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« US Dollar Rally Losing Momentum | Main | Lost Principles »

Yamana Gold Incorporated: Call Options Bought!

Yamana Gold Call Options 25nov08

Yamana Gold Incorporated has been dramatically oversold in our view so today we decided to buy the JAN 2009 Call Options at a strike price of $5.00 for $1.20 per contract. This stock has suffered more than most during the current de-leveraging exercise and the dash for cash, which we consider to be an aberration when compared with similar stocks.

From its recent lofty heights of around $19.00 Yamana fell approximately 70% and has traded as low $3.31. The snap back has already begun so we are not in at the bottom however; we thought it better to wait for some signs of recovery before making a move. If you have already bought then give yourself a pat on the back, you are braver then we are.

Our expectation is that the US Dollar is coming to the end of its rally and will fall as quickly as it went up, if not quicker. The price of oil is also looking like it has been oversold recently and it too could stabilise and then head north. Paper money is being manufactured out of thin air bringing with it inflation, albeit with a lag time, but that’s our view.

Something else of note, at the time of placing this order, is that Yamana has a P/E ratio of 12, Kinross Gold is 26, Agnico Eagle is 46, Randgold is 56.

Just a reminder of how Yamana Gold sees the situation taken from a recent communiqué them:

“We remain committed to delivering value to our shareholders. Yamana continues to be one of the lowest cash cost companies in the industry and we are uniquely positioned with a declining cost structure and increasing production all in gold. We have the stability of the jurisdictions in which we mine. Most of our 2009 and 2010 production estimates are based on mines that are or will be built by the end of this year. We are well positioned with cash, cash equivalents, and growth both in production and cash flow, and other valuable assets. We have many upcoming positive events expected for the end of this year and we are currently on track to deliver on these milestones”.

Yamana Gold has a market capitalisation of $4.06 billion, a P/E ratio of 13.33, with 699.21 shares outstanding and is trading at $5.81 as we write, with current volume at 8.68 million shares.

Yamana Gold Incorporated trades as AUY on the New York Stock Exchange and as YRI on Toronto Stock Exchange and as YAU on the London Stock Exchange.

Got a comment, then fire it in!

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Note: At this point during todays trading session our order has only been partially filled, so we will wait and see what the rest of day the brings as we dont want to chase the price.

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Reader Comments (7)

PS: If you are not already aware of this site and you are new to options trading you might find this link interesting. Its morningstar’s section on options where you can input the stock that you want to trade and it will tabulate various metrics for you - have fun!

November 28, 2008 | Unregistered CommenterGold Prices

Bought back everything I sold of AUY between $16 and $13 at $4.40 to 3.75 and more. But I have a question. Why would options to buy @$5.00 be so cheap when shareprice is already above $5.00?? jt

November 29, 2008 | Unregistered Commenterjo ta

Nice work Jo Ta, that is the way you should play. Marvelous.

To answer your question, simply; Risk.
The odds of gold putting up a rally above 825 barrier are substantial. Next to that, Yamana is substantially undervaluated, so the risk is reasonably low. That is unless there will be another round of forced selling across the board.

Which reminds me; Hedgefund leverage was 175 percent one quarter ago, now its approx. at 145 percent. (debt to equity ratio if I'm right). Which basically means there can be expected another 30% dip in commodities, as these funds were and still are unwinding investments in the yen/dollar carry trades and short dollar/long commodities trade. When this happens, is another good question.

The odd's are even. short or long...both risky. Stabilization is likely. Maybe a bottom? Place your bets please ;)

November 29, 2008 | Unregistered Commenterde Graaf

Just a quick note to let you know that we bought more of these contracts today for $1.00 per contract.

December 1, 2008 | Unregistered CommenterGold Prices

The crew of Goldprices is showing real confidence here.
Under normal 'december conditions' I would agree, but possibly I'm just more scared to use options than you guys are.

Today's decline in Yamana shareprice is troublesome in my view. Bob, what do you know more than I / we know about the market and the price of gold in these circumstances? If you can enlighten us a bit with your confidence, that would be great.

If not, I hope you made an educated bet.

December 1, 2008 | Unregistered Commenterde Graaf

We are of the opinion that gold and Yamana were oversold. We had just made a purchase of the call options on Yamana but did not get the amount that we wanted, so this mini sell off presented us with an opportunity to complete our order at cheaper prices as we bought the second group for $1.00 per contract. This is a highly speculative trade on our part as we can lose the total amount if Yamana heads south. Time will tell!

December 2, 2008 | Unregistered CommenterGold Prices

Thank you for the clarity given.

December 2, 2008 | Unregistered Commenterde Graaf

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