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Is It Time to Increase Yamana Gold?

- By Alberto Abaterusso

For the rest of 2018 and full 2019, gold miner investors should considering increasing their positions in Yamana Gold Inc. (AUY).

The Canadian mid-tier gold producer's stock has not hit a new 52-week low yet, but the share price is just a few cents above the lowest price listed by the technical indicator. Yamana Gold is trading cheaply on the New York Stock Exchange. Following a 12% drop in the market value for the 52 weeks through Sept. 12 the share price is $2.50 as of Thursday morning, and is below the 200-, 100- and 50-day simple moving average lines.

The below chart, which is powered by GuruFocus, illustrates what I just described.

Yamana Gold appears to trade at compelling valuations. The price-book ratio is 0.58 versus an industry median of 1.74, and the EV-to-Ebitda ratio is 4.78 compared to an industry median of 9.3. Those are two of the most used ratios to screen for value in the gold mining industry.

Furthermore a 14-day Relative Strength Index of 28.4 is suggesting that the stock is near to oversold levels and that a correction to the upside may happen soon. The technical indicator usually ranges between 25 and 75.

As of September 2018, there were 14 analysts surveyed on Yamana Gold. Five of them recommended buying the stock and seven suggested holding it. Two said it will underperform over the next 52 weeks.

The average target price is $3.86, which is a nearly 55% growth from current valuations.

Investors need to know that the catalysts that may propel the share price up are the following:

The first is production, which is projected to exceed 900,000 ounces of gold. If that production target is accompanied by a rising commodity, Yamana Gold will beat consensus on sales and adjusted net earnings, producing a positive surprise with a strong impact on the market value of the stock.

Also, a higher ore grade of metal at the El Penon deposit in Chile and a higher throughput expected at Cerro Moro in Argentina should both increase the production of silver and copper.

It is possible that the current market valuation is influenced by fears that the government of Argentain could implement a tax on the metal that will be traded abroad. Argentina announced the imposition of an export tax because the country has a target of fiscal stability to reach. The Argentinian government's proposal needs to be translated into legislation before the export tax is effective.

However, significant devaluation of several local currencies and the stipulation of foreign exchange options contracts should put the Canadian miner in a strong position. Therefore, the company will generate positive cash flow, not only for the rest of 2018, but also for the entire year of 2019, and even if the Argentinian export tax becomes effective.

Disclosure: I have no positions in any security mentioned in this article.

This article first appeared on GuruFocus.