Why Yamana Could Fall Harder than Its Peers if Gold Pulls Back


Dec. 4 2020, Updated 10:53 a.m. ET

High gold price leverage

Along with Kinross Gold (KGC), Yamana Gold (AUY) is also highly leveraged to moves in gold prices (GLD) (IAU). AUY has gained 150% year-to-date, the second highest among its senior peers.

Historically, Yamana Gold has lagged behind its peers. Due to its high financial leverage, it’s a higher beta play on gold compared to its peers (GDX) (GDXJ). This led its share price to rise relatively more than its peers’ shares when the gold rally started at the beginning of 2016.

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Beginning of a change

Yamana Gold’s net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) is quite high at 2.3x. Its leverage is higher than Agnico Eagle Mines (AEM) and Goldcorp (GG). However, if gold prices stay at current levels, its net debt could decline. The company expects to reduce its net debt by $300 million.

Yamana is targeting a net debt-to-EBITDA ratio of 1.5x–2.0x. Its free cash flow generation potential is also improving, which should also be instrumental in strengthening the balance sheet and reducing its net debt.

The company has also been cutting costs consistently. Lack of operational consistency was one of the investor worries for Yamana. But for the last few quarters, the company has started to deliver consistently on all of its mines. This could go a long way in restoring investor confidence in the company.

Yamana’s non-core asset sales could also unlock value. Investors should note that most of these catalysts will work with higher gold prices.

If there is a phase of lower gold prices, Yamana could offer more downside as compared to its peers due to its higher financial leverage and not-yet-robust fundamentals.


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