Here’s Why Yamana Gold Stock Could Underperform
Yamana Gold Inc. (NYSE:AUY) has increased over 66% year-to-date. We ask if Yamana Gold stock continues to show this sort of performance going forward. It’s questionable.
Before going into any details; when it comes to mining, and when you know precious metal prices are suppressed, gold miners must be agile. There are a few things that should be controlled quickly else the mining company runs into trouble.
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The first thing a gold miner should focus on is lowering production costs. Sadly, Yamana Gold isn’t doing this. In the third quarter of 2016, the company produced an ounce of gold at all-in sustaining costs of $965. In the same quarter a year ago, these costs were $844 an ounce. (Source: “Yamana Gold Announces Third Quarter 2016 Results,” Yamana Gold Inc., October 27, 2016.)
Simple math here; costs at Yamana Gold increased over 14%.
Here’s the problem; when costs are rising and gold prices aren’t, Yamana profitability gets hurt. Obviously, this could impact Yamana Gold stock.
Second, you want to see miners ramping up gold production as gold prices don’t perform. Yamana isn’t doing enough. When comparing it to other similar gold miners, it is lagging.
In the first nine months of 2016, the mining company produced 949,751 ounces of gold. In the same period a year ago, its gold production was 913,161 ounces. This represents an increase of just four percent year-over-year.
Look at a comparable mining company like Alamos Gold Inc (NYSE:AGI). It reported an increase of over eight percent in gold production. (Source: “Alamos Reports Third Quarter 2016 Results And Provides Exploration Update At La Yaqui,” Alamos Gold Inc, November 10, 2016.)
Higher gold production would increase profitability in times of low precious metal prices. Obviously, it could have implications on Yamana Gold stock.
Lastly, a mining company must be very liquid so that it can continue its operations as gold prices remain low. Yamana Gold has improved its liquidity situation, but we question if it’s enough.
At the end of the third quarter of 2016, the company had current assets of $669.2 million and current liabilities of $513.8 million. This gives the company working capital (a measure of liquidity) of $155.4 million. But, know that it has massive debt load as well. Yamana Gold’s long-term debt was $1.65 billion at the end of the third quarter of 2016. (Source: “Condensed Consolidated Interim Financial Statements,” Yamana Gold Inc, last accessed December 7, 2016.)
Here’s what investors must also understand; when and if there’s speculative capital coming in, the liquidity ratios and long-term debt matter. Speculators tend to consider mining companies with higher debt ratios as risky. This could cause Yamana Gold stock to underperform relative to other mining companies.
Yamana Gold Stock Outlook: Grim Performance Could Be Ahead
Saying the very least, Yamana Gold stock outlook appears grim for the rest of 2016, and in 2017.
Yamana gold hasn’t been as active as other mining companies. This could have consequences on Yamana Gold stock going forward. The performance we have seen so far could lag if the company doesn’t strive to improve its operations.
What could change our outlook on Yamana gold stock? Higher gold production, lower costs, and a reduction in long-term debt.
