Yamana
Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) continues to be a mixed bag.
Operations are on track at most mines, other than Chapada; despite the Chapada
shortfall, the company says it remains on track to meet its production
guidance around 1.3 million ounces. The company is taking steps to reduce its
debt, selling a small mine, Mercedes. It is also looking at selling part of
its Aqua Rica mine. Exploration, particularly around existing mines, has been
promising, while its Argentinean properties could see some advance, given the
change in government. If Yamana can deliver, the stock could see a rerating,
since on many metrics it is undervalued relative to its peer group. But there
always seems some stumble with Yamana. It missed the opportunity to sell its
Brazilian assets, announced with fanfare last year. The problems at Chapada,
representing a quarter of the company's asset value, were unexpected. We will
hold, waiting lower prices and evidence of improving operations and balance
sheet.
Short sellers give us a great buying opportunity
Vista Gold
Corp. (VGZ:NYSE.MKT; VGZ:TSX) is much the same story, but the last
several months have clearly demonstrated the stock's tremendous leverage to
higher gold prices, moving from 27 cents at the beginning of the year to a
high of over $2 in June. The move was exaggerated by two newsletter recommendations.
Disingenuously, one of these letters that pushed it up then turned and
recommended shorting the stock, which-partly-led to the stock plunging. This
trade might look good on paper for the letter to boast about, but I wonder
how it worked in practice for many of its subscribers!
At any event, the stock fell over 50%, to under $1, before today's rally.
And the short interest has shot up, from well under 100,000 for most of the
past year to a current high of 1.3 million. Remember, these shorts will have to
cover, and this will provide both some downside resistance as well as an
exaggerated move when the stock starts to recover and the shorts rush for
cover.
Vista has a solid balance sheet, with working capital of $33 million,
including $27 million in cash, following an early August $17 million equity
raise. This provides the company with considerably more time to execute on
Mt. Todd, but also allows the company to advance the project. With annual
running costs around $6 million, there was no imminent need to raise so much
cash, representing 15% dilution. I suspect we will see a feasibility study on
Mt. Todd as well as other action advancing the project. And more work will
allow the market to give a more realistic valuation on the project in Vista's
stock price. The cash also puts the company in a better position to undertake
some M&A transaction of its own. Vista has said it is looking but has
found nothing yet.
Vista is a buy here; I wouldn't chase the stock, but under $1.05 is a good
price.
Solid long-term holding with upside
Silver
Wheaton Corp. (SLW:TSX; SLW:NYSE) has seen higher revenue, as expected
with high gold and silver prices (offset partly by the lower production as
Penasquito, expectedly to be only temporary). Silver Wheaton has a good
project pipeline and available resources for future acquisitions. Though cash
is only $103 million against debt of about $1.5 billion, the debt is very
serviceable and a line of credit is available as needed.
SLW is trading at only a modest discount to industry leader Franco Nevada
(just 2% if the reserves for the Canadian tax dispute are eventually used for
that purpose). But of course, should Silver Wheaton win the case, there is
considerable upside. Given the rally in the stock price, the risk from lower
silver prices, and the valuation, we are holding.
IN THE REAL WORLD
The Treasury Department and banking regulators have put out a paper to
"dispel certain myths" around new anti-money laundering regulations.
They note that 95% of "compliance failures" are resolved without
penalties. In theory, much of what they say could be true, but in the real
world when banks are told to "assess the risks" of relationships
with foreign banks and customers, are instructed to "request additional
information" on individual transactions, when banking regulators are
breathing down their necks and they watch other banks receive multibillion
fines for violations, is it any wonder that more and more banks decide not to
do business with certain customers? It hardly matters if a matter is resolved
without a fine if the banks have to answer money-laundering charges. Even the
IMF and World Bank have complained to the U.S. about the impact the rules are
having. This is the story with more and more government by regulator where
the plain wording of new rules, whether the Treasury or the SEC or numerous
other regulators, tells only a small part of the story.
