Inside Yamana Gold’s Financial Deleveraging Efforts

Yamana Gold (AUY) is committed to reducing its net debt by $300 million by the end of 2017. The company is targeting a net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio of 1.5x–2.0x.

The company expects improvement in its financial leverage in 2016 as debt reduction initiatives continue and as EBITDA increases on higher production. It also mentioned that while this transition happens, a ratio of 2.0x–2.5x is expected.

The start of Yamana’s projects, including Cerro Morro, could also lead to lower costs. Free cash flow could thus help its net debt situation. The above graph shows Yamana’s and its closest peers’ (GDX) (GDXJ) financial leverages. Yamana has a higher leverage than Newmont Mining (NEM), Agnico Eagle Mines (AEM), and Kinross Gold (KGC)

Yamana Gold seems comfortable as far as its debt maturity schedule is concerned. It has only $113 million in debt repayments due by the end of 2017.

The company generated net FCF (free cash flow) of $37 million in 2Q16 and $85 million in 1H16. This represents an increase of $117 million over 1H15. As the planned production increases start delivering over the second half of the year, the company expects further increases in FCF, which should be instrumental in strengthening its balance sheet and reducing net debt.

In the next and final part, we’ll see how Yamana has started to narrow its valuation gap against its peers.