Prospecting for Gold at Yamana

We agree that Yamana has a bright future. It continues to grow its production organically while picking up smaller gold producers at what it believes are favorable prices. In August, Yamana announced a friendly takeover of Viceroy Exploration and its Gualcamayo project in Argentina, which increases its Latin American base while adding another high-potential territory.

Recent geological estimates indicate the property contains 2 million ounces of gold in its primary mineralized zone, the Quebrada del Diablo. With more testing and digging, the property could also yield a greater-than-expected gold deposit, thus strengthening Yamana's long-term production potential. We also like the fact that Yamana has no long-term debt despite its acquisition strategy.

But while we believe the company has an attractive mix of potential earnings growth and commodity exposure, we want to maintain our discipline of purchasing stocks at the point when upside potential is significantly greater than risk.

So for now we will remain on the sidelines. Yamana's stock has almost tripled since trading below $4 a share a year ago, while analyst expectations have already priced in the majority of the company's future growth.

A number of risks could drive shares lower in the short term, such as another earnings miss, a delay in the company's growth plans, increasing labor costs or a significant decrease in the expected future price of gold. While we believe shares could reach as high as $15 in the next 12 months, we will wait for a pullback closer to $9 before considering adding Yamana to our model portfolio.