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3 Takeaways From Yamana Gold's Q3 Earnings

Yamana Gold (NYSE: AUY) recently released its Q3 earnings. Reporting a $0.01 loss per share, Yamana came up short of analysts' expectations of $0.05 in earnings per share. But there's much more to a company's quarterly performance than just one number, so let's dig in and mine the report for some of the more interesting nuggets.


Image source: Getty Images.

Mining the production figures

Successfully bouncing back from an unexpectedly poor second quarter, Yamana reported 328,604 ounces of gold production in Q3 -- a 3% increase year over year. Consequently, management affirmed its gold-production guidance for fiscal 2016 of 1.26 million to 1.3 million ounces.

Reporting a 65% quarter-over-quarter improvement in gold production, Chapada -- one of Yamana's three cornerstone mines -- played a pivotal role in the reiteration of management's guidance. In fact, Chapada, which returned to normal throughput levels in September following mechanical failures in Q2, is expected to extend its performance improvement through the fourth quarter and into 2017. 

In addition to Chapada, Yamana reported improved gold production at another of its cornerstone mines: Canadian Malartic. Located in Quebec, the Canadian Malartic mine reported a 5% increase in gold production quarter over quarter. But not all of Yamana's cornerstone mines reported improvements; the El Penon mine, located in Chile, reported a 0.5% decrease in gold production quarter over quarter.

Yamana's three cornerstone mines account for approximately 50% of the company's annual gold production.

Digging out of debt

Building upon its success in reducing its net debt by $286 million through fiscal 2015, Yamana's management identified a new goal at the start of fiscal 2016: a $300 million drop in net debt by the end of 2017. The company took a large step toward achieving that goal during the third quarter, reducing its net by $163 million -- considerably more than the approximate $40 million reduction it reported in the second quarter.

How was the company able to effect such a significant decrease? The largest driver of the reduction was the completion of the sale of the Mercedes mine in Mexico, for which the company received $123 million in cash.

Image source: Yamana Gold corporate website.

As a result, the company ended Q3 with $244 million in cash and cash equivalents. 

Management also acknowledges its strong cash flow as another driver in its ability to reduce its net debt during the quarter. Generating $78.3 million in net free cash flow during the third quarter, Yamana reported only $8.4 million during the same period last year.

Looking a bit at EBITDA

When evaluating a company's finances, oftentimes investors will turn to the company's earnings before interest, taxes, depreciation, and amortization, or EBITDA. Believing this provides a more accurate of a company's profitability than just its net income, investors may weigh this more heavily than other metrics, as it strips away subjective charges, such as depreciation, that afford accountants room for massaging. 

Yamana, for example, reported a net loss of $11.2 million, but this doesn't provide the full picture of the company's profitability. Turning to its EBITDA, we find that the company reported $160.7 million for Q3 -- a 22% increase year over year. The company also benefited from an expansion in its EBITDA margin year over year. Whereas the company reported an EBITDA margin of 31% in Q3 2015, it reported an EBITDA margin of 35% for Q3 2016.

For another perspective on the company's EBITDA, it's important to consider the company's pipeline, since management contends that EBITDA growth will be driven by the organic generation of cash flow. The most advanced project in its pipeline is Cerro Moro, located in Argentina. According to management, the project is ahead of schedule, and first gold production is expected in early 2018. Management estimates annual gold production of approximately 150,000 ounces in the mine's first three years.

The takeaway

Yamana Gold had some cause for celebration in the third quarter. With normal operations resuming at Chapada, the company seems to be back on track. But it's imperative to acknowledge how the company benefited from the market price of gold. During the third quarter, Yamana reported an average realized gold price per ounce of $1,337 -- 19% higher than the $1,122 it reported during the same period last year. It will be interesting to see how adversely this affects the company in the fourth quarter.

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