Recently reporting its first-quarter earnings, Yamana Gold (AUY) booked a loss of $0.01 per share, coming up short of analysts' consensus estimate of $0.02 per share. There's much more to a company's quarterly performance than just one number, however, so let's dig in and take a closer look at how one of the leaders in the gold-mining industry fared in its first quarter.
Staying on track
Since management has revealed its plans to forego acquisitions and pursue organic growth, many investors are focused on how well Yamana is executing on the projects in its pipeline. Fortunately for investors, this can be chalked up as a success for the quarter.
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According to management, development of Cerro Moro -- pegged as the company's next cornerstone mine -- continues to remain both on schedule and budget. In fact, Yamana reported that some aspects are progressing ahead of schedule -- namely, site construction and detailed engineering plans. Located in Argentina, Cerro Moro is still expected to begin gold production in early 2018.
In addition to advances at Cerro Moro, project development at Chapada progressed as expected. For example, Yamana completed the commissioning of the cleaning circuit expansion project, and management still believes the project -- expected to improve both gold and copper recovery -- will be completed in the fourth quarter.
Great expectations
Exceeding expectations for the first quarter, Yamana reported gold production of 215,647 ounces. Although the company reported decreases in year-over-year gold production at four of its mines -- Chapada, El Penon, Minera Florida, and Canadian Malartic -- this was offset by increased production at Jacobina and Gualcamayo.
Of the four mines which reported decreases, El Penon was the most significant -- due, in part, to an interruption of operations related to disputes with two labor unions representing underground workers. The mine's gold production, 40% lower compared to the same period last year, was largely anticipated -- the result of a new production plan.
Yamana's unexpected overall performance was so significant that management increased its guidance for fiscal 2017. Whereas it had originally forecast gold production to be 920,000 ounces, it now expects gold production to total 940,000 ounces.
Digging into earnings
Reporting revenue of $403.5 million, the company achieved a nominal year-over-year improvement on the top line -- a 0.65% increase over the $400.9 million which it reported in Q1 2016. This increase, however, didn't translate to the bottom line; Yamana reported a $5.9 million net loss in the quarter.
Since Yamana posted net earnings of $36.1 million during the same period last year on comparable sales, it's understandable that some investors are disappointed. Perhaps for some, even more concerning than the lack of earnings is the company's cash flow in the quarter. According to Morningstar, Yamana reported negative free cash flow of $78 million. The last time the company reported negative free cash flow was in Q3 2015.
Of course, failing to generate free cash flow is rarely a good thing, but it's even more concerning for Yamana. One of management's goals is to strengthen the company's balance sheet by achieving a $140 million reduction in net debt by the end of fiscal 2017. And how will the company realize this goal? According to Yamana's 2015 annual report, management expects to reduce debt through the "organic generation of cash flow."
Investor takeaway
With co-product all-in sustaining costs (AISC) for Cerro Moro to be less than $600 per gold ounce and management counting on the mine to contribute to revenue, earnings, and cash flow increases, it's assuring to see that the project's development remains on track. Over the next few quarters, investors will want to continue monitoring the mine's progress, as it will play a prominent role in the company's future.
Additionally, investors should keep an eye on Yamana's free cash flow growth. Management contends that the lack of free cash flow in the first quarter was due in part to "net changes in working capital, associated with timing of payments or collections." Furthermore, management estimates that the adjustments to working capital will reverse throughout the year; consequently, investors should confirm free cash flow returns in the coming months.
