Yamana Gold Research Report - Risks
This report reflects the research and analysis I've performed on this company. It is provided for informational purposes only and does not constitute personalized financial advice nor an endorsement or solicitation to purchase stock in this or any other company. Please do your own due diligence or hire a financial advisor before making any investment decisions.- AUY:US research report posted: 2007, July 15
- Risk Detail
- Possible Upside
- Competitor Review
- Valuation and Assessment
- Standard risks regarding gold mining companies:
- Exploration risk - looking for new deposits requires heavy capital investment with the strong chance of coming up empty
- Actual production may not match estimated proven+probably reserves.
- The mining industry is under pressure from rising production costs.
- Gold may be the most maligned, volatile commodity trading in 21st century markets - subject to central bank manipulation and not nearly as practical as other commodities like oil, corn, silver, uranium, etc. Any gold-related investment will be a whiplash ride.
- Government and environmental risks, etc. etc.
- Huge "en bloc" deal involving Northern Orion Resources and Meridian Gold contains several possible negatives:
- No synergies involved so CEO Marrone seemed to be hanging the proverbial hat on multiple re-rating due to the new size of the company.
- Marrone mentioned the "company-making" assets of Yamana (Chapada & Gualcamayo) as well as NTO (Agua Rica & Alumbrero) but said, "to be fair", Meridian had some nice assets as well. Marrone admitted that the NTO assets would make new Yamana too copper-heavy so Meridian was needed to maintain the gold profile (so needed, in fact, that the deal is contingent on acquiring Meridian). This implies the deal isn't compelling on the strength of the assets but rather for its own sake.
- Analysts on the conference call seemed outright hostile and combative in panning the proposal. The market may view the new Yamana as a base metal miner and not pay the gold multiple.
- Operationally, Yamana is still fairly new. While they rightly boast of bringing the flagship Chapada and São Francisco into production (currently at costs around $300 per oz), it's too soon to assign a confidence rating to their operational abilities much higher than competent.
- A sill pillar failure at one of the mines at Jacobina will reduce production by ~38% at that site.
- A large part of their upside story resides in the Gualcamayo property in Argentina. Currently, this mine has not completed its feasibility study nor is the permitting process done. Both were expected by end 06/2007. Any permitting issues or impediments to development will negatively impact NAV.
- Mill completion at Chapada not completed until 04/2007 when scheduled for 03/2007.
- My impression is if they say something's going to get done, it will probably get done but maybe a little late and slightly overbudget.
- Other Risks:
- Chapada, their crown jewel property, will produce most of its gold in the 1st five years of its projected 19-year mine life. After that, it will be a copper mine with gold by-products.
- Copper hedges do not qualify for hedge accounting so any mark-to-market losses reduces earnings on a non-cash basis -- $35 mil in 2006, $8.5 million in 2005.
- Habitual diluter - the Meridian/NTO deal would double shares outstanding. From 2003-2005, share count has tripled. They make no bones about wanting to be a consolidator.
- Latin American base of operations is not the most stable mining jurisdiction. While Brazil and Argentina are safe relative to Venezuela or Bolivia, both have recent histories of economic instability.
- They target smaller mines which makes it harder to achieve economies of scale and cost efficiencies. The majors tend to avoid these prospects for that reason.
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