Yamana Gold Inc. (TSX: YRI) is a Canada based precious metals producer with significant gold and silver production, development stage properties, exploration properties, and land positions throughout the Americas, including Canada, Brazil, Chile and Argentina. Yamana plans to continue to build on this base through expansion and optimization initiatives at existing operating mines, development of new mines, the advancement of its exploration properties and, at times, by targeting other consolidation opportunities with a primary focus in the Americas.

Investment Rationale

• Positive Gold Outlook: Many investors are concerned about the potential risks resulting from expanding budget deficits, which, combined with the low-interest rate environment and growing money supply, may result in inflationary pressures. This concern is underscored by the fact that central banks, including the US Federal Reserve and European Central Bank, have signaled greater tolerance for inflation to be temporarily above their traditional target bands. Gold has historically performed well amid equity market pullbacks as well as high inflation. In years when inflation was higher than 3%, gold’s price increased 15% on average. Also, gold should do well in periods of deflation. Such periods are typically characterized by low-interest rates and high financial stress, all of which tend to foster demand for gold.

• Offering Decent Yield Income: Amid the lower interest rate environment, YRI shares are yielding decently well with a dividend yield of 2.11%, higher than the Canada 10-Year Government Bond yield of approximately 1.5%. Moreover, the company has a consistent track record of dividend distribution regardless of the economic cycle. Also, the yield of 2.1% provides holding power to the investors as opportunity cost would be largely protected.

Dividend History

• Industry Leading Margin Profile: The group reported a decent quarterly result in the first quarter of 2021 and outperformed the industry median on margins. A decent margin profile reported by the company reflects the competitive advantage it has within the industry.

• Jacobina Optimization Project Moving Well: The Company is advancing the Phase 2 expansion at Jacobina for an increase in throughput to 8,500 tonnes per day. The company expects to provide an update regarding the capex and development schedule in mid-2021 once studies are finalized to facilitate permitting. It has also begun a conceptual study on the Phase 3 expansion, which would increase throughput to 10,000 tpd at modest capital requirements. The company has adopted a comprehensive Jacobina life-of-mine tailings management strategy that reduces surface disposition of tailings, with underground tailings disposal as backfill.

• Robust Financial Risk Metrics: The company has a robust balance sheet with strong risk protection metrics. At the of the Q1FY21, the company’s debt/equity ratio stood at 0.22x, shows quite manageable debt position, with a Net Debt/EBITDA ratio of 1.5x, which ensures negligible balance sheet risk.

• Risk Associated to Investment: The company is exposed to volatility in the gold and silver prices as it derives the majority of its revenue from these two precious metals. Any sharp plunge in these two metal prices would weigh on the group’s performance significantly. Further, Currency fluctuations may affect the company’s capital costs and the costs that the company incurs at its operations. Gold is sold throughout the world based principally on a US Dollar price, but a portion of the company’s operating and capital expenses are incurred in Brazilian Reais, Argentine Pesos, Chilean Pesos and Canadian Dollars. The appreciation of these foreign currencies against the US Dollar would increase the costs of production at such mining operations, which could materially and adversely affect the company’s earnings and financial condition.

Financial Highlight: Q1FY21

Source: Company Filings

• Net earnings of USD 54.7 million or USD 0.06 per share basic and diluted increased compared to net earnings of USD 45.0 million or USD 0.05 per share basic and diluted a year earlier.
• Adjusted net earnings were USD 67.2 million or USD 0.07 per share basic and diluted compared to adjusted net earnings of USD 47.2 million or USD 0.05 per share basic and diluted a year earlier.
• Cash flows from operating activities were USD 160.2 million, and net free cash flow was USD 123.5 million, in line or above the averages of the preceding three quarters, further demonstrating the strength and resilience of the cash flow generation capacity of the Company.
• Cash flows from operating activities before net change in working capital were USD 183.4 million, and free cash flow before dividends and debt repayments were USD 76.0 million.
• As at March 31, 2021, the Company had cash and cash equivalents of USD 678.1 million and available credit of USD 750.0 million, for total available liquidity of approximately USD 1.4 billion. Cash balances include USD 222.8 million available for utilization by the MARA Project. The remainder of cash and cash equivalents of USD 455.3 million, along with further liquidity and incoming cash flows, is more than sufficient to fully manage the Company's business and available for the Company's capital allocation objectives.
• The Company's quarterly dividend rate of USD 0.02625 per share (annual USD 0.105 per share) is 110% higher than the same quarter in 2020 and 425% than the same quarter in 2019.
• Gold equivalent ounce ("GEO") production was 231,988 GEO, including gold production of 201,117 ounces and silver production of 2.13 million ounces, both in line with the plan.
• Cash costs and all-in sustaining costs ("AISC") were USD 698 and USD 1,045 per GEO, respectively, which on a consolidated basis were in line or better than plan and consistent with the comparative period.
• Mine operating earnings of USD 149.5 million increased by USD 50.2 million or 51% in relation to the comparative prior-year quarter. The increase is related to the strong precious metal price environment and strong operational performances from the mines resulting in higher gold production at comparable costs.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 28.82% of the total shareholding. Van Eck Associates Corporation and The Vanguard Group, Inc. holds the maximum interests in the company at 11.23% and 3.01%, respectively. The institutional ownership in YRI stood at 51.42%, and ownership of the strategic entities stood at 0.41%.

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: The group has reported a solid first quarter of 2021 with strong production results and cash flow growth. The group delivered a standout performance from Canadian Malartic and Minera Florida. At Jacobina, production reached an all-time monthly high in March, with total production in line with the plan for the quarter. The company has adopted a comprehensive Jacobina life-of-mine tailings management strategy that reduces surface disposition of tailings, with underground tailings disposal as backfill. Furter, Drilling Identifies Potentially Significant Extension to East Gouldie Zone.

Also, we believe that Gold would remain in the investor’s limelight on the back of heightened uncertainties over equity market valuation and higher inflationary pressure. Also, Gold has historically performed well amid equity market pullbacks as well as high inflation. In years when inflation was higher than 3%, Gold’s price increased 15% on average.

Further, the company has a robust balance sheet with strong risk protection metrics. The company has sufficient liquidity through its current balances and incoming cash flows to fully manage its business and fund growth without thinking about borrowing.

Hence, based on the aforementioned facts and valuation, we recommend a ‘Buy' rating on the stock at the closing price of CAD 6.14 on June 9, 2021.

1-Year Technical Price Chart (as on June 9, 2021), Analysis by Kalkine Group

*Recommendation is valid at June 10, 2021 price as well.

Disclaimer

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