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Yamana Gold Stock Is Stifled By the Range-Bound Gold Market

Will Healy

Yamana Gold (NYSE:AUY) stock fell following its quarterly report. The Toronto-based gold producer beat earnings estimates but missed on revenue. This left Yamana Gold stock falling back towards 52-week lows.

AUY stock

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Yamana Gold has moved to stabilize its balance sheet in recent weeks. However, until the gold market sees significant upward price movements, both AUY and other gold stocks will see little traction.

For its first quarter, the company reported earnings of two cents per share. This beat analyst estimates by one penny per share. AUY lost three cents per share in the first quarter of 2018.

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However, revenues of $407.1 million missed expectations by $7.39 million. They also fell 10.5% from year-ago levels. Even worse, revenue fell short in a quarter where production exceeded analyst estimates. AUY stock fell by more than 3% in morning trading following the announcement.

During the quarter, Yamana Gold sold its Chapada copper and gold mine in Brazil to Lundin Mining (OTCMKTS:LUNMF) for over $1 billion. As our own Will Ashworth points out, this allows Yamana to bring down its $1.793 billion debt burden.

Yamana Gold Is a Proxy for Gold Prices

I agree with my colleague that this sale strengthens the balance sheet of AUY stock. Does it make AUY a buy? I’m not so sure.

On the surface, the forward price-to-earnings (PE) ratio of around 14.9 appears reasonable. It looks even better when traders factor in predicted earnings increases. Wall Street expects profit growth to average about 40% per year over the next five years.

Still, such forecasts tend not to guide gold stocks. Historically, Yamana Gold stock and the equities of peers such as Newmont Goldcorp (NYSE:NEM) and Lundin Mining tend to become proxies for gold prices. Unfortunately for Yamana Gold investors, gold prices have seen little traction over the last few years. AUY stock briefly surpassed $20 per share in 2012 as gold prices surged toward $2,000 per oz.

However, the price of gold has not exceeded $1,400 per oz. since 2013. Consequently, it has remained range-bound since that year. Over the last 5.5 years, gold has bottomed at about $1,050 per oz. and has seen a top of around $1,375 per oz.

This has left Yamana Gold stock trading in a range. As a result, the stock price trades at levels it saw in 2015. Now, with gold at around $1,275 per oz., AUY stock has traded between $2 per share and just above $3 per share for the last two years.

Yamana Gold and the Looming Bear

Gold tends to rise when investors lose confidence in the reserve currency, which remains the U.S. dollar. However, in the midst of a crisis, history shows that traders lose confidence in gold.

At the height of the 2008 financial crisis, gold fell in value as investors flocked to the perceived safety of the U.S. dollar. Gold did not rise again until 2010 when investors started to want an alternative to the dollar. After about three years, the price of gold fell back to the range where it trades today.

As things stand now, I don’t see any catalyst that will take gold sufficiently higher. If history serves as a guide, a stock market swoon will become bearish for the dollar, and by extension, AUY stock. As long as investors retain their confidence in the dollar, neither gold nor gold stocks will break out of their respective ranges.

The Bottom Line on Yamana Gold Stock

After earnings, expect little activity from AUY stock until it can rise out of its trading range. AUY sold off as the company missed revenue estimates despite increased production.

On the surface, AUY looks increasingly solid. Selling the Chapada mine should reduce its debt. Moreover, the reasonable PE ratio and the high levels of profit growth predicted should presumably send Yamana Gold stock higher.

Unfortunately, gold stocks tend to follow the price of gold. As gold has remained range-bound, so too has AUY stock. Even worse, no apparent catalyst has appeared that would take gold higher.

If investors lost confidence in the dollar, both gold and Yamana Gold stock would become a screaming buy at current levels. However, as things stand now, things will likely get worse before conditions improve for AUY.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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