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Yamana Gold Research Report - Assessment

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.

Management:

** Integrity: C+. Peter Marrone, CEO

Marrone has a commanding style about him - seemingly the consummate salesman. Most investor presentations are heavy on "stock talk" -- how the stock is valued as opposed to operational matters. While Marrone is knowledgeable about operations at the various mines, he seems to spend a lot of time talking about how the market (under)values his company relative to peers. Perhaps it's a case of knowing your audience (a bunch of research analysts).
** Past Performance: B+.
Yamana has risen very fast in a short time. They are projecting 600,000 oz of gold production this year and should be transitioning into an earnings and cash flow operation. The balance sheet has plentiful cash with little debt. Even with the setback at Jacobina and the lag in Gualcamayo, Yamana is well-positioned to take advantage of a gold bull market.
Valuation:
I use a quick-and-dirty Baring rule-of-thumb NAV method for gold miners. The analysts like to do detailed DCF models for each mine and blend the figures to arrive at valuation but I'm not convinced you get more visibility for the effort expended. It's a classic case of confusing precision for accuracy.
Before the proposed mergers, I'd value Yamana anywhere from $18-$21 in today's current gold market. With the mergers, the raw calculations are even better but also misleading due to Northern Orion's heavy copper orientation. So I'd peg AUY at $16-$19 post-merger. All things being equal, I prefer the old Yamana over the proposed new one. At today's price around $12, this is 25-40% margin of safety.
This assumes gold @ $650, copper @ $2.50, zinc @ $1.50 and silver @ $13.
The Skinny:
In Texas hold 'em poker, my least favorite hand is a pair of queens. It's one of those hands where I've got to play it strong but I'm sweating the whole time. Any ace or king worries me and if the opponent shows strength, I've got to wonder about folding.
In my Agnico-Eagle report, I dubbed Yamana the "Cramer-anointed gold stock", which is a back-handed way of saying the stock had a good amount of hype behind it. AUY, along with the other gold miners, took a dive. Then they announced the deal with Northern Orion and Meridian. The market punished them, holding down AUY even while stocks like IAMGold and Agnico-Eagle have climbed. This leads us to our "pocket queens" situation and the way I see it, the hand demands to be played.
Yamana is a quality gold miner with sizable current production. They are coming into their mature phase with positive cash flow and earnings. The proposed merger has hung a cloud over the stock, making it available at a good price. It's not our favorite gold mining stock - i.e. it's not 2 aces, but 2 queens ain't bad and the downside is low-risk and low-impact.
If the merger doesn't go through, then Yamana is the same company it was before the announced merger. This is the same one that John Doody of Gold Stock Analyst proclaimed a double within two years (he put a sell on it when the deal was announced).
It's hard to see this deal actually happening. Meridian has already announced their opposition to it and given the open hostility rained upon Marrone on the conference call, I hope he thinks twice about raising the offer. NTO shareholders didn't sound pleased by the proceedings either.
If the deal closes at the announced price, new Yamana is worth a little less in our eyes but still has upside to its current price. The new company would have attractive assets and be drowning in cash flow. According to Marrone, they used a baseline copper price of $1.50/lb in running the numbers so there's quite a bit of wiggle room (current copper ~ $3.25/lb).
If Yamana raises their offer, the stock's already got the bad news priced in and shouldn't dovetail too much. We wait for the bounce and exit at the next opportune moment.
Certainty Rating: B+.
Gold mining stocks are extremely volatile. Even so, the current economic and monetary policies all but assure a depreciation of the US dollar. Barring a global market meltdown, Yamana will shake off the hangover from this deal and we should see a nice bounce as the gold/dollar story slowly plays out. If there is a global market correction, there won't be many places to hide, safe haven or not.
It's important to come into this investment with eyes wide open. Yamana is an operationally competent company with a tendency to dilute shares. But that is Marrone's style; any investment in Yamana must acknowledge and accept that aspect of their strategy.
My biggest concern is a raised bid price for Meridian. But other than that or massive operational setbacks (always a possibility), Yamana offers good upside with low risk of capital loss. Just remember to buckle your seat belt on any gold investment.
Accumulation Range: $12 or better (for a 25-40% margin of safety)
Intrinsic Value Range: $16-$20

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