Yamana Gold: Oversold and underbook an attractive investment (NYSE: AUY)

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Most of my articles over the past few months have been from a growth perspective, rather than a value perspective, so for this month I’ve decided to analyze a “value” stock with which to I had some experience in the past.

Yamana Gold (NYSE:AUY) was a stock I originally bought in mid to late 2019, when it was trading at around $3.60 per share. I had planned to own Yamana for a while and had great investment results early on, until the coronavirus pandemic hit in early 2020 and the stock plunged to less than $3.00 per share. I took the opportunity to accumulate more stocks for around $2.70 during the stock market crash, which reduced my cost base considerably, and by mid-2020 the stock had made a full rebound, then some . However, I made a crucial mistake during this investment process: I sold the stock too early.

Throughout 2020 I made a variety of market moves where I sold many of my small positions to rebalance my portfolio. Once the price of gold started to peak above $2,000 an ounce, it made sense to take profits and reposition the money into other investments with a more favorable risk/reward ratio. . Coincidentally, I ended up sheltering myself from this year’s bear market in the stock, which has fallen over 30% in price since the start of the year. With the negative sentiment surrounding gold at the moment, the market has produced a situation in Yamana Gold where the stock is oversold and the company is trading below its book value, making it an attractive investment opportunity. . I am strongly considering getting back into the stock long-term at these levels, which seem far too cheap to ignore.

In short, Yamana Gold appears to be an excellent defensive play for investors considering inflation hedges in case inflation fears grip the market again. Even if gold prices continue to correct, the stock is already trading at a discount to its book value with a margin of safety, making it a classic value investment that could potentially be worth investing in. be held long term.

Oversold and trading below book value

Yamana Gold recently hit a 29 on the 14-day Relative Strength Index reading on July 8, making the stock technically oversold in the short term. This is most likely a negative reaction due to recent gold selling after the Fed took a more hawkish stance in early June, which saw the precious metal fall from $1,900 an ounce to below $1,800 very quickly. The price of gold recovered from the selloff just as quickly and still remains in a slightly bullish trend over the past three months.

Source: bullionbypost.com

This recent volatility in commodity prices has caused many stocks of gold mining companies, such as Yamana Gold, to fall below their book value per share, which was about $4.60 to the March 31, 2021 quarterly statement. Mean reversion remains very likely, in my view, and the stock may now be trading with a margin of safety from its historical performance.

Yamana Gold from a technical point of view

AUY bottomed in May 2019 at less than $2.00 per share and has since started a multi-year uptrend where the stock has returned over 100%. Shares hit an intraday high of $7.02 in mid-2020 before entering a bear market that pushed the price lower to the $4.00 support level before rallying.

Source: Google Finance

From a longer-term perspective, the stock peaked at around $6.51 and fell 38.4%, which almost perfectly matches the Fibonacci number of 38.2%. To learn more about technical analysis and Fibonacci numbers, you can check out this Article from Investopedia, which provides an overview and information on the subject. This retracement to the support level of around $4.00 has happened many times in the past with Yamana Gold stocks, and even matches the low during the stock market crash of 2008. Less than $4.00 per stock seems to be an area of ​​accumulation for long-term shareholders.

The stock’s 50-day moving average is $4.74 and the 200-day moving average is $4.82, so a reversion to the mean would more than likely put the stock above book value once again. more.

However, stocks could be pushed even lower in the short term due to the negative sentiment surrounding gold itself, and these mining stocks are subject to higher volatility because of this. If the $4.00 support level does not hold, the next level would be to watch for a test of $3.50, which could turn out to be a fantastic buy price in the accumulation zone.

Dividend yield, risks and long-term implications

Yamana Gold has a dividend yield of nearly 2.5%, which is pretty decent, and it matters a lot for long-term capitalization and reinvestment of dividends over time. In my view, an extended period of stagnation would be an opportune time to accumulate more stocks and reinvest dividends at prices below $4.60 per share (near book value).

Some risks to be aware of are that gold and other commodity prices correct further from last year’s crisis highs in 2020. However, from a five-year time horizon, the price of gold still seems to be in an uptrend. Using gold mining stocks as an inflation hedge has worked in my own portfolio in the past, and now is the time to reconsider this strategy once again.

Another concern that could worry the market in the short to medium term relates to the capital expenditure that will be necessary for Yamana to move from an open pit mine to a more underground mine. In the years to come, the Canadian Malartic mine, which is the largest gold mine in Canada, will eventually produce less and less from the open pit.

Canadian Malartic is currently an open pit mine, but the operation is advancing a large underground project, known as the Odyssey Project, which will convert Canadian Malartic to an underground operation by approximately 2028 with a mine life which will last until at least 2039.

Source: yamana.com

However, another thing to consider is their copper project in Argentina, a joint venture with Newmont (NYSE:NEM), which will remain a tailwind for Yamana Gold that the market may not be fully pricing in. Although the company is somewhat in debt, Yamana has enough cash on hand that I’m not too concerned about debt. In my view, the market is exaggerating investment concerns over the Canadian Malartic mine and failing to consider the longer-term implications for the company. This could be one of the reasons stocks have been under pressure lately and the company is trading below book value as the market reacts to the situation and developments occur.

Conclusion

Yamana Gold appears to be trading with a margin of safety, currently below book value, with short-term oversold conditions. These factors present a buying opportunity for a long-term value investment for those looking to add inflation hedges to their portfolio. The market appears to be discounting the shares due to recent volatility in precious metals and commodity prices, as well as concerns over capital expenditures by Yamana to transition deeper underground from open pit to over time. However, the market may ignore the upside potential of the copper project in Argentina, as part of the joint venture with Newmont Corporation. Stocks look too cheap to ignore, and a mean reversion above book value looks very likely in my view.

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