I would like to start this article with a confession. Until a few years ago, I didn’t care much about Yamana Gold (AUY). The company’s balance sheet was stretched, there were investments that didn’t impress me too much and for the better part of the last 15 years; I ignored Yamana Gold. That changed a few years ago when the company got its act together. The balance sheet was cleaned up, the company started making interesting acquisitions, and Yamana as a whole completely converted into a reliable gold producer. Yes, Yamana is still overexposed to South America but its asset base is a little more diversified and the acquisition of the Wasamac project could prove to be a good deal.
A look at Q3 and 9M 2021 results
I would like to come back to the performance of the company in 2021 because it will explain my thesis why Yamana Gold could have a promising future. Yamana will publish its annual financial results in February, so I will go over the performance for the 9 months of 2021 and go from there.
In the first nine months of 2021, the company produced a total of 730,000 gold equivalent ounces, of which approximately 644,000 ounces were real gold (sold at an average price of $1,800/oz) and the remaining gold equivalent production consisted of just over 6 million ounces of silver sold at an average price of $25.25 per ounce. The 9-month production results were positively impacted by a strong production result in the third quarter, as the company produced just over 225,000 ounces of gold and just under 2.3 million ounces of silver .
Total cash flow from operations in the first nine months of the year was approximately $554 million before taking into account changes in the working capital position. From this number we still have to deduct the $13.4 million in lease payments and the $39 million in interest payments. As you can see in the image below, Yamana Gold also recorded a cash outflow of $53 million related to the early extinguishment of debt. While this is obviously a net cash outflow, my goal is to calculate the company’s sustainable free cash flow and I’m ignoring this one-time item for now.
Adjusted cash flow from operations after making the necessary adjustments was approximately $500 million. And as you can see above, total investments were only $267 million, which translated to a positive free cash flow result of $233 million in the first nine months of 2021. This includes all capital expenditure: maintenance, expansion and exploration investments. “Pure” sustaining capital was only $130 million in the first nine months of the year and even if you included the $49 million of capitalized exploration, sustaining capital would have been less than $180 million, which would result in an underlying free cash flow result. over $320 million for the first nine months of the year.
There are currently 963 million shares outstanding (including shares issued in connection with the acquisition of Monarch Gold), meaning that free cash flow per share in the first nine months of the year has already exceeded $0.33. Not bad for a stock that trades at just over $4.
And keep in mind that the $48.6 million in capitalized exploration isn’t the only exploration-related cash outflow. In addition to capitalized exploration efforts, Yamana Gold spent an additional $24.8 million on exploration, so the reported sustaining free cash flow includes nearly $75 million of exploration-related expenses and investments. ‘exploration.
A final important element of my investment thesis is Yamana’s strong balance sheet. At the end of September, the company had approximately $460 million in cash on a consolidated basis and only $773 million in long-term debt. This means that the net debt position has decreased to a very manageable $313 million. There are other liabilities as well, but the balance sheet has grown much stronger in recent years.
High Gold Price Will Provide Continued Financial Flexibility
Yamana’s performance in the first nine months of the year was already strong, but I’m particularly pleased with the recent updates provided by the company. Earlier this month, Yamana announced fourth quarter production exceeding 280,000 gold equivalent ounces, which is a new quarterly record. This pushed annual gold-equivalent production to over one million gold-equivalent ounces, meaning Yamana exceeded its own forecast. Additionally, the all-in sustaining cost in the fourth quarter was only $970 per gold equivalent ounce and the AISC for the full year is now expected to be around $1030/oz (and that includes an impact additional inflationary $20/oz).
Yamana aims to keep the production rate steady for the next two years, although I’m looking forward to seeing the company present its three-year guidance in February to see if there are any changes to the 2022 production guidance and 2023, and to see the preliminary forecast for 2023.
In its 10-year strategic production outlook, Yamana Gold is betting that the Wasamac project in Quebec will reach production in 2026 (seems feasible) and this should increase the production rate to around 1.2-1 .25 million ounces of gold equivalent.
Wasamac’s initial capex was set at just over $400 million (although this will likely increase due to inflation), so Yamana Gold should have no problem funding this growth project using its own cash flow. free cash generated internally over the next few years. The debt market also appears to like Yamana’s outlook, as the company’s longer-term debt (6-10 years) has a current YTM of just over 3%.
I wasn’t a huge fan of Yamana in the 2010s but have recently revised my view as the company’s balance sheet looks much better now and the stock is currently trading at a sustainable free cash flow yield (defined as adjusted cash flow from operations less sustaining capital expenditures and all exploration activities but excluding growth capital expenditures) by more than 10% using the current price of gold.
I have started to build a long position in Yamana Gold and I will probably try to extend this position by selling put options.