There are basically three different categories of
gold companies; the small cap exploration companies,
mid-cap juniors and the large-cap major gold producers.
If you are going to invest into the highest return
and risky category you go with the exploration companies
which traditionally way outperform the other groups
in a rising gold market – or go broke trying
to find gold. These small caps may have some working
gold mining operations, but they do not have a lot
of gold already found and being mined, and thus not
a lot of profits to fund exploration and the bottom
line. Their upside potential is a factor of finding
more gold. The major large-cap companies have the
proven reserves and pump out the gold and the profits
non-stop. These large caps will perform well in this
rising gold price environment as long as they execute
well with this category having the least amount of
risk connected which translates into less potential
return.
For the best balance
of risk exposure and potential upside, I prefer the
mid-cap category. My favorite gold miner WAS a mid-cap
company.
Last year Yamana
Gold (NYSE: AUY) bought two other mining companies;
Northern Orion (NTO) and Meridian Gold (MDG) and graduated
to become the newest large-cap. As a result of this
the P/E ratio for AUY is the lowest among the major
gold producers.
First, lets review the 7 Golden Rules from
my previous article and see where AUY stands;
Rule
1) Location, Location, Location.
Yamana has production
and development operations in Brazil, Argentina, Chile,
Honduras, Mexico and the United States. All of these
governments are democratically elected, politically
stable and developed to different degrees as capitalistic
in nature with relatively free markets. Being politically
stable is the most important factor as it minimizes
the probability of a coup, junta or dramatic change
in the country’s leadership. GRADE:
A
Rule
2) He who has the Army makes the Rules.
There is no Hugo
Chavez, Fidel or Raul Castro, Vladimir Putin, Hu Jintao,
Kim Jong Il or Evo Morales running any of these countries.
In other words, there are no despots, dictators, communists
or socialists with enough power in any one country
that can wake up one day and decided to steal a gold
mine. GRADE: A
Rule 3) How
Deep does a Gold-digger Dig if a Gold-digger does
Dig Gold?
Of all the large-cap
gold miners Yamana has the lowest cost per ounce of
mining gold. As a result of by product (copper, silver,
etc…) production. Yamana actually has a cost
of negative $20 an ounce to mine gold. Only Agnico-Eagle
(NYSE: AEM) has a per ounce cost less than $200 an
ounce (AEM cost - $48/ounce) among all the rest of
the large-cap gold miners. GRADE:
A+
Rule
4) Hedge Hogs.
Yamana is currently
completely un-hedged as far as its future gold sales
are concerned. Recently Yamana hedged some of its
forward copper production. GRADE
B+
Rule
5) As Long as there is Life there is Hope.
Yamana’s
recent acquisitions of Meridian Gold and Northern
Orion greatly increased their overall proven and probable
reserves as well as further diversifying their portfolio
of mines. Yamana has a goal of producing 2.2 million
ounces of gold per year by 2012. Buying these companies
was a great move and it not only increases the gold
they have in the ground, but also the companies they
bought were all involved in South America and places
that Yamana already knew well and had mines in. This
allows for combining some logistical operations and
synergy for cost savings. Along with many proven producing
mines providing cash flow and profits, Yamana has
promising mines in the developmental stage. If we
were evaluating pharmaceutical companies this would
be metaphorically the same as talking about their
‘drug pipeline’. GRADE
B+
Rule
6) Variety is the Spice of Life.
Yamana is currently
operating 10 gold mines located in 6 different countries
along with 4 mines in the developmental and advanced
exploration stages. GRADE
A-
Rule
7) Knowledge is Power
Yamana has a strong
management team experienced not only in operating
a gold mine but also in the development of new mines.
There is a difference in the skill set needed to operate
a proven mine as opposed to that needed to develop
a new mine and their management team has both. While
Yamana has missed their estimated earnings numbers
in the past, the current combination of NTO and MDG
and the high levels of the price of gold will result
in a dramatic rise in their profit levels. Management
seems to be not as deft at managing the street’s
expectations and needs to temper Wall Streets analysts
more effectively. GRADE:
B-
OVERALL
GRADE: A-
Yamana has a great
mix of operating mines in favorable countries, mine
diversification, low-cost production, low relative
valuation and good potential for future growth with
an active exploration and development program. Should
Yamana experience P/E expansion as they settle into
the large-cap sector, which commands a higher P/E
valuation than the mid-caps, while the price of gold
rises, the stock has the potential to move much higher
and outperform those in its group.
With inflationary
pressures becoming a back seat issue at The Fed as
they rescue the banking system and the housing market,
gold is expected to rise in price. Gold is also considered
to be a hedge against worldwide political unrest.
Possible future events such as another war in Lebanon,
Israel trying to take out the Iranian nuclear program
(if not the United States), escalation of tensions
in Palestine, the Sunni-Shiite civil war erupts in
Iraq, having another promising world leader like Benazir
Bhutto being assassinated, war in the Sudan, etc…
would give gold more of a tailwind to climb higher.
And finally, one of the biggest reasons we are going
to see commodity prices stay high for a long time
- the emergence of a middle class in China and India.
'The Economist' stated that over the last ten years
China has created a 'middle class' of about 200 million
people. What happens now that they have a few yaun
in their pockets and can buy a gold chain?
Obamanomics
– Senator Barrack Obama is starting to look
like at least the Democratic nominee for President
of the United States and possibly the next President.
His plans of higher taxation and increased social
spending could cause for even more of a budgetary
deficit which would cause gold to rise even higher.
Now
lets take a look at the chart!
The blue lines
are Yamana's uptrend lines. As a stock takes off the
uptrend lines become more and more vertical. The more
highly sloped trend line is a 'confirmed' trend line
- meaning that it has three points where the trend
line is tested and holds. 1-2-confirmation-3! Confirmed
trend lines are strong and show you where to get into
a stock if it ever pulls back to that line. Trendlines
can also tell you when a stock that is rising is slowing
down or reversing and thus when to take profits.
On Thursday, February
28th, Yamana broke out and closed at an all time high.
While a lot of people are leary to buy a stock at
an all time high, a stock that breaks out and moves
to an all time high is telling you that it is strong.
The horizontal
green lines are support lines. You can see that these
support lines are drawn from previous tops on the
chart. Also, after the tops were made you can see
how subsequent gaps lined up with these tops. Gaps
can be support or resistance, and when a stock gaps
up and trades back down to that gap, it will hold
as support. When a stock gaps down it becomes resistance
to a stock that trades back up to it. On the top most
green line you can see how, after a gap down, the
next two rallies back to that gap are held back by
that gaps resistance. Once that 17 resistance gap
was broken it becomes support as per the Change of
Polarity Principle and the fact that there were previous
tops that lined up at that exact same level.
Buying Yamana
at a pullback to 17, as long as the blue uptrend line
is not broken to the downside, would be a great entry
point - if it comes back that far. Notice there is
another gap on the breakout that has already halted
a sell off in the stock once. To learn more about
trend lines, gaps, the Change of Polarity Principle
and support visit www.StockTradingCards.com.
This
is a strong chart!
If you want
to go gold – go Yamana!
To learn more about Support, Resistance and Trend
Lines see Stock Trading Cards T1 through T9 and watch
Lecture 3. Visit www.StockTradingCards.com
~ Robert Perrego
Disclosure - I and my family,
and some of my friends, own Yamana stock and Yamana
stock call options
3/1/2008 10:04:20 PM
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