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Yamana Gold Is Predicted to Outperform

The precious metal gold is up trending.

Gold rebounded from its May 21 low at $1,271.15 per troy ounce and following 11.7% upside for the 10 weeks through July 26, the price of $1,420.40 is 7.5% off the year to date cumulative average of $1,321.09.

Silver bounced back from its May 29 low at $14.3750 per troy ounce and after 14.4% increase for the 9 weeks through July 26, the price of $16.44 is 7.5% above the year to date cumulative average of $15.2886.

While it is certain that the Federal Reserve will announce an interest rate cut at the July 30-31 FOMC meeting, it is instead uncertain how sharp the rate cut will be. Further, it is questionable whether the US Central Bank will implement more cuts until the end of 2019, technical market analyst Gary Wagner wrote on Friday for Kitco.com.

Regardless Federal Reserve's Chairman Jerome Powell's rates policy tone for 2019, the interest rates cut will drive gold and silver prices higher as investors will prefer precious metals to bonds and other fixed-income securities for their investments.

Investors could take advantage of the rising gold price by purchasing shares of publicly-traded mining companies.

As of July 27, analysts on Wall Street recommend an overweight rating on shares of Yamana Gold Inc (NYSE:AUY) meaning they predict that the Canadian mid-tier mining company will outperform either the industry or the overall market within 52 weeks.

The average target price of $3.28 entails 13% rise from Friday's closing price of $2.90 which could already be hit during the current quarter. As seen before, the price of the commodity will be the first key driver of the stock's share price in the current quarter.

The second will be an increase in gold and silver production at low costs, following the decision of the company to allocate more funds to enhance mineral resources and reserves at key operations.

The company aims to extend the mine life of gold and silver assets Cerro Moro in Argentina, El Penon in the Dominican Republic and Minera Florida in Chile.

Yamana Gold also targets to extend the mine life as well as to increase grade and mineral resources of its gold mines Jacobina in Brazil and Canadian Malartic in Quebec.

Yamana Gold targeted to produce 1.01 million ounces of gold equivalent in 2019, which, following the April sale of the Chapada copper and gold mine in Brazil, is 4.7% down from the previous guidance of 1.06 million ounces.

Gold and silver productions are already increasing. From its mines, the company produced 232,863 ounces of gold, 2,171,836 ounces of silver and 31.2 million pounds of copper in the second quarter of 2019. Year over year, gold increased 4%, silver grew 65.8%, while copper was almost flat.

Second-quarter operating results with an average price of $1,310 per gold ounce, of $14.90 per silver ounce and $2.776 per copper pound enabled Yamana to generate expected non-GAAP earnings per share of 2 cents and to beat forecasters on revenue of $463.5 million.

Moreover, revenue increased 6.5% year over year, net free cash flow rose 156% to $123 million and net debt decreased by $13.1 million to about $1.76 billion.

The sale of the Chapada mine has provided the Canadian mining company with an upfront cash payment of $800 million. The company has already used about 48.1% of it to refund the revolving credit facility entirely, improving the net debt-EBITDA leverage ratio of Yamana Gold to 1.5x.

Yamana Gold may use the remaining fraction to reimburse the March 2012 and June 2013 senior notes.

Planned reductions in general and administrative expenses plus reduced finance cost due to the extinguishment of part of the debt will help to drive operating margins and free cash flows higher, producing a positive effect on the stock's share prices.

The stock is not cheap. Following 6% decline for the 52 weeks through July 26 the share price is still well above the 200-, 100- and 50-day simple moving average lines.

The share price at close Friday was also 15.5% off the middle of the 52-week range of $1.78 to $3.23.

Disclosure: I have no positions in any securities mentioned.

This article first appeared on GuruFocus.