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

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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.




Conclusion

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.
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