Editor's note: This Stocks Under $10 alert was originally sent to subscribers Nov. 13 at 3:30 p.m. EST. It's being republished as a bonus for TheStreet.com and RealMoney.com readers. The author, Larsen Kusick, is part of TheStreet.com Stocks Under $10 Investment Team.


When we spot a great opportunity, we will occasionally review or even add a name that trades slightly above $10 to the Stocks Under $10 model portfolio. Yamana Gold ( AUY), currently trading at $11.28, looks like a strong prospect for the model portfolio on a pullback. So let's take a detailed look at this Toronto-based South American mine operator.

With its aggressive plan for production growth, Yamana is particularly interesting because of its combination of untapped in-ground assets and un-hedged position in gold. The company has six operating mines in Brazil and another in Honduras, along with a number of development-stage properties and land positions, mainly in Brazil.

The company's principal product is gold, but it also mines copper. Yamana's largest opportunity comes from its recently completed Chapada copper-gold mine, which is scheduled to begin production this month.

In terms of gold production, Yamana's numbers are astounding. During the first nine months of 2006, Yamana produced 246,829 ounces of gold, including 88,781 during its most recent quarter (ended Sept. 30). Management expects to achieve an annual production rate of 600,000 ounces of gold by the end of 2007, and reach an annual rate of 1 million ounces by late 2008.

These aggressive targets indicate the large amount of gold that Yamana has in its mines and land assets, as well as the lofty expectations of the company.

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) and Newmont Mining ( NEM), 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)and Goldcorp ( GG).

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.

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.

In keeping with TSC's editorial policy, Larsen Kusick doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Kusick is a research associate at TheStreet.com, where he works closely with Jim Cramer and works on TheStreet.com Stocks Under $10. Prior to joining TheStreet.com, he worked in options trading and management consulting. He appreciates your feedback; click here to send him an email.

Interested in more writings from Larsen Kusick? Check out Stocks Under $10.

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