Yamana Gold (NYSE: AUY) doubled its dividend in early 2019. That's a huge indication of where management sees things going for this mid-tier gold and silver miner. But management's positive outlook will only prove true if a number of things go right. Here's what you need to watch over the next year or so.
A big move
Yamana Gold made the decision to double down on precious metals in early 2019 when it agreed to sell the Chapada copper mine for roughly $1 billion ($800 million up front, plus potential contingent payments). That move helped the company to reduce costs, trim its leverage, and afford that big dividend hike. It also tied the company's price performance more tightly to the price of gold and silver. Although all precious metals miners are subject to this concern, it is a notable change from the past -- Yamana generated nearly 20% of its revenue from copper in 2018.
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In other words, this is a big change of direction. It also came with a renewed focus on internal growth. The company currently believes it has a slate of expansion opportunities, and that its Jacobina, Cerro Moro, Canadian Malartic, and Agua Rica assets will provide internal returns of as much as 15%. The projects it has in the works, meanwhile, are expected to increase production by as much as 150,000 gold equivalent ounces (GEOs).
Change takes time
This all sounds good, but there's a problem for investors over the next year or so: The miner's projects aren't going to bear much fruit until 2021. In fact, production is expected to be roughly flat in 2019, with a modest 2% increase projected for 2020. That means that Yamana will be spending a lot of cash on projects over the next year and a half or so without seeing huge benefits. Yes, production could jump as much as 15% in 2021, but that's still a long way off, and there's a lot of work to get done before the company can claim this victory.
So investors shouldn't expect too much from Yamana over the next 18 months or so. But that doesn't mean there won't be a lot to watch -- for starters, with gold and silver becoming even more important to the company's top and bottom lines, expect Yamana to track the price of these precious metals more tightly. That's not good or bad, but it is something to keep in mind now that the copper mine sale has been completed.
With regard to the company's performance, monitor the progress it makes on its balance sheet. So far management has been living up to its word, and has used a significant portion of the proceeds from the mine sale to pay down a credit facility and back a $415 million tender offer for some of its long-term debt. At the end of the second quarter its net-debt-to-EBITDA ratio stood at roughly 1.5 times. This, however, is just the start for the company, as management hopes to keep lowering its net debt to EBITDA to 1.0 times by the end of 2021. Continue to monitor the company's progress on the leverage front.
In addition, investors should watch for progress at the company's big capital projects. That includes the development of the Agua Rica mine in Argentina with partner Goldcorp (now a part of Newmont Goldcorp), which is still in the early stages; a phased expansion at the Jacobina mine in Brazil, which is going better than planned and is projected to increase production at the mine from roughly 150,000 gold equivalent ounces in 2019 to 170,000 GEOs in 2021 (and as high as 225,000 GEOs by 2023; and exploration and expansion efforts at the Canadian Malartic mine in Canada, which aren't expected to provide a meaningful boost to mining results until 2021. News has been pretty good so far, but there's still a lot of work to be done.
Don't judge a book by its cover
The headlines at Yamana Gold probably won't be too exciting over the next year or so. But that's really just part of the miner's long-term plan. The big stock price driver, as with most precious metals companies, will be gold and silver prices.
But don't let that fool you, there's a lot going on behind the scenes at Yamana as it works to reposition itself following the big asset sale. Watch closely to make sure management is living up to its word on debt reduction, as well as its ability to successfully get its slate of production-enhancing projects over the finish line on time and on budget. These somewhat mundane matter are the important story right now.
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