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How Yamana Gold Can Narrow the Valuation Gap with Peers

Anuradha Garg - Author
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Nov. 20 2020, Updated 3:11 p.m. ET

Valuation

The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple is a good measure for capital-intensive industries. It helps investors compare companies with various capital structures.

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Discount to peers

Yamana Gold’s (AUY) valuation multiple has varied widely between 5.1x and 15.1x. Remember, valuation multiples signify what investors are willing to pay for a stock based on analyst estimates.

Yamana Gold is now trading at a forward EV-to-EBITDA multiple of 5.1x, which is just higher than IAMGOLD’s (IAG) multiple in the intermediate gold space. It’s also important to note that these mining companies have low EBITDA margins as compared to their peers. Notably, Agnico Eagle Mines (AEM) has the highest multiple of 10.8x, with the highest EBITDA margin of 48%. Eldorado Gold (EGO) comes in second place, with a multiple of 9.0x and margin of 46%.

While the short-term concerns for production and costs could continue to weigh on Yamana’s stock, in the medium term, its focus on cost cutting and deleveraging could lead to rerating.

Narrowing the valuation gap

Previously, Yamana’s operational inconsistency was a major investor worry. But for the last few quarters, the company has started to deliver consistently on all 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. However, investors should keep an eye on the execution challenges in its new projects.

Investors who want to diversify their risk can invest in gold mining companies through the VanEck Vectors Gold Miners ETF (GDX). GDX invests in senior and intermediate gold mining companies. Newmont Mining makes up 6.9% of GDX. The SPDR Gold Shares (GLD) provides exposure to spot gold prices.

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