Yamana Gold: Can hedge against economic headwinds (AUY)

Yamana Gold Co., Ltd. (NYSE: AUY) is a medium-sized Canadian producer of equivalent gold ounces and makes an excellent hedge as its shares are expected to trade above current levels.

of We expect the stock’s valuation to improve over the course of 2022 as the market may welcome the company’s primary operating potential, which is strong cash flow generation.

A strong portfolio of mining operations in Santa Cruz, Argentina, Bahia, Brazil, and Antioquia, in northwest central Colombia, is expected to continue to perform well after a very strong second quarter of 2022 . We support a bullish stance on Yamana Gold in the coming months.

Yamana Gold’s mining business turning around

Given the strong performance of Yamana Gold’s minerals business, it is expected that the company will continue to generate strong cash flows.

In the second quarter of 2022, Canadian miners saw ounces equivalent to gold [GEO] Output for the aforementioned quarter was 260,960 GEO compared to 241,341 GEO in the previous year, thus a significant year-on-year increase. Costs remain consistent compared to last year, as evidenced by the all-in sustain cost, which increased from just $3 per GEO to $1,084.

In the second quarter, the company benefited from an efficient mine expansion strategy and successful exploration programs, as well as increased throughput in the richest part of the underground deposit and access to more valuable zones of the ore body. I was.

Cash flow rewards Yamana’s efforts

Thanks to efficient operations and supportive pricing, operating cash flow and free cash flow before dividends and debt service grew significantly by more than 15%. Operating cash flow in the fourth quarter was approximately $190 million and free cash flow was approximately $53 million.

Miner outperformed many operators, including one of its larger rivals, Kinross Gold Corporation (KGC), but instead posted operating cash flow up just 1% year-over-year and free cash flow just over 10%. Increased.

As the same factors observed in the second quarter of 2022 are likely to continue for the rest of the year and beyond, Yamana Gold Inc believes its cash flow is not a sporadic result compared to its peers. I look forward to showing you.

The additional cash flow gives the company greater financial flexibility.

2022-2024 production guidelines and current resources

In terms of future gold equivalent production, Yamana Gold expects to produce 1 million ounces in 2022, just below last year’s 1.01 million GEO, rising to 1.03 million GEO in 2023 and 1.06 million GEO in 2024. I expect.

The company conducts mineral activities in catchments of proven mineral resources that are likely to have the following characteristics: The company’s proven and probable reserves currently comprise approximately 13.67 million ounces of gold and approximately 111.26 million ounces of silver, with an average precious metal content of 0.56 for gold and 5.5 for silver per tonne of mineral. .

At current gold and silver prices, Yamana Gold has more than 15, possibly 20 years of production ahead, excluding ounces from estimated reserves.

In the short term, the company expects production to rise in the second half of 2022 as a result of mining sequence impacts and high-grade metal veins expected to intersect, particularly at silver deposits.

Balance sheet looks solid

The company’s balance sheet, which needs to ensure business continuity and financial flexibility as well as protect against the adverse effects of commodities market volatility, currently looks strong.

Cash and cash equivalents on hand were $545.1 million, representing 0.7 times total debt of $773.5 million in the second quarter of 2022. However, the interest coverage was 10.44. 1.5.

Analyst on Yamana Gold stock price and current stock price

Sell-side analysts have issued forward-looking recommendations for the stock in recent weeks and expect a solid rally in the stock over the next 52 weeks.

The median recommended rating is higher than the rating and the median target price is $6.69, reflecting the potential upside of nearly 33% above current stock levels.

At the time of this writing, the shares are trading at $5.09 each, but as a valuation compared to a 52-week range of $3.70 to $6.40, growth potential, and gold price appreciation expectations. does not seem high at all.

Expectations for rising gold and silver prices

A brief mention of the factors that will affect the price of gold over the next few months is that the yellow metal, on which 90% of Yamana Gold’s profitability depends, will rise significantly over the next 52 weeks, as shown in the table. Help support expectations.under [Prices are from tradingeconomics.com.].

financial instruments	Current Market Price per Troy Ounce [$/Oz.]	52 week price target [$/Oz.]	Change
gold bullion market	1,786.72	1,854.93	+4%
silver bullion market	20.233	18.39	-9%

click to enlarge

The factors driving the gold price above current levels are: U.S. inflation is showing signs of slowing, with inflation at about 8.5% in July, down from 9.1% in June and just below analysts’ forecasts of 8.7%. I’m here.

But given that this inflation is still at a record high and at the highest level in almost 40 years, objectively more improvement was needed to beautify the release. Moreover, the slight drop in inflation in July was due to lower gasoline prices, most likely a result of government measures to reduce fuel taxes. With annual inflation continuing to be a serious concern for the economy, a series of aggressive US Federal Reserve rate hikes, along with the implicit risks of deterring household consumption and business investment, will lead to a rapid increase in the prices of goods and services. expected to slow down the rise. These elements of Gross National Product are starting to crack down.

By acting as a safe haven, gold allows investors to shield the value of their assets from the headwinds of entrenched inflation and significant recession risk. Technically, the U.S. economy is already in recession, and GDP growth should have contracted for her second consecutive quarter. This will increase demand for gold as a hedging instrument, putting upward pressure on the metal’s price per ounce.

Conclusion

Yamana Gold shares benefit from a portfolio of mineral assets that perform exceptionally well in terms of volume and cost and generate strong cash flows. The company is well positioned to take advantage of the expected gold and silver price increases. Yamana Gold could be an excellent hedge against deep-seated inflation and recession.