In a July 30 research note, Andrew Kaip reported that BMO Capital Markets elevated its rating on Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) to Outperform to reflect the positive outlook for the company. "Given solid execution at Cerro Moro and a transition to free cash flow generation projected for Q3/18, we expect shares of Yamana to rebound as the company's overall risk profile moderates," Kaip added.
Kaip provided three primary reasons for the rating upgrade.
One, given its Q2/18 numbers, Yamana is expected to exceed full year 2018 production guidance for gold, silver and copper on the heels of starting Cerro Moro ahead of schedule.
Two, now that 18 months of expending capital to construct Cerro Moro are behind Yamana, it can now generate cash and strengthen its balance sheet. "At spot metal prices, we see Yamana moving toward generating free cash flow of $100 million per quarter and net debt:EBITDA declining to 1.2x (current 2.1x) by mid-2019," Kaip noted.
Three, upside remains in Yamana's share price, as it is still trading at a discount to its peers. The two factors that led to its lower comparative share price—high financial leverage due to spending on Cerro Moro and execution risk at that project—are no longer in play. Therefore, Kaip wrote, "we see room for the share price to rise above $4."
In fact, BMO has a target price of CA$4.25 per share on Yamana. The stock is currently trading at around CA$3.05 per share.
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Disclosures from BMO Capital Markets, Yamana Gold, July 30, 2018
Analyst's Certification: I, Andrew Kaip, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.
Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Company Specific Disclosures
Disclosure 8C: BMO Capital Markets or an affiliate has a financial interest in 0.5% or more in the issued share capital of Yamana Gold.
Disclosure 9: BMO Capital Markets makes a market in Yamana Gold.
Disclosure 16: A research analyst has extensively viewed the material operations of Yamana Gold.
Disclosure 17: Yamana Gold has paid or reimbursed some or all of the research analyst's travel expenses.
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