The hits keep on coming for the battered Yamana Gold (AUY) . On the whole, there was a lot to be happy about in the company’s Q3 earnings report. Gold production was up over 25% year-over-year to just shy of 400,000 ounces, and revenue spiked just under 10% to over $500 million in that same period. Good signs, right? Reason for hope after just a brutal 2013, right?
Well, unfortunately for Yamana’s shareholders, these positive developments were largely (pretty much entirely) overshadowed by a wee little impairment charge in the $600 million-plus range that resulted in a net loss of $1 billion for the quarter that had the stock down over 14.5% in Thursday trading.
Gold Prices, Capital Expenditures Making Gold Mining a Tough Business to Be In
Yamana certainly picked a bad time for the writedown related to its three Brazilian mines and the new taxes in Chile. The company had just swung back into profitability in Q2 following a FY 2013 that saw the company post steep losses (driven mainly by a really bad Q4) as gold plunged almost 30% over the course of the year (continuing its lengthy decline from peaks in 2011 around $1,900 an ounce).
Gold prices certainly seem to have found a relatively stable trading range between resistance at about $1,400 an ounce and support at $1,200, which at least means mining companies are protected from volatility for now. But it’s gold, after all, so who knows how long this will last. After all, there’s still a shockingly large contingent of otherwise rational people waiting on the United States to return to the gold standard and gold to shoot to $10,000 an ounce.
But the markets clearly aren’t interested in the long-term outlook, which, again, is arguably not THAT bad for Yamana if you really do consider the losses as one-time writedowns and focus on the revenue and production growth. The big sell-off would seem to indicate that patience is wearing thin.
Not a Great Stock to Own These Days…
Shareholders of Yamana have been suffering a lot lately. From a peak in November of 2012 of over $20 a share, the company has lost over three-quarters of its market cap to a current share price just over $4.50 a pop. And, as much as that might hurt, one thing lost in the major writedown was a big cut to the company’s Q4 dividend.
Yamana announced a Q4 dividend of $0.015 a share, its lowest level since 2010. And for a stock that has clearly not been returning value to shareholders over the last couple years by way of rising share prices or promising margins, dramatically slashing its dividend is really just cutting off one of Yamana’s last legs to stand on.
…But, As Always, That Could Turn Around
However, in the spirit of it always being darkest before the dawn, some would indicate that today’s price crash could easily mean a solid time to buy into the stock.
Obviously, if one runs off investing in every company that looks oversold in the immediate aftermath of a lousy quarterly report, you’re probably not going to be very happy with the results. However, the idea that the market’s present reaction could be overdoing it, especially given that there’s reason to believe this is a more temporary issue, is not completely irrational.
The stock’s technicals are currently pointing to the stock being oversold and having been for some time. The 14-day RSI was under 30, traditional oversold territory, for almost all of September and, while creeping back over 30 for October, has stayed just at or just under that level for the last 60 days. Today’s slump has pushed things down closer to 20.0. Add to that the stochastic 14-day RSI, which was firmly below the 0.20 barrier for all of September and you’ve got a picture of a company that’s been taking a beating for a long while now.
September’s lengthy sell-off could be related to the 20-day SMA crossing the 50-day SMA from above early in the month. However, October saw the MACD line cross the signal line from below early on. Today saw it cross from above again, which is a sell sign, but it was clearly driven by the selling sparked with the Q3 report.
Much of Yamana’s future is tied to gold prices. That should come as a shock to all of no one. That’s not exactly comforting because who knows where the price of gold is headed. It could still be oversold from people bailing starting in late 2011 and poised to bounce back, and it could just as easily be hovering prior to crashing further. Then again, it could also just be finding a consistent price channel that will hold for some time.
However, this earnings report could indicate that, even if things hold steady, Yamana could be profitable into the future. And if gold ends up bouncing back, now may be the best time to get in, especially if Q4’s earnings report, lacking another major one-time impairment charge, ends up showing profits and returns the dividend to a level more consistent with the last few years.
Any “cheap” stock in a distressed moment is always a tricky call. People love to quote Warren Buffett’s observation that one should be “greedy when others are fearful,” but there’s a confirmation bias there. The many, many people who have lost fortunes chasing falling knives don’t get quoted, but they could just as easily offer the wisdom that “sometimes when everyone thinks something is bad, that’s because it actually is.” However, investors like Buffett and Peter Lynch got where they did by taking long, hard looks at stocks like Yamana. Who’s to say whether those two would (or will, in Buffett’s case) take this chance to grab a stake in a company that’s been oversold? Either way, it clearly warrants some deeper thought.