Yamana has no net debt, which means it has grown to the point it is self-funding its future development. This is a testament to the quality of the company's assets and management.
It's also extremely rare in the gold mining sector.
You see, gold mines take large capital investments and years of development to reach a positive growth point. But Yamana is already past that point, and its profits and share price will soar as it continues to expand.
Just look at the last time I told you Yamana Gold was a "Buy." It was one year ago and Yamana was trading at $11.26 a share. Since then it's climbed 15% while other stocks have tumbled. And that's just the beginning. Yamana will keep climbing as the share price gradually starts to account for the company's growth outlook.
So if you didn't buy Yamana Gold Inc. following my last recommendation, you should do so now as the company rakes in profits without worrying about debt (**).
Yamana Gold Inc.
Yamana has spent the last decade building a diverse portfolio of low-cost mining locations. The company currently operates six mines, with 50% of its production coming from Chile, 30% from Brazil, and 20% from Argentina.
This global operations mix has big benefits for Yamana. First, it reduces the geopolitical risk threatening some of the company's competitors. And secondly, the low expenses grant Yamana a negative production cost of $80 per ounce, once byproducts are sold and taken into consideration.
This means that with an average sell price of $1,509 an ounce, Yamana enjoys an average cash margin of $1,589 an ounce in what is normally an extremely expensive sector to produce.
I absolutely love this cash margin, which will get even fatter with Yamana's projected production increases.
Yamana expects to grow annual production more than 60% between 2010 and 2014, from 1 million gold equivalent ounces (GEO) to 1.7 million ounces. New mine operations will contribute about 440,000 to 470,000 GEO per year by 2014 and the rest from expanding capacity at current mines.
It would not shock me if the company's production is pushing 2 million GEO by 2017.
Yamana also has the chance to profit from rising silver prices as silver accounts for 20% of total GEO production.
Since my original "Buy" recommendation last September, the company has focused on strengthening financial performance, and it's succeeded.
Second-quarter revenue rose 63% to $573.3 million in 2010's second quarter. Adjusted earnings (non GAAP) went up 122% year-over-year in the second quarter to $186.2 million. Cash flow increased 70% to $331 million. Better still, over the past year, Yamana's cash on hand has surged 99% to $521 million.
The stock rose 7.27% yesterday (Wednesday) to close at $13.73.
Yamana Gold was a "Buy" a year ago, and given the company's strong growth prospects, I'm just as bullish now as I was then – maybe even more so. I expect we'll see the same levels of growth going forward as we have in the past year.
Let's look to pick up more shares of Yamana Gold as it continues to profit in these hard economic times.
(**) Special Note of Disclosure: Jack Barnes has no interest in Yamana Gold Inc. (NYSE: AUY).
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning twice a week. In his previous BSH column, Barnes analyzed Southern Copper Corp. (NYSE: SCCO).
News and Related Story Links:
- Money Morning:
The Gold Price Conspiracy Uncle Sam Doesn't Want You to Know About
August Investor Presentation
- Money Morning News Archive:
Previous "Buy, Sell or Hold" Features.
Confessions of a Macro Contrarian.