Always Hard to Judge a Bottom
02/21/2014 10:30 am EST
Will the recent rally in gold hold, or will it retreat again before the end of the year? Although the market is divided on the answer, MoneyShow's Jim Jubak still offers his best projection.
It's always hard to judge the bottom of a cycle—and it's certainly hard for gold right now. I suspect that the recent rally in gold, to a close of $1,320.90 an ounce on February 20, isn't likely to hold and that we'll get a retreat back below $1,200 before the year is done. But that's only my best projection, and the market is deeply divided right now, between analysts calling for gold to move higher from here (and to finish 2014 higher), and those projecting an end of the year price at $1,050 an ounce, or so.
In this context, I can't say whether this is the time to start buying shares of Yamana Gold (AUY). If gold moves lower, so will the shares of gold miners. Those shares have, by and large, outperformed gold itself in 2014.
But I do think that Yamana's fourth quarter earnings report, announced on February 19, does represent something very like a bottom for the company: big impairment charge, big cuts to capital budget and to the dividend, and what looks like a stabilization of the all-in cost of production at a very low level.
Impairment for the quarter came to a whopping $682 million against operations in Brazil because of a delay in starting operations and against several exploration projects. That took the loss for the quarter to $536 million. Excluding these items, the company earned 5 cents a share in the quarter, down from 26 cents a share in the fourth quarter of 2012.
Gold reserves fell by 8%. That is a relatively small reduction, in comparison to those being declared by other gold miners recently—Goldcorp (GG), for example, declared a 15% reduction in reserves. Yamana Gold has been relatively aggressive in cutting the price assumptions it uses in calculating reserves (at $950 an ounce versus $1,300 an ounce at Goldcorp), so the low price of gold in 2013 has relatively less effect on Yamana's reserve calculations.
For the year, Yamana reported that it had reduced exploration spending to $30 million, a 50% reduction from 2012, and that total capital spending of $1 billion in 2013 would fall to $480 million in 2014. The company also announced a big 42% cut to its dividend, to an annual 15 cents a share. All-in sustaining costs fell to $947 an ounce in 2013 thanks to cost cutting, and the company projected that all-in sustaining costs would dip further to $925 in 2014. Production in 2014 will climb, the company projects, by 200,000 ounces.
To me, this adds up to a lot of bad news, and while I can imagine another batch of negatives if gold plunged below $1,000 an ounce, I think this is enough to mark a bottom for Yamana. Given the uncertainties of the price of gold, I don't think I'd back up the truck right now, but I'm certainly going to continue to hold the shares in my Jubak's Picks portfolio. I'd buy more if the price fell to $9.50 or less. And I'm keeping my target price at $14.50 a share, although I'm stretching out the schedule for that price to November 2014.
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Goldcorp or Yamana Gold as of the end of December. For a full list of the stocks in the fund see the fund's portfolio here.