Prospecting for Gold at Yamana

Although the company is able to set precise targets for gold production, predicting revenue is more difficult because Yamana is an un-hedged gold producer. This means the company does not use derivatives such as futures and options to try to lock in profits before delivering its product to market.

So because of the volatility of gold prices, it becomes more and more difficult to forecast Yamana's revenue the further we try to peer into the future. However, this un-hedged strategy can serve as an added incentive for investors who believe gold prices will rise in the future.

At present, Wall Street estimates a greater-than-200% increase in Yamana's annual revenue for 2007. In contrast, most large-cap gold companies, such as Barrick Gold(ABX Quote) and Newmont Mining(NEM Quote), are predicted to grow revenue at a single-digit percentage rate during the same period. Slightly higher rates, about 20%, are expected for Gold Fields(GFI Quote)and Goldcorp(GG Quote).

Recent developments at Yamana suggest that management's aggressive plans are on track. On Nov. 6, the company provided an update on its exploration efforts, stating that it continues to see potential for multiple mines along the Guapore Gold Belt, an area in Western Brazil that includes its Sao Francisco mine.

With production from Chapada set to begin contributing by the end of this year, much of the upside for Yamana lies in how much gold production the company can hit two or more years from now. Investors are likely to applaud any updates regarding the scheduled 2008 expansion of Yamana's Jacobina mine-and-production start at Sao Vicente.

Third-quarter earnings, however, disappointed Wall Street analysts because of production levels that missed expectations and rising costs at some of Yamana's mines. For the quarter, Yamana reported earnings of 2 cents a share on revenue of $50.3 million, missing consensus estimates for earnings of 4 cents a share and revenue of $58.9 million.

But in spite of the weaker-than-expected results, analysts maintained their generally optimistic views for the company's future, primarily due to the company's high-growth profile. Given that Yamana is a long-term story in an early stage, Wall Street is willing to forgive a few short-term hiccups in production and slightly higher costs, especially when associated with getting production started.