EUR 850.00 For Business Accounts Only

Morningstar | Yamana’s Outlook Through 2021 Has Little Growth at Middling Costs; Shares Fairly Valued. See Updated Analyst Note from 15 Feb 2019

Yamana finished the year slightly ahead of its guidance, producing more than 940,000 ounces of gold compared with guidance of 920,000. Costs were decent, with Yamana producing at byproduct all-in sustaining costs (AISC) of $835 per ounce. Although 2018 was decent, management’s outlook through 2021 leaves us underwhelmed. The company continues to expect around 950,000 ounces for the next three years, with no development projects likely to drive production growth. Furthermore, costs are likely to rise, as management provided 2019 byproduct AISC guidance of $835 to $890 per ounce.

Our forecast has not changed materially following the 2018 earnings release, so our U.S. dollar-denominated fair value estimates of USD 3 per share is unchanged. Due to slight changes in currency exchange rates, our Canadian dollar-denominated fair value estimate increases to CAD 4 per share from CAD 3.90. Our no-moat rating remains unchanged. At current share prices, we see limited risk-adjusted upside for Yamana.

In December 2018, the U.S. Federal Reserve once again raised the federal-funds target rate by 25 basis points to a range of 2.25% to 2.50%. This was the fourth rate hike of the year. However, the Federal Open Market Committee appears to be taking a more cautious approach to future rate hikes. The dot plot has reflected a meaningful change in expectations. The December dot plot implied two rate hikes in 2019 versus the three hikes that had been implied back in September. Additionally, language in the FOMC statement now takes a softer tone, indicating a more cautious approach to further rate hikes.

The market has taken a bearish view on the FOMC’s more dovish tone. Current interest rate option prices imply a more-than 90% chance that there will be no rate hikes by the end of 2019. Additionally, they reflect a higher probability for a rate cut than a rate hike by the end of the year.

All else equal, a slower rate hike path reduces 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.