Yamana Gold (AUY) has recently provided its preliminary first-quarter results, which are especially interesting to evaluate in the light of the recent developments in the world. Before the real problems with COVID-19 became visible, I was bullish on Yamana Gold, and it’s high time to re-evaluate the thesis.
Yamana Gold announced that its preliminary production was 221,746 gold equivalent ounces (GEO), including gold production of 192,238 ounces. Almost all company mines were operating for the full quarter, although Canadian Malartic in Canada and Cerro Morro in Argentina suffered shutdowns due to government-mandated virus containment measures.
Canadian Malartic was placed on care and maintenance on March 24 and remains in this state. Cerro Moro was transitioned to a reduced production schedule on March 19, but the Argentinian government declared mining an essential business on April 3, and the mine is currently in the process of remobilizing.
In the first quarter, Yamana Gold’s share of Canadian Malartic production totaled 64,763 ounces of gold. This is the company’s biggest production contributor, so its temporary closure is hardly good news. The company commented:
The temporary restriction order for non-essential services by the Quebec Government, which was initially expected to expire on April 13, 2020, has been extended to May 4, 2020 […] the company is seeking clarification if the extension applies to mining companies“.
In case Canadian Malartic does not work until May 4, Yamana Gold will likely lose about 25,000 ounces of gold production or more in the second quarter, depending on how fast it could get the mine back to the working state. Not surprisingly, Yamana Gold expects that second-quarter results will be worse than first-quarter results:
Due to the impact of COVID-19, the company expects the second quarter to be weaker than previously anticipated, after which the company expects a resumption of normal operations in the second half of the year“.
Updated guidance will be presented on April 30 when Yamana Gold will report its first-quarter results. The previous guidance implied production of 990,000 GEO, while the years 2021 and 2022 were expected to bring production of 1 million GEO. All-in sustaining costs (AISC) per ounce were previously expected to be in the $980-1,020 range. Yamana Gold stated that favorable exchange rate movements had positive effects on costs. However, the re-starts of Cerro Moro and Canadian Malartic (when the current restriction is lifted) will demand capital. Also, various additional virus containment measures could also come at a cost, so it will be interesting to see whether the current full-year AISC guidance stays intact in the new guidance which will be published together with first quarter results.
Yamana Gold decided to draw $200 million from its $750 million revolving credit facility but does not expect to use this money. The company stated that it was a precautionary measure to boost liquidity at times of elevated uncertainty. The move is understandable since Yamana Gold had no way to forecast which mines it will temporarily “lose” due to virus containment measures which were introduced all over the world.
In my opinion, Yamana Gold is well-prepared for the current crisis as it has sufficient liquidity and no debt maturities until March 2022. Sure, the temporary loss of production from Canadian Malartic is a negative catalyst, but we should not forget that the coronavirus pandemic boosted gold prices, which remained firmly above $1,550 per ounce for the most part of the first quarter. In the fourth quarter of 2019, Yamana Gold’s average realized gold price was $1,484 per ounce. While the current gold price upside will not be able to fully offset the lost revenue from Canadian Malartic, it will certainly help to mitigate the temporary problem.
I’d also note that I expect all major economies to get back to work (with various restrictions) at the beginning of May regardless of the virus situation since it is simply impossible to keep people in lockdown for a longer time due to devastating economic consequences which will lead to more deaths than the virus. Thus, I believe that Canadian Malartic’s care and maintenance regime until May 4 is the worst-case scenario for the company.
I’m less optimistic on the general market as I think that the negative economic data in April will put significant pressure on stocks, and at this point, I’m not sure whether gold equities will be able to withstand this pressure. However, I am optimistic about Yamana Gold’s prospects in the longer term since the restrictions will be lifted, but the gold price will likely stay elevated, contributing to the company’s cash flow.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AUY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may trade any of the above-mentioned stocks.