Let’s Value Yamana (AUY)

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AUY GDX

First, you have a try: Yamana BoAML Presentation_v001_r6047f

16 YAMANA GOLD AND AGNICO EAGLE COMPLETE ACQUISITION OF OSISKO MINING CORPORATION AND THE CANADIAN MALARTIC MINE16

http://www.yamana.com/Investors/FinancialCorporateReports/

I will back with my valuation by the end of the week.   Why has AUY been lagging the GDX (an index of senior miners like GG, AEM, ABX) after outperforming in terms of stock price?

6 responses to “Let’s Value Yamana (AUY)

  1. I think the Greenwald way would be to focus on an ARV instead of EPV due to cyclicality. Without looking deeply, most of the value is in the PP&E, which I assume are mining rights and/or land and/or equipment. At that point it’s a coin flip for me to say whether or not book is correct. I’d have to hire an expert to go visit the sites and give me his assessed value.

    Worse, the value of rights or stuff in the ground is often based on a DCF and we know how off they can be – even for the insiders – with just tiny errors in input.

    I’ll be curious to see what people do here.

  2. I normally stay away from gold mining companies because of the price unpredictability of the product they produce. However, the absolute hate the market seems to have towards them almost has me interested.

    Strictly for the mental exercise I gave AUY a brief look over. I’m green to mining companies, so take this with a grain of salt.

    For the valuation, I’m ignoring the measured and indicated resources as these are not economically valuable at the current gold price. I used the 23.185 m ounces (18.5 before the Osisko purchase, plus 50% of the 9.37 million purchased) of proven and probable. I read somewhere a bit back that some investors only use proven, but I figured adding in the probable would offset the disregard I’ve given the measured and indicated.

    So, the next value needed is the cost to take the goods (gold) out of the ground. On a co-product basis, AUY is at $925. By-product (price offset by whatever other minerals can be sold during the mining process) is at $850. An article on Seeking Alpha had AUY’s cost at $1150 all in (one of the lower cost producers). I’m going to use $1000 for my valuations. It’s higher than the costs AUY reports in their fillings, but I’m assuming they’re taking the easy to mine gold now as they try to conserve cash. The gold they take in the future should be more costly.

    Golds recent price of $1318 gives us a spread of approx. $320 (Their purchase of Osisko was a price of $416 per ounce of proven/probable reserves, but apparently their mines are lower cost. If this is incorrect, perhaps they overpaid. Which, according to Greenwald, all acquisitions are overpriced). This times the reserves of 23.185 gives us a value of $7,419. Minus debt of $1,340 (may have more after the acquisition, but I didn’t search for this) gives us an equity value of $6,079 divided by share count of 752 equals $8.08 stock price (Interestingly enough, pretty much their current stock price). You could consider this high since the gold would be mined over the next 14 years or so, but considering this is just a ball-park, it should do. With a margin of safety, I’d be willing to do a more refined valuation if the stock was around $5.50 or so.

    On a more earnings power value, their estimated production for 2014 plus 50% of Osisko’s estimated production is 1.675 million ounces. This times the 320 above would produce earnings equal about $0.71/share. Times a multiple of 11 (probably high) gives a value of $7.81.

    So I’m staying away for now. I have no idea what the value of gold should be. What concerns me is the huge run up the past few years, and it seems a lot of the mines open today are feasible only have the multigenerational highs. If supply is a factor in gold prices, then this is ok and prices will stay up. If its true that all gold ever mined is still being traded, and countries (China etc) doesn’t keep buying gold, theres no need for more supply and prices will plummet. There’s also a million other factors that I’m not smart enough to know the future of (a lot of talk of inflation hedge, but this only seems to hold in the medium to long-term, short-term not so much).

    In terms of why the recent lagging in stock price, this could be from the location of some of their mines. Believe some are in Argentina, and they’ve been in the news a lot lately for a not so good outlook (and payments to holdout bondholders). Could also be because of the cash drain (cash flow being funded by debt concerns me). Just my 30k feet view.

    • TJ, you know more about this than I do, but what I find interesting about your calculation is that if extraction does turn out to cost $1150 instead of $1000, then fair value goes from $8 to $3.40

  3. Ya, it all comes down to the variables. The consensus online for all-in costs range from $1000 to $1250. Previous quarters it was just above $1400. It all depends what you include/exclude. You also get silver and copper when mining gold and, when sold, this would reduce the costs. Also important to note that, at least back in 2013, AUY used a gold value of $950 in determining reserves (company they just acquired used $1300). One of the lowest. They noted something about a long-term view as their reasoning in the conference call. So perhaps they’re being conservative, or they believe this is the appropriate gold price.

    https://www.explorationinsights.com/pebble.asp?relid=3443

    This site offers a good review of figuring the cost per oz of mining gold. If I use their cash-cost method, I get around $1000 for the previous couple years. Although this doesn’t take into effect the cost to find new mines, or cap-ex to sustain existing mines. So maintenance cap-ex should be also accounted for if we’re valuing based on a no-growth methodology (assuming management is competent and will not lose value in buying/producing new mines).

    I would look at AUY the same way Pabrai looked at ZINC. He was looking for a low risk/high uncertainty investment. He knew zinc would be used far into the future and ZINC, because of the proximity of the mines, was a low cost producer. Eventually other mines would go out of business, supply would fall, and ZINC would make a solid profit again. Low risk in that they’d be the last to go bankrupt, and this would only happen if nobody used zinc anymore. High uncertainty because he didn’t know when supply/demand would tilt back in his favor. The difference for me is zinc is a manufacturing mineral that is used up and new supply is needed to replace it, whereas gold is theoretically a store of value and never really used up (except for certain, low-quantity situations).

  4. May relook at AUY at these price levels. Seem to be some assets selling on the cheap. Most important to me (and a determinant on if I’ll buy) is if they’ll be the last man standing in an industry downsizing. Are they a low cost producer???

    Is this a better opportunity than some of the miners and oil and gas services which are also beaten down and unloved?

  5. Yamana has total all in costs/oz of $1,308 as per 3Q2014. Without Depletion, depreciation & Amortization (non-cash costs) $944. Eldorado is also low cost at $1,255 and $1,052. Yamana has debt but it is reasonable, but the market is fearful. So if gold goes to $1,000 it will slow its production. If gold goes to $1,000 and stays there then you will probably see global financial crisis due to deflation/emerging market problems. The world is wallowing in debt. Yes, yamana has one of the lower cost profiles. The safest investment in this industry is RGLD and FNV –not as cheap because they benefit from dropping gold and oil prices.

    Miners at all time cheapness in their history to gold. You may want to go with SGDM. Yes you pay 0.4% but that ETF has ten quality miners. Unless mining ceases to exist despite its 10,000 year history, you will probably see a decent return over the next three years. These stocks are VERY volatile.

    I will post more tonight.

    Oil service companies are also cheap but not as cheap IN GENERAL as miners.

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