Yamana Gold: Could hedge against economic headwinds (AUY)

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Author’s Note, 8/14: My article represents a possible scenario for Yamana Gold as a stand-alone business, assuming the business combination with Gold Fields Ltd. does not materialize. I have now included this information both in the bullet points and at the beginning of the article for clarity.

Yamana Gold Inc. (NYSE: AUY) will be acquired by Gold Fields Limited (GFI), based in South Africa, at a ratio of 0.6 GFI shares per AUY share, valuing Yamana Gold at $6.7 billion. The transaction is expected to close in the second half of the current year. To close successfully, the transaction requires the approval of shareholders of both companies and the approval of regulators.

Assuming the deal does not materialize, here is a possible scenario for Yamana Gold Inc. (AUY) should it continue as a standalone business.

Against increased inflation and a significant risk of recession, Yamana Gold Inc., a mid-size Canadian producer of gold equivalent ounces, represents a good hedge with its shares which are expected to trade above current levels.

The asset is expected to improve during 2022 as the market may accommodate the company’s main operating potential, which is strong cash flow generation.

A strong portfolio of mining operations in Argentina’s Santa Cruz province, Bahia state in Brazil and Antioquia department in central-western Colombia is on track to continue to perform well after a strong second quarter of 2022. This, coupled with expectations of higher gold prices in the coming months, supports a bullish position in Yamana Gold Inc.

About the Positive Trend of Mineral Business of Yamana Gold

Based on the positive trend of Yamana Gold Inc.’s mining activities, continued strong cash flow generation is likely to occur.

In the second quarter of 2022, the Canadian miner saw the volume of gold equivalent ounces [GEO] increase a lot year over year as the production in the aforementioned quarter was 260,960 GEO compared to 241,341 GEO in the previous year. Costs were consistent with last year, as can easily be seen from the all-in sustaining costs, which increased by only $3 to $1,084 per GEO.

The company benefited in the second quarter from an effective mine expansion strategy and successful exploration programs, in addition to increased throughput in most rich parts of the underground deposits and access to areas most valuable mineralized bodies.

Cash flow pays for Yamana’s efforts

Thanks to efficient operations and favorable pricing, operating cash flow and free cash flow before dividends and debt service grew remarkably by more than 15%. Operating cash flow hovered around $190 million in the quarter, while free cash flow was around $53 million.

The miner has outperformed many operators, including one of its biggest rivals, Kinross Gold Corporation (KGC), which instead saw a just 1% year-over-year increase in cash flow from operations and a little over 10% increase in free cash flow.

Given that the same factors we observed in the second quarter of 2022 will most likely occur for the remainder of the year and beyond, Yamana Gold Inc can only hope to show its peers that cash flow is not were not a sporadic result.

The additional cash flow will give the company greater financial flexibility, although the company does not intend to exceed $175 million in expansion capital just yet and therefore maintains a cautious profile.

Guidelines for production in 2022 and into 2024, and current resources

In terms of future gold equivalent production, Yamana Gold expects to produce one million ounces in 2022, slightly less than GEO’s 1.01 million last year, and then increase to 1.03 million. in 2023 and 1.06 million GEO in 2024.

The Company will undertake mining activities in a probable and proven mineral resource catchment area with the following characteristics. The Company’s proven and probable reserves are currently approximately 13.67 million ounces of gold and approximately 111.26 million ounces of silver, and the average precious metal grade in grams per tonne of ore is 0 .56 for gold and 5.5 for silver.

Based on current gold and silver prices, Yamana Gold has over 15, possibly 20 years of production ahead of it, not including the ounces that can be obtained from estimated reserves.

In the short term, the company estimates that production will increase in the second half of 2022 due to the impact of the mining sequence and due to the higher grade metal veins that are expected to be intersected at the silver deposits in particular. .

The balance sheet looks solid

The company’s balance sheet, which must not only ensure business continuity and financial flexibility but also protect against the negative impact of fluctuations in the commodity markets, currently appears solid.

Free cash and cash equivalents of $545.1 million was 0.7 times total debt of $773.5 million in Q2 2022. However, interest coverage was 10.44, indicating that Yamana Gold can easily bear the financial burden, as the ratio should ideally not be lower than 1.5.

Analysts on Yamana Gold stock and current stock price

Analysts on the sell side have issued positive recommendations for this stock and predict a rise in the stock price over the next 52 weeks.

The median recommendation rating is an overweight rating and the median target price is $6.69, reflecting nearly 33% upside potential from current stock price levels.

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At the time of writing, the shares are trading at $5.09 each, which doesn’t seem expensive at all as a valuation in light of comparing it to the $3.70 to 6 range. $.40 over 52 weeks, the potential for growth and expectations of higher gold prices.

Expectations for higher gold and silver prices

A brief mention of the factors that will affect the price of gold over the next few months serves to support expectations 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 below [Prices are from tradingeconomics.com.].

Financial instrument

Current market price per troy ounce [$/Oz.]

Price target in 52 weeks [$/Oz.]

To change

Gold bullion market




silver bullion market


6:39 p.m.


The factors that will drive the price of gold higher than current levels are as follows. Inflation is showing signs of easing in the United States, standing at around 8.5% in July, down from 9.1% in June and slightly below the 8.7% forecast by analysts.

But when you consider that this inflation is still at an all-time high, the highest in nearly 40 years, objectively more improvement was needed to glorify the publication. In addition, the slight drop in inflation in July is due to a drop in the price of gasoline at the pump, probably due to government measures aimed at reducing fuel taxes. As annual inflation continues to be a serious concern for the economy, a series of aggressive rate hikes by the US Federal Reserve should therefore dampen the rapid rise in prices of goods and services, with the implicit risk of dampening household consumption and business investment. These components of gross national product are beginning to collapse.

By acting as a safe haven, gold allows investors to protect the value of their assets against the headwinds of entrenched inflation and significant recession risk. Technically, the US economy should already be in recession with GDP growth contracting for two consecutive quarters. Thus, the demand for gold, as a hedging instrument, will increase, creating upward pressure on the price per ounce of metal.


Yamana Gold benefits from a portfolio of high performing mining assets in terms of production and costs generating strong cash flows. The company is well positioned to take advantage of the expected rise in gold and silver prices. Yamana Gold could provide a good hedge against deep-rooted inflation and recession.

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