Gold has dropped over 30% from its high near $1,800 U.S. an ounce in September 2012 to $1,228 today. That’s partly because the U.S. Federal Reserve has indicated that it is likely to scale back its bond-purchasing program, known as quantitative easing. Slowing down the growth in the money supply will reduce the likelihood of a sharp increase of future inflation. Since many investors buy gold as a hedge against inflation, its price has weakened.
The best way for aggressive investors to invest in gold is to buy shares of companies with rising production that will give them steady cash flow even if gold prices fall further. Here is our assessment of one of the gold stocks we cover for Stock Pickers Digest.
YAMANA GOLD (Toronto symbol YRI; www.yamana.com) owns eight operating gold mines in Mexico, Brazil, Chile and Argentina. It also holds a 12.5% stake in the Alumbrera copper/gold mine in Argentina, and has a number of other properties in advanced stages of development.
In the three months ended September 30, 2013, Yamana’s revenue fell 25.4%, to $456.7 million from $611.8 million a year earlier (all figures in U.S. dollars).
Gold production declined 1.1%, to 306,935 ounces from 310,490. Prices for gold, and for copper and silver, also fell. Both copper and silver are significant byproducts of Yamana’s gold mining.
Gold stocks: Yamana aims to start mining at Cerro Moro by 2016
Yamana holds cash of $232.1 million, or $0.31 a share. Its $1.1 billion of debt is 14.7% of its market cap. The shares yield 2.9%.
The company is conducting a feasibility study on its advanced-stage Cerro Moro project in Argentina, which holds as much as 2.4 million ounces of gold. Yamana bought Cerro Moro for $404 million U.S. last year. It hopes to start up a mine as early as 2016.
The company will likely produce almost 1.4 million ounces of gold for all of 2013, up 16.7% from 1.2 million ounces in 2012. Production will move even higher in 2016 if Cerro Moro starts up.
In the latest edition of Stock Pickers Digest, we look at Yamana’s cash flow in light of its production prospects—especially at Cerro Moro—as well as the long-term outlook for gold and copper prices. We conclude with our clear buy-hold-sell advice on the stock.
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