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Morningstar | Yamana’s First-Quarter Results Don't Inspire Optimism About Its Prospects; Shares Fairly Valued

During the first quarter of 2019, Yamana produced more than 270,000 gold equivalent ounces (GEO), roughly 30% above production in the prior-year period due to the opening of Cerro Moro. The new mine also helped bring companywide costs down, with cash costs falling 5% over the prior year to $666 per GEO and all-in sustaining costs (AISC) falling 6% to $930 per ounce.

However, beyond the opening of Cerro Moro, we don’t see a lot of opportunity for expanded production or lower costs over the near to medium term. Yamana’s three-year production outlook affirms our concerns, with implied production growth of just 3.5% from 2019 to 2021. Combined with the recent underwhelming sales price the company received for Chapada, we don’t see any positive catalysts on the horizon.

We’ve lowered our fair value estimates slightly to $2.30 and CAD 3.10 per share, down from $2.40 and CAD 3.20, respectively. Our no-moat rating is unchanged. Shares look roughly fairly valued on a risk-adjusted basis.

After last raising the interest rate in December 2018, the Fed has paused its increases, leaving the federal-funds target rate at a range of 2.25% to 2.50%. Amid signs of a slowing economy including slowing consumer spending and business investment, the Federal Open Market Committee, or FOMC, now sees no rate hikes in 2019. The dot plot has reflected a meaningful change in expectations, as the December dot plot implied two rate hikes this year.

The market view is even more bearish. Current interest rate options not only imply no chance of a rate hike but more than 50% chance that there is at least one rate cut by the end of 2019.

All else equal, the turn in the Fed’s sentiment on its rate hike path has reduced the downward pressure on investment demand for gold that we’ve observed over the last few years. However, the FOMC would likely return to rate hikes if inflation were to strengthen due to stronger economic growth. Although pressure on investment demand for gold has softened, we don’t expect a strong resurgence in the near future.

On the back of stabilizing investment demand, gold prices have settled in the high-$1,200 to low-$1,300 per ounce range, falling roughly in line with our forecast for a nominal gold price of $1,300 per ounce by 2020.