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Bear of the Day: Yamana Gold (AUY)

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Investors have been fleeing gold investments this year, and the tarnish on the yellow metal has spilled into gold stocks.  Yamana Gold (AUY - Free Report) , Zacks Rank #5, is a Canadian gold producer with operations in the Americas and has been a causality of the bear market in gold.Investors should look to mine for profits elsewhere.

Yamana’s earnings estimates are falling like the price of gold:

Of the ten analysts covering Yamana, six have cut their profit estimate over the past 60 days.  The consensus outlook for 2013 earnings per share has declined from $0.85 to $0.68 or 20% over the same period.  Furthermore, the most accurate forecaster of earnings for Yamana is more pessimistic than the consensus looking for 2013 earnings per share at $0.49, which is about 28% below the consensus view of $0.68.  This raises the prospect for a downside earnings surprise.   The weak trend in earnings estimates bodes poorly for Yamana which has already missed profit estimate four of the past five quarters.  A firm dollar, higher treasury yields, strong equity returns, and talk of the Federal Reserve tapering its asset purchase program have created a bearish cocktail for the gold market and a headwind to the outlook for Yamana’s profits.  Furthermore, India has historically been a large buyer of gold, but the weakness in the Indian rupee has hurt the purchasing power of the Indian consumer.   The Indian government has implemented measures to restrict gold imports in order to reduce India’s current account deficit and the Central Bank of India has curbed the use of credit cards for the purchase of gold items, including jewelry.    Investor distaste for gold may be seen in the liquidation of gold held by the SPDR Gold ETF (GLD).  Gold holdings have declined by almost 389 tonnes or 28.7% since the end of 2012.  At 962 tonnes, holdings are at their lowest level since February 2009.

The drop in gold prices comes after a fall off in free cash flow in 2012:

In looking at Yamana’s financial health, one factor which jumps out in the cash flow statement is the drop in free cash flow (operating cash flow less capital expenditures) in 2012.  Free cash flow was a negative $360 mln in 2012 and was the first negative year since the financial crisis year of 2008.  Lower gold prices could put pressure on cash flow and reduce the ability of the Company to bring new mining capacity on line.  Yamana may also face higher costs due to inflationary pressures linked to input costs and lower copper credits.  The crimping of cash flow and lower revenues from falling gold prices could stall the company’s ability to lift its dividend, which has been growing in recent years.

Looking for alternatives elsewhere:

Until the macro drop for the mining sector becomes shiny and gold can confirm a bottom, buyers in the mining sector may be shy.   Newmont Mining (NEM), Zacks Rank #3, and Freeport McMoran (FCX), Zacks Rank #3, may provide alternatives to Yamana for those who have an appetite for gold exposure.  Yamama’s dip in free cash flow, recent string of disappointing profit releases, and loss of earnings momentum suggest investors should search elsewhere for their pot of gold.

Nick Kalivas is the newest member of Zacks.  He has written numerous articles on investment topics and market strategy.

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