This is my new series whereby I will be discussing a stock every week. These include the stocks I own in my portfolio or stocks I will add to my portfolio in the near future. In time, I will provide you with an overview of my entire portfolio so you can see the more important picture – the asset allocation and the percentage of each individual stock (rather than the stock itself).

This is one of my favorite stocks as it has already increased by over 100% since my buy but is yet to provide me with its full return potential of another 300%-500% available over the next 3-5 years, for a total anticipated gain of about 400%-700% on my position.

The stock is – YAMANA GOLD (ticker AUY). As it may be inferred from the name, this is a gold miner stock. The purpose of the company is to extract mostly gold and other precious metals such as silver and copper. Given that gold is considered the ultimate hedge against a crisis, I would adjust this statement by saying that “gold mining stocks” are better. This is because while owning gold can allow one to sell this gold at a higher price. Gold miners mine gold at lower prices that we can buy. Moreover, gold miners have added value, i.e. they refine the gold into bullions and sell the refined gold at a much larger profit than the price difference value. As such, they have an economic value added which makes them more valuable than the commodity itself.

0. Key highlights

  • Yamana Gold (AUY) is a value mid term gold company with a potential to increase by a factor of 4-5 from current price of about $5 to $20-25 in the next 5 years
  • In 1 to 3 years it can increase to $13-$15, a factor of 2.5 and 3 increase
  • EPS could increase by factor of 10-16
  • It is one of the only mines in the world with about 60% of its total gold mine not used
  • Three big rallies over the years of 400%, 800% and 1200%
  • Will this rally to be the fourth?

1. Company Profile:

YAMANA GOLD is a Canadian-based precious metals producer with significant gold and silver production, development stage properties, exploration properties, and land positions throughout the Americas, including Canada, Brazil, Chile and Argentina. Yamana plans to continue to build on this base through expansion and optimization initiatives at existing operating mines, development of new mines, the advancement of its exploration properties and, at times, by targeting other consolidation opportunities with a primary focus in the Americas. In 2020, we expect to deliver production of 857,000 ounces of gold and 11.5 million ounces of silver. On a gold equivalent basis, we expect to produce 990,000 ounces (gold plus silver at a ratio of approximately 86.1:1).

Source: https://www.yamana.com/English/company/company-overview/default.aspx

2. Theoretical perspectives behind selection

There is a debate on paper vs physical gold, I will get into that topic too with more details. For now, my thesis is that a total system collapse (of financial markets and the dollar as the world’s reserve currency) of the US is unlikely, so gold will offset inflation but gold miners will produce real return (i.e. inflation-adjusted return) due to their productive capability and economic value added.

1) Austrian economics perspective (medium efficiency) – gold is a good hedge (as total system collapse of the financial system and the dollar is unlikely in the next 5-10 years). Physical gold and gold mining stocks are good choices, but gold mining stocks are better due to higher potential ROI created by economic value added.

2) Elliot Wave theory – markets move in 5 waves – a new bullish 5 wave sequence has begun in 2016 from $1.51 and AUY is headed higher towards $20-$30; or AUY will experience a short-term drop to around $2 and begin this 5 wave sequence in the next couple of years.

4) Socionomic theory – bad news good for stock reversal – negative news on profitability and considered unlikely to sustain positive profitability of Q1 2020. Socionomic theory predicts that one of the best points for stock reversal is having very bad news.

4) Value investing – Low P/B stock = Price to Book = 1.2 = pay 1.2$ for 1 dollar of company assets -> value stock (discounted price)

*A separate article on investment theories will be posted to explain these in further detail.

3. Key characteristics:

  • Current AUY Gold Reserve = 19.4 Million Oz
  • Total AUY Mine Gold reserve = 46.35 Million Oz
  • Remaining Gold in AUY Mine (not yet mined) = 26.95 Million Oz
  • Depleted Gold of mine % = 41.86%
  • Available Gold to mine % = 58.14%

4. Unrealized and profit revenue

  • Unrealized revenue (resource/inventory) = 19.4M Oz x 1500 = $29.100 B
  • Unrealized revenue – future mining: = 26.95 mil Oz * 1500 = $40.425 B
  • Total = about 70 b

5. Revenue impact from unrealized revenue

Table 1.1. Yamana’s Income Statement

No alt text provided for this image

Source: https://s22.q4cdn.com/899716706/files/doc_financials/quarterly/2019/q4/Yamana-GoldInc_FS-Q4-2019_Final.pdf

The key implication is that the current revenue is $1.6 B. The company has yet to reap the rewards of about $40 B from future mining operations and about $30 B from its reserve. This can of course take 100 years but even with 5% of this amount over next 5 years (i.e. about 1% per year), this would be about $3.5 billion in unrealized revenue – section 4 (0.05*70 = 3.5 billion). Based on current revenue, this would represent a 1-1.5x increase in revenues.

The key thing not seen from Table 1.1. is that Yamana offers a direct exposure to gold mining, but partially exposure to silver and copper.

Author note (1) to avoid numerous calculations and not overgrow the potential of the company, the calculations on future growth are based only on growth of gold mining revenue. In reality words, the company has net revenue of $1612.2 million (or $1.6 billion) but $1.2 billion is from gold, while the other 400 millions are from silver and copper.

So let us focus on gold mining as it represents about 75% of the company’s revenue source and is thus more than reasonable to provide us with a basic valuation of this stock.

6. Cost per mining oz

  • Mining cost: 596

7. Current Profitability

  • Profit per oz.= 1500 – 596 – 550 (other costs)= $354
  • Net profit = 220.6 million
  • Profitability 220.6/1262.8 = 17.9% (there is a gap between profitability per oz % and total profitability because of tax, i.e. this is slightly lower)

8. Potential future profitability

Profit assumptions – price of gold to reach $2,000 and $3,000 in next 3-5 years

  • Profit per oz at $2,000 per oz = $854 – calculated as $2,000 – $596 – $550
  • Profit per oz at $3,000 per oz = $1,354 (calculated as $3,000 – $596 – $550)

if at $1,500 profitability is 17%, then

  • profitability at $2,000 should be about 33%-75% (2000-1500/1500=33% 854/1146 = 74.5%)
  • profitability at $3,000 should be about 100-113% (3000-1500/1500 = 100% or 1354 (new profit per oz)/1146 (total cost before profit)

9. Revenue, profit and EPS implications

A 1x x increase in revenue by $3.5 B on $1.6 B = $5.1 B revenue by 2025-2030 (from section 3.)

100% increase profitability assumption base on a price of 3000 per oz (section 5) = 2.55 B profit. An increase from 0.2 B to 2.75 B.

EPS implications

At $2.4. billion profit (net income) this leads to about $322 million (0.3 B) to be paid to investors due to a 12.66% payout of the company’s net income

Total shares outstanding = 952 million

  • Then EPS = net income/total shares 322 M / 952 M = 0.34

*This is not the full calculation as there is dividend but let us exclude this for simplification

From EPS to stock value

Long-term valuation

Current EPS = 0.02

  • Future EPS OF 0.32 means a 16x (0.32-0.02/0.02) increase in EPS
  • This should translate to a $1.51 x 16 increase in share price from low point at about 1.51 to $24.16.

Intermediate valuation

if we take the lower price of 2000 per oz and 75% profitability, then EPS is 0.22 = 10x increase in EPS

Intermediate sales price (at gold price of 2000 instead of 3000) = $15.1 (10×1.151 = $15.1)

*also simplified

But why from low point not current price?

It should be remembered that investing is about anticipating future profitability rather than existing profitability. Some, investors made a bolder bet at the price of 1.51 share believing the stock is undervalued and anticipating growth in the future. Based on these past expectations which came true by today, profitability and price have already increased based on expectations of the future. This means, applying a 15x to current price would not be fair because “smart money” had the first information and committed at the best point.

This however does not mean the stock is still not undervalued. At $5 the stock has the opportunity to increase by over 100% before reaching its intermediate price of about $15 and its long-term target price of about $22.

10. Actionable prices

Buys

My first buy was at 2.4.

Secondary stock buy around at $4-$5 (after initial buying at $2.2-$2.8 in Q1 2020) for long-term growth

Potential third, fourth and fifth stock buy around $2.8, $2 and $1.3 if such an opportunities become available

If prices dip only to 2.8, and not further the fourth and fifth buy will not be executed.

Sales

Intermediate target price = $15.1

Long-term target price = $20 and $24.16

11. Elliot wave analysis (technical analysis)

No alt text provided for this image

Let us look at the four windows from left to right

  1. Bullish (1st window) – a major 3-rd wave to take the stock towards 13.7 and ultimately to $20-$30
  2. Short-term bearish long term bullish (2nd window)- seeing about $6-$7 and revisiting $2-$1.3 before starting the 5 way rally up towards 20-30 again.
  3. Intraday – 5 waves of of a third wave of 5 (window 1) or (5 waves of C) (window 2) – towards $6.3 – $7. The way in which 7 is reached should be predicted by the blue waves pattern.
  4. Indicators – RSI (relative strength index) held support at 40 RSI, so in short-term another push to 70-80 to bring about a price increase to $6.3 or $7 is needed. From there, a drop should follow in both price and RSI. To maintain bullish momentum, however, RSI must not dip below 40 and price should not dip below $2.8 in a significant way. If the drop is significantly below 40, this would trigger further sell off and drive the stock to around $2 or lower before resuming bullish momentum

12. Best and Worst performance

Best performance

  • From 19.4 in 2007 to 4 in 2008; (4-19.4)/19.4 = -79.5%
  • From $20.1 in 2011 in to $1.5 in 2015 = (1.5-20.1)/20.1 = -92.5%

Best performance

  • From $2 in 2004 to $19.4 in 2007 = (19.4-2)/2 = 870%
  • From $4 in 2008 to $20.1 in 2015 = 20.1-4/4 = 427.5%
  • From $1.5 in 2015 to now $4, to potentially $20 by 2021-2023 = 20-1.5/1.5 = 1233%
  • From my price of $2.4 to $20 = 20-2.4/2.4 = 733% potential gain by 2023-2025

13. Advantages and Disadvantages (qualitative evaluation)

Advantages

  • Yamana Gold is the 6th largest gold miner in the world
  • Top 3 in having the smallest depleted percentage of its mines relative to Kinross and Barrick gold (i.e. Yamana is one of the few gold mining companies with above 50% of reserve available to mine) 
  • Lower mining cost in the world even relative to largest player in the world – Newmont Mining (NEM) – 687-761 per ounce
  • Yamana Gold could outperform pure gold mining stocks as it also mines silver which is expected to also increase even more rapidly than gold

*I will post my favorite silver stock in the near future

Disadvantages

  • Smaller reserve relative to Barrick and Newmong Mining can make it more profitable at later stage, i.e. this stock may lag in performance relative to other gold stocks
  • More volatile on the way up, but more volatile on the way down
  • Despite having lowest mining cost per oz, Yamana had experienced significant other costs which allowed it to break even at price of gold of near 1.2k per oz

14. Risk Evaluation and decision-making based on quantitative evaluation

We cannot know whether gold will actually fall to $600-$800 due to deflationary pressure or directly continue to rally towards $2000-$3000 per oz in expectations of inflationary pressure (to tackle the disinflation/deflation situation). These represent alternative case scenarios. So having an initial position which can drop by 50% to make a 100%-200% gain 1-2 years and up to 300%-500% gain in 3-5 years from current prices would still be worth it for me. This represents an informed decision about what might happen and a drop to lower prices can only be welcomed as it provides significant opportunity to average out the price and increase profit potential to 700%-1000% in the next 5 years.

In the worst case, if due to disinflation and deflationary pressure the prices of gold per o.z. drops to $600-$800, this company will still not be in financial trouble, thus unlikely to go bankrupt because it has survived few such periods. However, even if short-term dip potential is unknown, long-term revenue and growth potential is known, thus this is for me is a safe price to buy given the potential risk/reward ratios, industry developments and particular company characteristics.

15. Disclosure

Disclosure: This is not investment advice but rather educational content about why I make certain investment choices. I share this content so you can get to know the businesses I invest in. This is by no means a solicitation to buy this stock. Rather, it is a summed up version of my research behind why I have bough it. Whenever you decide to buy a stock I urge you to do your own (similar or broader) research before making investment decisions.

#stocks #gold #forecast #marketintelligence #money #profit #invest #investing #investment #elliotwaveforecast #value #analysis #stockanalysis #TIA #theinvestmentaddict #finance #research #businessintelligence #socionomics #elliotwave

@waveriderscm

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