Yamana Gold (AUY): An Undervalued Stock with a lot of PotentialsteemCreated with Sketch.

in #gold6 years ago

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Yamana Gold is a gold mining company leading the industry in low-cash cost production operating in the most politically stable countries for mining. Yamana Gold is expecting 940,000 ounces 0f gold production and 4.74 million ounces in silver production for 2018. Yamana strives to have the highest production in the industry while still maintaining far below average costs.

One thing to note is that Yamana is still a small company. They are focused on expanding their operation. One route a mining company can take to increase their production is by finding new mines through exploration. The number of variables involved in exploration of new mines make it difficult for any company to easily predict the cost. 

High costs can have a major impact on profitability and can result in inconsistent earnings. This is one of the reasons why this sector is so volatile.

Balance Sheet:

Let's take a look at Yamana's balance sheet...

There are a few things here to take note of.

From September 30th to December 31st of 2017:

  1. Current Assets Increased by $197 million 
  2. Long-term Assets decreased by $230 million 
  3. Current Liabilities increased by $128 million
  4. Long-term Liabilities decreased by $15 million
  5. Total Equity $4,447,300,000
  6. Equity Attributable to Shareholders $4,313,400,000
  7. Common Stock Issued and Outstanding 948,524,667 

Income Statement:

A few things to note:

  1. Loss of $191 million for the second half of 2017
  2. Loss of $147.5 million in 2017 as a whole
  3. Loss of $0.20 per share
  4. Yamana seems to be struggling with cash flow

Overview:

We can gather that even though Yamana has lost this quarter of $0.20 per share, they are still managing to bring their long term debt to lower levels while simultaneously acquiring more assets. By no means did Yamana perform well Q4 of 2017, but this is just a bump in the road during a period of expansion.

Book Value Per Share (BVPS) vs Market Value Per Share (MVPS):

Value investing is something that I learned about while reading Intelligent Investor by Benjamin Graham. 

Value investing is the process of finding investments, whether it be stocks, bonds, or real estate at bargain prices.

One way to determine if a company stock is selling at a bargain is by calculating it's book value versus the market value. Market value is determined through the price discovery mechanism that is the New York Stock Exchange (NYSE). The book value is determined by subtracting total liabilities from the total assets. This then gives you a number called 'equity.' You take the equity and divide it by the number of shares outstanding (issued and still held by the public).

I created an excel sheet to calculate Yamana's book value. It turns out that AUY should be valued around $4.50, 33% higher than you can buy it for. I see it as being on sale.

Technical Analysis:

As we can see here from the weekly chart, Yamana broke free from it's major bearish trend at the start of 2016. January 2016 was declared the start of a new bull market for precious metals. After a thrilling 6 months for AUY, it developed a year-long bearish trend. AUY seems to have broken free into a promising upward trend.

Here we have the daily chart of AUY. My fundamental target for AUY is about $4.50, and the upward trend that I have drawn seems to align with this view. A few things to note for AUY:

  • Strong support developed at $2.50
  • Resistance at $3.20 which may develop into a support line depending on how AUY responds to it these next few weeks
  • Strong resistance at $3.80

The Role of Gold Price for Mining Stocks:

One thing to always keep in mind about mining stocks is that they follow the price of metals. Gold is followed by the GDX and Silver and the SIL follows silver. 

Here we can see that Gold has entered a positive trend similar to Yamana. if the gold price continues to rise, Yamana and other gold miner stocks will continue to do well.

Overview:

Yamana's balance sheet is decent enough to make me comfortable with the amount of loss they are taking on as they struggle with cash flow. Having an issue with cash flow is not an uncommon problem for juniors. Keep in mind that -$0.20 earnings per share is not a horrible loss. Tesla is currently operating at more than -$3 of earnings per share and declining. When the miners start having exceptional earnings, it will be likely that speculation will take over and the earnings won't be something you pay attention to anyways, though I recommend that you do so.

Yamana gold is considered to be a junior gold miner, meaning that it is still looking to expand operations, find new mines, and increase production. These types of stocks are very speculative, volatile, and are at times considered "penny stocks." These types of shares can create huge gains if played correctly, and huge losses if played poorly.

While there is definite risk involved in holding any junior gold miner, there is still enough upside to Yamana that makes me confident in allocating a good portion of my portfolio to this company.

I think the book value of $4.50 per share is a solid number to expect for the market price in the future.

Read this article from Seeking Alpha about what junior gold mining stocks elite investors are buy today. Yamana is one of them!

Disclaimer: I am not a financial advisor. The articles that I write are for educational purposes only. Do your own research and hold yourself accountable for the investments that you choose to make.

 

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