The following post on Yamana Gold (NYSE: AUY) was originally posted October 28, 2007 at odysseyroad.com.
It seems that of all my holdings, Yamana Gold (NYSE:AUY) is the most difficult to track. Now that the three-way merger between them, Northern Orion, and Meridian Gold is a lock, it is time to see what the combined company will look like.
With the merger, Yamana captures additional gold production as well as several developing mines. According to their press release of October 18, they are targeting 1.2 million ounces of gold production in 2008, and 2.2 million ounces by 2012. With the acquisitions, they are obviously further diluting their shares by adding 179 million additional shares outstanding. Silver and Zinc are also present in their acquired mines. Below I’ve attempting to construct an income statement by using their 2008 gold production goal and annualizing the production of their other minerals based on their October 15th press release.
2008 Estimate
| Gold Sold (oz) |
1,200,000 |
650.0 |
$780,000,000 |
| Copper (lbs) |
122,000,000 |
7,500 |
$415,154,265 |
| Silver (oz) |
8,000,000 |
$13.0 |
$32,000,000 |
| Zinc (tonnes) |
3,200 |
$2,700 |
$8,640,000 |
| |
|
|
|
| Total Est. Revenue |
|
|
$1,235,794,265 |
| Cost of Sales |
|
|
$556,107,419 |
| |
|
|
|
| Mine Operating Earnings |
|
|
$679,686,846 |
| |
|
|
|
| Operating Expenses |
|
|
$200,000,000 |
| |
|
|
|
| Operating Earnings |
|
|
$479,686,846 |
| |
|
|
|
| Interest and Derivative Exp |
|
|
$100,000,000 |
| |
|
|
|
| Earnings Before Taxes |
|
|
$379,686,846 |
| |
|
|
|
| Taxes |
|
|
$113,906,054 |
| |
|
|
|
| Net Income |
|
|
$265,780,792 |
| Shares Outstanding |
|
|
534,000,000 |
| Income/Share |
|
|
$0.50 |
| PE |
|
20 |
$10 |
I’ve maintained the 55% gross margins that they have reported so far in 2007. As the price of gold changes, the cost of goods sold should remain constant. Yamana often reports their production cost of gold after by subtracting the value of the other minerals they mine from the cost of goods sold. So far in 2007, this has been a negative number as copper has begun to offset the costs of gold production. With the addition of these two companies, I’m estimating a cost of production of approximately $85 per ounce.When approaching expenses, I’ve multiplied annualized 2007 expenses by 2.5 times. They should gain some efficiencies from this merger, but I’m not counting on big improvements in 2008. The other aspect of this estimate is the price of gold, which is currently well above $750 per ounce. Using $750 an ounce results in $0.66 per share in net income or $13 per share at a P/E of 20.This may lead to the conclusion that Yamana is overpriced today. This is not necessarily the case. If the price of gold remains constant and they hit their 2012 production target. The price per share is equal to $33 per share based on this model. This doesn’t include increased expenses , but also doesn’t include increased production of other minerals besides gold. If $33 per share is achievable, that is roughly a double in five years.Despite all the movements, share issuances, financing activities, and now mergers occurring at Yamana, I still have the same conclusion that I have when I first purchased shares. Yamana continues to create value, and it is worthwhile to hold as a hedge against currency and inflation risk. If the price of gold continues to rise over the next five years, this merger will only magnify Yamana’s returns. I think a good price to add to shares would be around $13 per share. I will look to add at these levels to keep Yamana at around 5% of my individual stock holdings.
This entry was posted
on Tuesday, December 18th, 2007 at 5:37 am and is filed under Holdings, Yamana Gold.
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