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Buy Yamana Gold (AUY)
02/29/2012 3:15 pm EST
I think the strength in the dollar is temporary due, first, to this morning’s announcement by the European Central Bank that European banks had borrowed 530 billion euros under the central bank’s new three-year loan facility. That means the central bank has added 1 trillion euros to its balance sheet since December. The central bank’s balance sheet now stands at a record 2.74 trillion. The currency markets, rightly, feel that this expansion is inflationary down the road.
The dollar’s strength is due, second, to disappointment in this morning’s testimony by Federal Reserve chief Ben Bernanke that the U.S. central bank wasn’t thinking about another round of quantitative easing that would pump more dollars into the U.S. money supply.
On a day when the European Central Bank adds 530 billion euros to its money supply, the Fed seems like a paragon of strong money.
Of course, that’s not really true. The Fed remains committed to 0% interest rates through 2014 and the U.S. government’s fiscal deficit continues to build up debt—and add to the money supply.
Before today’s drop, the U.S. Dollar Index was sinking toward a test of resistance at its 200-day moving average and gold mining stock (represented by the Market Vectors Gold Miners ETF (GDX)) had moved above its 200-day moving average.
In other words, with the dollar falling, gold and gold mining stocks were moving to new highs. I think that pattern will resume after a brief interruption.
The two gold mining stocks that I’d add on this temporary weakness are Goldcorp (GG) and Yamana Gold. Goldcorp is already a member of my Jubak’s Picks portfolio http://jubakpicks.com// with a target price of $55. Today I’ll be adding Yamana Gold with a target price of $21 a share by December 2012 to that 12-18 month portfolio.
Yamana has the elusive combination that I’m always looking for in a gold mining stock. Its cost of production is at the low end for the industry—at $486 a gold equivalent ounce in the fourth quarter for 2011. And its gold reserves are climbing--the company reported a 9% increase in reserves in 2011.
All this is why I added it to my Jubak Picks 50 portfolio on January 13 (http://jubakpicks.com/ )
As I wrote then, low production costs for a gold mining company largely hinge on the richness of the ore grades in its mines. The richer the ore is in gold, the less of it a company has to dig, move, and smelt to recover an ounce of gold. It also helps if the ore you mine for gold contains concentrations of other valuable metals such as copper. Yamana’s flagship El Penon mine in Chile grades out at a high 7 grams of gold per ton of ore. Its Chapada mine in Brazil produced almost 150 million pounds of copper in 2010. Yamana’s Agua Rica mine, now under development, looks likely to contain reserves of 6.6 million ounces of gold and 10 billion pounds of copper. The result of these riches is lower costs.
Yamana is forecast to grow gold production by about 70% from 2010 through 2015 by beginning fold production at its Pilar, C1 Santa Luz, Ernesto, and Mercedes mines by 2013 and by increasing production at existing mines.
In the short-term you want to own Yamana because of that rising production. I’d put a $21 one-year target price on the shares, which traded at $17.25 at 1:30 New York time on February 29. In the longer-run you want to own Yamana because of that rising production and the almost 100% certainty that all the money being added to the global balance sheet by the Federal Reserve, the European Central Bank, and others will eventually produce rising inflation and falling currencies in the developed world.
One last thing, Yamana Gold raised its dividend by 10% on February 22. The new annual yield of 1.3% isn’t much to get excited about (although it does beat the 0% paid by physical gold), but it is an indicator of the company’s faith in its prospects going forward.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Goldcorp and Yamana Gold as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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