Digging up the facts on Yamana(YRI)

Investment Opportunity – Yamana(YRI)

Pro:

- Potential natural growth (without further acquisition) of reserves through exploration including a conservative doubling of Pilar’s reserves from 1.5 million to 3 million with up to 5 million)
o This will also serve to increase production in some of Yamana’s smaller mines, thus moving from small to medium sized mines. This may help to improve the market’s perception on the quality of Yamana’s assets.

- Reduction of reliance on Copper as a revenue stream as more Gold based resources come online between 2010 and 2013. This should serve to help the market to see Yamana as more of a pure play on Gold rather than as a diversified precious/base metal producer.

- Technical’s, trending sideways for the last month. Currently in the middle of its 2010 range (12.7 – 9.72; currently at 11.25). However has outperformed: Kinross, Goldcorp, Newmont, and Barrick over this same 1mo period.


- Dividend increase, whilst the dividend yield is not attractive enough on its own to warrant investment in the stock, this increase on the 5th of May is an implicit signal that management expects higher steady Cash Flows, this is accompanied by a better/improving cash position. However plowback is still high (.8623) indicating that management wants to grow this business, perhaps aggressively. This improving financial position should help to eliminate the need for further stock issuance.

- Dog of the industry, being at the bottom of the industry in terms of performance, with seemingly improving financials, and production volumes along with a shrinking reliance of Copper as a source of cash flow, the market may start to increase its support for the stock based on the overall outlook for the company improving.

Cons:

- Divestiture by major shareholders: 5.3 million shares by Pyramis, 6.1 million shares by Fidelity, and 1.1 million shares by Blackrock, and 100k by TD and 170k by Harris Bank (owned by BMO). This is somewhat concerning since Fidelity, Pyramis and Blackrock were some of Yamana’s long time institutional investors.

- Poor Gold Play, as it currently stands, Yamana has given investors very poor exposure to gold. It would appear that the stock has benefited very little in the past year from the appreciation in gold prices in the last 6 mo. If this relationship holds true then Yamana shareholders may stand to gain very little from the medium term bullish sentiment for gold prices. The same can be said for Yamana’s performance compared to Copper’s performance over the same 1 year time period.


- Historical inconsistencies with regards to targets, this may very well be one of the reasons that YRI is trading at a discount to its NAV compared to its peers. The CEO (Peter Marrone) assures us that 2010 will be different, since YRI is already on track for Q2 and missed Q1 targets by 10,000 oz only because of an earthquake in Chile. If YRI misses these targets, the impact on the share price will likely be very detrimental.

- Diversified asset pool, the fact that YRI has many lower capacity mines has been a problem since it can be perceived as ‘more headaches’ by the market. However within this lies an opportunity if YRI can indeed deliver on its promise and expand the production capacity on some of its mines. However as it stands now this is currently a problem.

- Exposure to potentially imminent tax royalty increases, after announcements made by Australia about the consideration of tax hikes, there is a risk that this may spread to South American countries where YRI operates (Argentina, Brazil, Chile). This is an industry wide problem as much as it would be a YRI specific problem.