Yamana Gold Inc upgraded to buy at TD

Yamana Gold stockholders believe employee pay should reflect the company's stock performance.

Yamana Gold Inc. was upgraded to buy from hold at TD Securities because it has made several moves which should allow it to focus on key operations and shore up its balance sheet.

Analyst Steven Green also raised his price target on the miner to US$6 from US$5, noting that Yamana’s spinoff of three non-core Brazilian mines into Brio Gold Inc. will eliminate further cash drain and permit management to focus on more important projects.

Mr. Green also highlighted Yamana’s recent $299-million equity financing, which began the company’s delivery process following 2 yrs of heavy capital investments and also the acquisition of Osisko Mining Corp. It had $1.9-billion of net debt at the end of 2014.

Yamana also boosted its debt load between 2011 and 2014 to finance its growth, such as the acquisition of Osisko’s Malartic project, which raised the company’s net debt by roughly $560-million and pushed its balance sheet leverage to the high end in accordance with its peers.

Meanwhile, capital paying for development projects in Brazil along with a sharp decline in commodity prices led to negative free cash flow for the past 3 years.

Mr. Green expects management will focus on further credit card debt reduction, anticipating net debt to EBITDA will dip to some “more comfortable” 1.7x by the end of 2016. That compares having a current pro forma ratio of 2.1x, including the equity raise.

“Regardless of the weak gold prices, Yamana transitioned to free cash flow positive territory in Q4, which we expect continues in 2015 using the focus going back to its key low-cost mines and significant decline in expected capex,” the analyst said inside a research note, adding that net debt should fall to approximately $1.18-billion and it is net debt to EBITDA ratio to 1x.

Yamana’s recent guidance reduction and changes to the way it reports results (straight gold and silver production, rather than gold equivalent utilizing a 50:1 silver ratio) has produced significant declines in analyst estimates, but Mr. Green believes the low expectations are achievable.

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