Yamana Gold (NYSE: AUY) and Agnico Eagle Mines (NYSE: AEM) are both mid-tier gold producers that operate a handful of mines around the world. Furthermore, both have compelling growth prospects up ahead that position them to increase production and cash flow at a healthy pace in the coming years. There is one thing, however, that sets them apart: valuation. That lone factor makes one appear to be the much better buy between the two right now.
The bull case for Yamana Gold
Last year, Yamana Gold produced 823,264 ounces of gold along with 127.3 pounds of copper and 4.75 million ounces of silver from the five mines it currently operates across North and South America. While that's a sizable output, it's not enough to make it a top 10 gold or silver producer. The company, however, recently added a sixth location after it brought the Cerro Moro gold and silver mine in Argentina on line. Yamana believes that as Cerro Moro ramps up, gold production will increase at a 5.6% annual pace through 2020 to 970,000 ounces per year. Meanwhile, the company sees silver output rising at an even faster 37% yearly clip, pushing it up to more than 12.9 million ounces by 2020. On a gold equivalent basis, the company's output should increase almost 29% by 2020.
Image source: Getty Images.
That fast-paced growth of low-cost silver and gold production should produce a "step change in cash flow" starting in the second half of 2018 according to the company's projections, which assume that metal prices cooperate. The surge in cash flow should enable Yamana to quickly pay down debt and get its leverage ratio down from 2.85 times last year to a more comfortable 2.0 times in the short-term. This combination of rapidly rising cash flow and an improving balance sheet has the potential to boost Yamana's value in the coming years.
The bull case for Agnico Eagle Mines
Agnico Eagle Mines is a bigger mining company than Yamana. Overall, it operates eight mines that produced 1.7 million ounces of gold last year, good enough to make it the ninth-largest gold producer in the world. In addition to gold, Agnico Eagle Mines also produces some silver, zinc, and copper, though these metals only contributed 5% of its revenue in 2017. For comparison's sake, Yamana gets 16% of its revenue from copper and another 5% from silver.
In the near term, Agnico Eagle expects its production to decline as it depletes the reserves at two of its mines. However, the company has several expansion projects underway that should reverse that trend and help boost gold output up to 2 million ounces by 2020, good for about an 18% increase. That rising output should also expand the company's cash flow, positioning it to deliver significant free cash in 2019 if gold prices hold up. That increasing cash flow will give the company the money to pay down debt, fund new expansion projects, or boost its dividend, all of which should create more value for investors.
A similar future for a fraction of the cost
Both Yamana Gold and Agnico Eagle Mines expect to deliver similarly fast-paced production and cash flow growth over the next couple of years. However, despite those similarities, investors are paying significantly more for Agnico Eagle's stock these days.
Price to 2018 Estimated cash flow per share
Agnico Eagle Mines
Peer Group Average
Data source: Yamana Gold investor presentation.
Because of that, Yamana Gold's stock looks dirt cheap compared to both Agnico Eagle Mines and its gold mining peers. While Yamana Gold does have a higher leverage ratio than most gold producers, the company sees that number dropping quickly as cash flow rises alongside production from Cerro Moro. Because of that, it's hard to justify its low valuation, which is why Yamana is the better buy versus Agnico Eagle right now in my opinion.
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