gold (AUY) was hit hard Wednesday, after the company announced first-quarter earnings of 16 cents a share -- 3 cents a share below the Wall Street consensus -- and revenue of $535 million. That's a 4.4% drop year over year and short of the $559 million consensus.

Worst, though, is a huge increase in cash costs of 31% year-to-year, due in good part to falling prices for the copper that Yamana produces as a “byproduct” of its gold mining activity.

Shares were down 5.2% on the news as of 2:30 p.m. Wednesday, New York time. (Yamana Gold is member of my Jubak’s Picks portfolio.)

I’m not suggesting that you rush out to buy Yamana today. It remains hard to call the trend in gold prices, and I doubt that we’ve seen a bottom. And it’s even more difficult to pick a bottom for the shares of gold mining companies.

These stocks are caught in a vise of lower gold and copper prices and rising production costs. I think Wednesday’s price of $11.39 on Yamana Gold is a reasonable price for adding to positions. However, I certainly would leave myself some room in any portfolio allocation to Yamana, in case gold goes lower. Adding pluses and minus, I guess that makes me neutral on buying the stock here. One thing I’d like to see is the near-term results of Yamana’s efforts to cut production costs by $100 an ounce by mid-2013 and $150 an ounce by the end of the year. If I saw signs of success in that endeavor, I’d go from neutral to buy.

But of equal—and perhaps greater—importance than buy/sell/hold on Yamana as an individual stock is the way that Yamana’s current results set a benchmark for judging the gold mining sector.

In this tough environment for gold mining companies, I’d like any stock that I owned in the sector to meet what I’d call the Yamana benchmarks.

And what are those?

Relatively low costs. The all in cost of $856 per ounce of gold gives Yamana a solid profit margin, even at current gold prices. The by-product cash cost is a low $383 an ounce.

And then there's relatively low near-term capital spending plans, and aggressive plans to study new spending in light of conditions in the market. The company announced plans Wednesday to evaluate its new Cerro Moro mine in Argentina and expansion at its Chapada mine in Brazil.

There's also increasing production, even with capital spending restraints. Gold production in the first quarter was up 4% year over year. For 2013 Yamana projects production of 1.4 million ounces of gold, up from the record 1.2 million ounces produced in 2012.

And how about solid positive cash flow -- so that the company won’t have to raise capital in 2013 or run the danger of making Wall Street nervous about any covenants on existing debt. First quarter cash flow for Yamana came to $214 million or 29 cents a share.

And finally, enough high-yield reserves so that the company can prioritize mining these higher margin deposits while going slow on reserves of lower ore grades—without jeopardizing production growth. Yamana looks to be able to do that at its Jacobina, Morro do Vento and Canavieiras mines in Brazil.

I’m not arguing that Yamana should be the only gold mining stock you own. Diversification in the sector remains important. But I do think investors should measure their gold holdings against this stock. If one falls markedly short, you do need to ask yourself why you own it -- and if there might be better candidates (even better candidates than Yamana) out there.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. When in 2010 he started the mutual fund he manages, Jubak Global Equity Fund (JUBAX), he liquidated all his individual stock holdings and put the money into the fund. The fund may or may not own positions in any stock mentioned. The fund did own shares in Yamana as of the end of March. 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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