Yamana Gold’s (AUY) valuation multiple has varied widely between 4.3x and 9.8x over the last five years. Valuation multiples signify what investors are willing to pay for a stock based on analyst estimates. Yamana is currently trading at a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 5.6x.
Discount to peers and historical multiple
This multiple implies a discount of 13.6% to its intermediate peers (GDXJ), including Agnico Eagle Mines (AEM), Eldorado Gold (EGO), IAMGOLD (IAG), and New Gold (NGD). These four miners are trading at forward multiples of 11.5x, 5.6x, 5.2x, and 4.9x, respectively. Yamana’s stock is also trading at a 13.5% discount to its last-five-year average multiple.
Narrowing the valuation gap
Yamana’s discount is most likely due to its inconsistent operating performance and balance sheet concerns. With the start-up of Cerro Moro, Yamana’s production and costs are expected to improve significantly. Consequently, its free cash flow generation should also take a major step up, sidestepping its balance sheet concerns. While growth in the gold mining industry is difficult to come by right now, Yamana is expecting to triple its silver production and increase its gold production by a fifth next year. If all goes as expected, Yamana’s valuation multiple could be re-rated higher.
Consistent operational performance at all of its mines could also go a long way in restoring investor confidence in the company. Investors who want to diversify their risk can invest in gold miners through the VanEck Vectors Gold Miners ETF (GDX). GDX invests in senior and intermediate gold miners, and Newmont Mining forms 6.9% of its portfolio.