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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

Comments are welcomed!

Wednesday, March 10, 2010

Perspective: Macro Strategist Don Coxe

BNN interviewed Don Coxe yesterday. Mr. Coxe is strategy advisor at BMO Financial Group and Chairman, Coxe Advisors LLC. Mr. Coxe, a 37-year veteran of the Canadian investment community, is a favorite macro strategist of mine and he aptly sums up the state of the world economy and where it is headed in the future.

His investment strategy theme is “Chindia’s necessity is the mother of investing,” a take on Thorstein Veblen’s early 20th century observation that “necessity is the mother of invention.” What Coxe is trying to convey is that we will continue to see a bifurcated market in which commodities continue to do well because of China’s and India’s (Chindia for short) demand for raw materials. He believes the economic recovery in Chindia is real and that demand for hard assets will continue to expand.

Coxe points to the problems of the West that will continue to hold back industrialized economies. The problems include a debt-laden consumer, sharply lower housing values, a trillion of toxic assets at the big bailout banks in the U.S., and the aging of the population in Europe and the United States.

He sees the bulks (iron ore, coal) doing very well going forward, citing a recent 20 percent price increase for iron negotiated by BHP Billiton (BHP) as evidence that Asia will continue to pull the world out of its economic malaise. Copper permeates the global economy, says Coxe. He talks about copper being another leading indicator signaling recovery for the world economy.

A bet on base metals is a bet on China. A bet on precious metals is a bet on Obama -- Don Coxe --

His take on gold is that the breakout above $1,000 an ounce occurred when the two biggest demand markets—the jewelry industry and Indian brides—were falling off. Major central banks had stopped selling gold and India’s central bank even made a huge purchase from the IMF. Coxe indicates that gold is a barometer for relative values because it is a store of value. Gold doesn’t make you rich, it protects what you have. In a recent report, he writes that “Gold is an absolutely necessary component of any wealth building strategy.”

Another thread that he expands on is that there is a tremendous level of financial paper throughout the world with counterparty risk. Counterparty risk is the risk that someone can’t pay back a loan. As a result, this means the paper (loan agreement) is only as good as the credit quality of the debtor. Coxe states that gold has no counterparty risk. As a safe haven play on extraordinary levels of public debt in U.S. since the Obama Administration has taken power, the price of gold has broken and stayed above $1,000 an ounce.

Gold is a bet that paper money isn’t a good bet.” -- Don Coxe --

He also expects there will be increased consolidation in the gold mining industry with majors cleaning up their balance sheets, paying down their debts, and building cash in preparation for acquisitions. As always, he offers his preference for gold companies with “unhedged reserves in the ground in politically safe areas of the world.”

Emerging gold producers with large and expanding reserves look like good plays if Mr. Coxe is correct.

Never invest on the base of a story on page one, you invest in a story on page 16 on its way to page one. -- Don Coxe --

Give it a listen, I think you’ll enjoy his perspective.

Source: BNN

Saturday, March 6, 2010

Yamana's Q4 2009 Earnings Review: Disappointing Results

Mid-tier producer Yamana Gold ($AUY) released earnings after the market closed on Wednesday, March 3. The company reported 14 cents per share, adjusted for special items, for the fourth quarter and 47 cents per share for the full year in 2009. On average, analysts were expecting 15 cents per share in profits for the fourth quarter and 48 cents for the full year.

Yamana shares sold off 4.6 percent on Thursday reflecting shareholder disappointment and lower gold prices. Gold also sold off about 1 percent on Thursday. The stock closed down 0.6 percent on Friday to end the week at $10.55 a share. Yamana is considered a premiere growth play in the gold mining sector among producers of 1 million ounces of gold annually. The fourth quarter report tarnishes this reputation for the near term.

Production Increases

The company announced that production for 2009 included 835.2 thousand ounces of gold and 10.5 million ounces of silver. This production level represents a 19 percent increase over 2008 in gold equivalence ounces (GEO). Yamana reiterated its production forecast of 1,030,000 to 1,145,000 GEO for 2010 and 1,045,000 to 1,150,000 in 2011. The 2013 production target is 1.5 million GEO, up 46 percent from 2009 levels.

Higher Operating and Administrative Costs

The penny earnings miss was due to higher cash operating costs and increased expenses in selling, general and administrative (SG&A) activities. The cash cost per ounce was $366, above analyst estimates of $348 an ounce. Executive bonuses also drove SG&A costs higher.

Co-product cash operating costs are not likely to show improvement for Yamana in 2010 from the fourth quarter unless they are able to process higher grade gold ore. Cash costs are projected to stabilize or could edge lower in 2011 if the company can increase the grade of ore processed.

2009 Annual Results

Yamana reported earnings of $192.6 million or 26 cents per share in 2009, compared to $434.8 million or 62 cents per share for 2008. Earnings from continuing operations were $211.8 million or 29 cents per share, down from $479.4 million or 68 cents per share for 2008. Earnings for the year, excluding special items, rose to $346.1 million or 47 cents per share from $281.2 million or 40 cents per share in the previous year. The consensus average earnings estimate was 48 cents per share for 2009. Revenue in 2009 increased 25 percent to $1.18 billion from $950 million in 2008.

RBC Downgrade

Yamana was downgraded to Sector Perform from Outperform at RBC Capital after the company released the Q$ report. RBC also lowered its target price to $13 from $14 a share.

2010 and Beyond

Stable cash flow and steady marginal growth in production are keys to the Yamana’s immediate corporate strategy for 2010 and 2011. Beyond 2011, the company is developing several properties and projected to eventually expand production to 1.7 million GEO. The illustration below from a February 2010 Yamana Gold presentation provides a list of the projects under immediate development, with expected annual production and start-up dates. Also provided on the illustration below are longer term (intermediate development) projects that the company has planned.


Yamana has been a darling of gold stock investors for several years as it grew from an ambitious junior producer to a solid mid-tier growth gold miner. They built a solid reputation of exceeding expectations year after year. Over the past year or so, the company has missed forecasts and the share price has stumbled. Management’s task now is to restore its luster of the past by executing its ambitious, but attainable, strategic plan.

Yamana Gold is projected to achieve 1.5 million GEO of production by 2013. If management does what it says it wants to do, Yamana Gold remains a solid growth pick for long term investors looking forward to 2012 and 2013.

Check out the Gold Stock Strategist newsletter for top picks in three risk-based categories of gold mining stocks—conservative, growth, and speculative. One speculative pick, Castle Gold, soared 100 percent in just 5 months!

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