A Must-Buy Gold Stock

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The Canadian-based gold producer Yamana Gold (NYSE: AUY) engages in the production, exploration, extraction and processing of gold and other precious metals. The company has operations in Brazil, Argentina, Chile, Mexico and Colombia.

Quarterly Earnings

On Feb. 20, Yamana Gold released its earnings for the fourth quarter of 2012. The company reported earnings of $169.2 million, or 22 cents a share, versus $89.6 million, or 12 cents a share, in the same quarter last year.

The chief reasons behind this profit boost were high sales and strong production, which compensated for higher operating costs.

Revenues grew 11% to $629.5 million amid a 17% rise in gold output. Average realized price increased to $1,692 an ounce, from $1,670 an ounce a year earlier. As far as production was concerned, Yamana produced 1.2 million gold equivalent ounces—9% higher than the previous year.

Going Forward

According to the company, new development projects at its latest mines will make sure Yamana increases production by at least 20% this year. The company should be increasing production at its Brazilian mines, especially at the Ernesto/Pau location. C1 Santa Luz and Pilar are under construction, first output at both mines is expected by the end of this year. In Argentina, development work has already started on the Cerro Moro project.

In 2013, Yamana’s focus will be on internal growth rather than on new acquisitions. As Chief Executive Peter Marrone said, “We're not at the stage of considering acquisitions at this point, we have two mines that start operations this year, three that reach commercial production this year and we have Cerro Moro.”

Yamana has plans of investing $470 million in capital projects, which includes $40 million on Cerro Moro and $445 million on sustaining capital.

Earnings Forecast for 2013

In 1Q 2013, analysts expect Yamana to earn $0.21 per share on revenues of $625.34 million. For the full year, analysts’ estimates stand at $1.50 a share on $3.45 billion in revenue. Yamana expects an output of 1.44 million to 1.60 million ounces this year, an increase of 20% from the previous year.

Valuation

Yamana Gold is trading at a forward P/E (1yr) of 9.52x, making it a rather cheap buy in its industry. Incorporating a dividend yield of 1.80% into its PEG gives us a healthy PEGY of 1.23. Yamana’s high operating margin of 38% shows that the company has been able to mint substantial profits despite the recent drop in gold prices. According to the sell side, it has a mean recommendation of 2, showing that Yamana is amongst the top buys in the gold industry.

The Gold Industry’s Major Players

The Canadian-based gold producer Goldcorp (NYSE: GG) engages in gold mining and related activities. It is trading at a forward P/E (1yr) of 10.87x and has a PEG of 1.08. Adding PEG into its dividend yield gives us a PEGY of 0.97. This low PEGY makes Goldcorp one of the most undervalued stocks in the gold industry. Just like Yamana, it’s generating healthy earnings on its sales—an operating margin of 41% is a testimony to this. A mean recommendation of 2.2 on the sell side suggests that Goldcorp is also a great buy in its industry.

On the other hand, Iamgold Corporation (NYSE: IAG) is trading at a low forward P/E (1yr) of 6.62x, which shows that investors aren’t expecting that much from the company in the coming years—a negative PEG of 1.84 clearly reflects this fact. Though the company is yielding a healthy operating margin of 33% on its sales, it’s slightly less than its top peers like Goldcorp and Yamana Gold. A mean recommendation of 2.7 on the sell side shows that it’s an average buy in the gold industry.

Conclusion

As a result of low gold prices and high capital costs, most of the mining companies are now focusing more on increasing their margins, rather than growth. In order to enhance its output, Yamana’s strategy going forward is to build its production base. Yamana’s main catalyst for production would be its mines in Brazil, which are expected to generate substantial cash flows for the company. Furthermore, the company has plans of investing more on internal projects rather than acquiring new projects. The company already has two mines lined-up that will start operating this year, and another three will reach commercial production.

Gold prices have almost bottomed out, making this a perfect scenario to go long on gold stocks. Given the fact that the QE3 program is likely to continue, the long term future of gold prices looks bright. In my previous article, I mentioned why I still remain bullish about gold prices in the long run. Yamana Gold is still one of the best buys in the gold industry, thanks to its great production outlook for the future. The bottom line is that Yamana Gold is still one of the most attractive buys in its industry, making a must buy at this stage.


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