Yamana Gold Inc. a Hot Precious Metal Penny Stock
Bigger is not better. You can’t always judge a penny stock by its share price. Yamana Gold Inc. (NYSE:AUY, TSE:YRI) is an excellent gold mining penny stock with a lot of upside potential in 2017. The company’s share price increased approximately 17% in January and remains bullish. That said, there are some critical factors that could propel Yamana Gold’s share price considerably higher in 2017.
At the end of 2015, most analysts on Wall Street were calling for gold prices to fall about five percent in 2016. They were wrong; gold ended the year up 8.4% at $1,151.00 per ounce. Gold prices soared in early 2016 on fears of a global recession and continued weakness in the U.S. economy. By July, gold prices had surged almost 30% to a high of $1,377.00 per ounce.
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But gold prices began to slide in the back half of the year. In early October, gold prices plunged by the most in 15 months as it looked more and more likely that the U.S. Federal Reserve was going to raise rates. This cobbled the demand for non-interest bearing assets like gold and silver.
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Precious Metal Analysis: Keep Gold and Silver on Your Radar in 2017
Gold prices took another tumble in the weeks following President Donald Trump’s election victory. After digesting the win, investors decided they liked Trump’s economic action plan. It has been widely held that his economic policy will lead to a wave of economic growth and be good for corporate America.
Even the International Monetary Fund (IMF), World Bank, and Organisation for Economic Co-operation and Development (OECD) agreed that Trump could be good for the global economy. The IMF upgraded its U.S. economic forecast, saying U.S. gross domestic product (GDP) will grow nearly half a percentage point faster over the next two years, expanding at 2.3% in 2017 and 2.5% in 2018. (Source: “World Economic Outlook January 2017,” International Monetary Fund, January 16, 2017.)
In November, the OECD said Trump’s planned tax cuts and infrastructure spending will help the U.S. economy advance by 2.3% in 2017 and 3.0% in 2018. Strong economic growth from the world’s biggest economy will help global GDP increase by 3.3% in 2017 and 3.6% in 2018. (Source: “General Assessment Of The Macroeconomic Situation,” Organisation for Economic Co-operation and Development, November 27, 2016.)
Despite the growing optimism on Wall Street, gold prices have been bullish in 2017. Gold prices have risen to a near-three-month high near $1,240.00 per ounce on growing political and economic uncertainty, a weakening U.S. dollar, and overvalued stocks.
The Fed didn’t raise rates at its last meeting, and bets on how often the Fed will raise rates in 2017 is open for debate. Cooled projections for the U.S. economy also weighed the U.S. dollar down.
Then there are uncertainties about President Trump’s economic and foreign policies. There is a lot of controversy about Trump’s temporary travel ban on seven countries. Trump’s “America First” platform is also causing some to fear a trade war with China.
Political uncertainty in Europe and weaker economic output and construction has dashed prospects for solid economic growth in the fourth quarter of 2016 and 2017. Keep in mind that Europe is the world’s biggest economic region. A continued slowdown in Europe could drag down the global economy.
Lastly, U.S. stocks are significantly overvalued. According to the Case-Shiller cyclically adjusted price-to-earning (CAPE) ratio, the S&P 500 is overvalued by almost 79%. The ratio has only been higher, longer, twice–in 1929 and 1999.
All of this has boosted the appetite for safe-haven assets like gold.
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How high will gold prices go in 2017? Many see gold prices hitting last year’s high at around $1,375.00 per ounce. That would represent an 11% gain from today, where gold is trading hands at $1,250.00 per ounce.
There’s a better way to take advantage of the momentum in gold prices, and that’s with gold mining stocks. That’s because gold mining stocks tend to outpace the advances in physical gold prices.
In 2016, gold prices ended the year up 8.4%. Over the same time frame, the Market Vectors Gold Miners ETF (NYSEARCA:GDX) ended the year up 48.5%.
Why?
An increase in gold prices from $1,000.00 to $1,200.00 represents a gain of 20%. If it costs a company $700.00 to mine an ounce of gold at $1,000.00, the profit is $300.00. If gold rises to $1,200.00, the profit is $500.00. That’s a 66% increase in profits off a 20% increase in gold prices.
Yamana Gold Inc. a Golden Opportunity in 2017
Yamana Gold is an excellent precious metals penny stock with a lot of potential in 2017. Yamana Gold’s share price has pretty much tracked the movements of gold. For the reasons mentioned above, however, it performed a little better.
In 2016, a year when gold increased 8.5%, the company’s share price ended the year up 47% at $2.81 per ounce. In the first six weeks of 2017, physical gold prices have increased 7.6% to around $1,240.00 per ounce. Yamana’s share price has climbed 24% to approximately $3.52 per share.
However, 2017 could be the year that Yamana’s share price really rewards investors and breaks free from the movement of gold.
For starters, Yamana has been improving its operations and making strategic acquisitions, including Riacho dos Machados, a gold and copper mine, which could double its output to 100,000 ounces per year. Yamana Gold Inc. is also looking to bring new production online in 2018 and 2019.
Toronto, Ontario, Canada-based Yamana Gold has a diversified portfolio of sustainable gold properties, industry-low cash costs, and operations in the world’s most stable mining jurisdictions.
The company has seven revenue-generating mines, three mines in development, and a large number in the exploration phase. The company’s current or targeted production profile is of at least 130,000 ounces of gold per year. (Source: “Our Portfolio,” Yamana Gold Inc., last accessed February 9, 2017.)
Of particular note, on December 23, 2016, Brio Gold Inc (TSE:BRIO), which was once in Yamana’s portfolio, became a standalone public company in which Yamana currently retains approximately 85% ownership.
Brio Gold has three operating mines (Pilar, Fazenda Brasileiro, and Riacho dos Machados) and is advancing the re-commissioning of another mine (Santa Luz). In 2016, Brio Gold produced approximately 190,000 ounces of gold. In 2017, production is expected to increase to 223,000–243,000 ounces. (Source: “Yamana Gold Provides Preliminary 2016 Operational Results,” Yamana Gold Inc., last accessed February 9, 2017.)
Overall, Yamana Gold has 4.86 million ounces of gold proven reserves and 11.02 million of probable reserves, for a combined total of 15.89-million ounces of gold. Proven silver reserves are 6.79-million ounces and probable reserves are 91.3-million ounces, for a combined total of 99.09 million ounces of silver. Proven copper reserves are 1.58 million pounds and probable reserves are 1.47 million pounds, for total proven and probable reserves of 3.05 million pounds. (Source: “A Proven Track Record of Increasing Our Mineral Resource Base,” Yamana Gold Inc., last accessed February 9, 2017)
According to the company’s preliminary 2016 operational results, Yamana expects to deliver gold production in line with expectations of approximately 1.27 million ounces of gold, seven-million ounces of silver, and 116-million pounds of copper. (Source: “Yamana Provides Preliminary 2016 Operational Results,” Yamana Gold Inc., January 11, 2017.)
Full-year production costs are also in line with expectations, with total costs of sales per ounce of gold sold of approximately $1,011.00 and all-in sustaining cash costs per ounce of gold produced of $914.00.
During the year, Yamana streamlined its operating asset portfolio through the sale of the Mercedes Mine ($140.0 million) and by Brio Gold Inc going public. Yamana Gold also advanced the Cerro Moro mine toward production in early 2018. Located in Argentina, Cerro Moro is a gold-silver project. In the first three years of production, Yamana expects to produce 150,000 ounces of gold and 7.2 million ounces of silver. (Source: “Cerro Moro,” Yamana Gold Inc., last accessed February 9, 2017.)
Critical Factors Could Send Yamana Gold Soaring
In addition to the reasons mentioned above (geopolitical and economic uncertainty, currency headwinds, and overvalued stocks), there are some other critical factors that could send investors running to safe-haven investments like gold in 2017.
One factor, in particular, is President Trump’s proposed tax cutting and $1.0-trillion infrastructure spending plans. While the plan will certainly create jobs, it will also have the added benefit of increasing the national debt well above its $20.0-trillion level.
According to the Congressional Budget Office (CBO), Trump inherited a national debt above $19.0 trillion, a 2017 deficit of $559.0 billion, and a still sluggish economy. The CBO believes that on its current course, without any input from Trump, the public debt will climb by another $10.0 trillion. With Trump’s tax cutting and increased spending plans, the national debt will climb by an additional $6.0 trillion over the next decade. (Source: “The Budget and Economic Outlook: 2017-2027,” Congressional Budget Office, January 24, 2017.)
By 2027, the U.S.’s gross debt will grow from $20.0 trillion to $30.0 trillion, and debt held by the public could rise from $14.0 trillion to almost $25.0 trillion.
Rising national debt troubles, coupled with rising interest rates, could send consumer confidence levels lower and investors seeking comfort in gold.
On the near horizon, Trump’s protectionist policies could set off a trade war with China, one which would hurt growth in the world’s two biggest economies. If Trump imposes a tariff against China of up to 10%, its exports to the U.S. could fall by as much as 25%. In a tit-for-tat scenario, if Beijing retaliates, U.S. economic growth could retrace by a quarter percentage point. Keep in mind, the U.S. economy grew just 1.6% in 2016. (Source: “Goldman Sachs claims Donald Trump trade war would hurt US and Chinese economic growth,” Independent, February 8, 2017.)
Thanks to Yamana’s low operational costs, strong production, development, and acquisitions, investors could easily see this penny stocks share price double from today’s $4.50 level.
