Yamana Gold Inc.
Q1 2019 Earnings Call Transcript

Published: 2 May 2019

[Operator:]

Thank you all for joining us this morning. Before I turn the call over, I need to advise that certain statements made during this call today may contain forward-looking information, and actual results could differ from the conclusions or projection in that forward-looking information which include but are not limited to statements with respect to the estimation of mineral reserves and resources, the timing and the amount of estimated future production, cost of production, capital expenditures, future metal prices, and the cost and timing of the development of new projects. For a complete discussion of the risks, uncertainties, and factors which may lead to actual financial results and performance being different from the estimates contained in the forward-looking statements, please refer to Yamana's press release issued yesterday, announcing first quarter 2019 results as well as the management's discussion and analysis for the same period and other regulatory filings in Canada and the United States. I would like to remind everyone that this conference call is being recorded and will be available for replay today at noon PM Eastern Time. Replay information and the presentation slides accompanying this conference call and webcast are available on Yamana's Web site at yamana.com. I will now like to turn the meeting over to Mr. Daniel Racine, President and CEO. Please go ahead.

[Daniel Racine:]

Thank you all for tuning in and welcome to our first quarter conference call. With me on the call today is Jason LeBlanc, our CFO. All members of our management are with us in the room and will be available for the Q&A portion of the call. We had a strong first quarter both operationally and from a sustainability standpoint. Our total recordable injury frequency rate declined to 0.6 during the quarter from 0.72 in the first quarter of 2018. We did not have any lost time injury at any of our operation in the latest quarter. While we are pleased with executing on our One Team, One Goal

[Jason LeBlanc:]

Thank you, Daniel, and good morning everyone. We delivered $407 million in revenue in the first quarter compared to $455 million in the same quarter last year. Revenue was impacted by lower gold and copper prices partly offset by higher year-on-year silver sales. Despite the decline in revenue gross margin increased by $10 million dollars over the last year underpinned by operational results and cost improvements. Net earnings attributable to Yamana equity holders was $0.00 per share. This includes certain non-cash and other items that may not be reflective of current and ongoing operations. Notable among these items was a $20.2 million non-cash tax on unrealized foreign exchange related to the making of our operating currencies versus the U.S. dollar. Excluding these items among others, adjusted earnings in the quarter would have been $0.02 per share. Cash flow before net change in working capital was $103.2 million during Q1. As Daniel mentioned though, this excludes deferred revenue from our copper advanced sales program. When adjusted for the program, cash flows from operating activities before net change in working capital would've been $128.3 million up from $84.1 million for the prior-year quarter. As a reminder, we will have our last delivery under the copper advanced sales program in Q2, which is about $25 million. As anticipated, Q1 had a large working capital outflow, with the seasonal nature of our operations and accrual cycle. But in Q1, we also had the impact of further precipitate inventory buildup and non-reversal from Cerro Moro. Furthermore, with weaker local currencies we had a non-cash impact from FX of about $10 million that went through working capital in the quarter. I'll speak to it shortly, but we'll see a big reversal of the precipitate inventory in Q2. These items also impacted our net debt and net free cash flow compared to year end. With increasing cash flow, and a reversal of these impacts beginning in the second quarter, we expect near-term improvements in cash flow and net free cash flow. Our Q1 operating cash flow is definitely not a representative run rate for the year. G&A expenses during the quarter were $21.5 million down from $26.5 million a year ago. We are also implementing a plan for further G&A savings that will begin later in the year after closing of the Chapada transaction. The precipitate inventory buildup at Cerro Moro resulted from above planned silver grades and positive grade reconciliation. This created capacity constraints at the mine for instance since startup. As Daniel highlighted earlier, we have arranged for the sale of approximately 27,000 gold equivalent ounces in Cerro Moro precipitate inventory, which will be reflected in gross revenue, and cash flow of approximately $34.5 million in the second quarter. We expect to make an additional sale of precipitate in June of approximately $10 million following which we expect inventory levels to be maintained. We have ordered an additional furnace to better manage any further capacity constraints, and we're currently assessing whether it will be installed, or whether the flexibility of selling gold and silver in precipitate form is a better solution to manage inventory. The sale of Chapada will allow us to significantly improve our balance sheet. With the proceeds of the transaction, we will be reducing our gross debt levels by repaying our revolver and shorter tenure fixed term debt. Upon closing of the transaction, which is expected in the third quarter, our net debt to EBITDA ratio will decline to 1.5x. But looking ahead, we expect our net debt to EBITDA ratio to decrease to one turn by the end of 2021. Our stronger balance sheet or more precisely the greater financial flexibility it affords is a key catalyst for what's next for Yamana. This includes the pursuit of near-term value enhancing, organic growth projects, greater commitments to our expiration efforts and opportunities to improve shareholder returns. With that, I'll turn the call back to Daniel.

[Daniel Racine:]

Thank you, Jason. To conclude, I will highlight several key points. Post Chapada, we will be left with a portfolio of high quality precious metal assets with a number of compelling opportunities for growth. The sale allows us to significantly and immediately improve our balance sheet. This in turn will allow us to make a meaningful return of cash flow -- of cash to our shareholders, through our dividend increase while also providing us with financial flexibility to pursue our organic growth opportunities using cash flow from operations. Finally, I would like to remind everyone that we have our AGM this morning at 11

[Operator:]

Thank you. [Operator Instructions] We have a question from Ralph Profiti from Eight Capital. Please go ahead. Your line is now open.

[Ralph Profiti:]

Thanks, Operator. Good morning. I'd like to ask two questions. Firstly, Daniel, on the expansion of Jacobina, because you've talked about high reserve grades, and higher mining grades coming, should we be thinking about phase one, though, as more of improvements around things like dilution around the pillars, mining methods? I'm just trying to get a sense of splitting the two phases of what actually is going on, particularly in phase one to get us those extra ounces?

[Daniel Racine:]

Yes, we have hard time to hear you, Ralph, but I caught it was on Jacobina. For phase one, it's basically putting the mill at 6,500 tons per day with the actual reserve grade. So there's no change in grade. It's minimal [ph] capital is just some optimization on screening, and stuff like that. So it's fairly easy to achieve. Phase two is basically 25%, it's some mill tweaking, and then about the rest is increasing our underground capacity to reach 75% or 80% and then at the end 8,500 tons per day. So it's fairly easy, the money is already achieving most of the tonnage. And then phase one will be completed by this time next year.

[Ralph Profiti:]

Okay, yes. Thanks for that. Jason, around the precipitate sales, have you locked in those prices already? Does it happen through derivative contracts, how does the pricing mechanism for receiving those revenues work?

[Jason LeBlanc:]

No, there's no lock-in of the prices, so we mentioned in May there, so we will be exposed to gold prices like our normal course sales would be -- it's very similar to what we would do on our concentrates, on the actual sale where we would lock in the prices at the point-of-sale. So I would expect those to be a couple of weeks out.

[Ralph Profiti:]

Yes. Okay, got it. Thanks, guys, thanks very much.

[Operator:]

Thank you. And the next question is from Tanya Jakusconek from Scotiabank. Please go ahead. Your line is now open.

[Tanya Jakusconek:]

Great, good morning everybody. Maybe the first one for Jason, can you just talk to us about what the net contribution to revenue would be from the precipitate, because there is other factors in there, and I think there's tax implication, and royalties or -- and then obviously cost for treating the precipitate.

[Jason LeBlanc:]

Sure. Yes. No, Tanya, I would assume it's very similar to what we would do with our gold [ph] rate sales. So that would be in the range of probably a little under 2% of gross proceeds would be a reasonable cost to apply for payable metals, treatment refining charges, logistics, et cetera. So, really, from our perspective, no different than a [indiscernible] sale, a little bit more intensive to manage, but from a cost perspective, it's very efficient.

[Tanya Jakusconek:]

All right. So if we take that assuming 98% is coming to you that would be in that ballpark?

[Jason LeBlanc:]

That's good, yes.

[Tanya Jakusconek:]

Okay, perfect. And then when do you expect that working capital to change or to obviously get those monies back through the year, when are you expecting that reversal?

[Jason LeBlanc:]

It would be pretty evenly balanced throughout the year, Tanya, not to be too precise about it. Obviously, Q2, we're going to have a big windfall from that precipitate that I mentioned, and we would expect normal course on that. Beyond that it would be the normal kind of sequence on the other working capital type items.

[Tanya Jakusconek:]

Okay. So if we were to take the precipitates out of the Q2 and then evenly distribute whatever is remaining for Q3, Q4, that would be a good enough assumption?

[Jason LeBlanc:]

Yes, that would be fair.

[Tanya Jakusconek:]

Okay.

[Jason LeBlanc:]

Tanya, the other thing that I've got to highlight now is just while we're on the point of working capital, is on the Chapada sale is you know, is part of these -- an asset sale like that we will have a working capital transfer, I guess, with that sale to the purchase and sale agreement provides for a commitment to move -- there's $33 million of working capital basis that purchased sale agreement to Chapada. So that would be part of a working capital movement outside of what I just mentioned for the year.

[Tanya Jakusconek:]

Okay. And that would be in Q3?

[Jason LeBlanc:]

That would be Q3, yes.

[Tanya Jakusconek:]

Okay. Perfect, and then maybe one for Daniel. Just on the Jacobina, again, and it's do with phase two, I'm just wondering -- I know that you've mentioned that you're committed to 7,500 tons a day. And you said, of the $100 million capital, I think 25% would be in the mill tweaking and the rest would be in the underground. What has to be done on the tailing side?

[Daniel Racine:]

On the tailing side, we are okay for now. We have to think about the future. And the part of the study is to look at either dry stack tailing or placed fill. As you know, we are mining in Jacobina for now for many years. There is many open stop there. And then it will make sense to probably switch to place fill. But we are -- the guys are studying right now. We have to do some tests on the material we have from the tailing to see what's the best option. But eventually we will switch to a very different type of tailing that we have right now.

[Tanya Jakusconek:]

And then if you were to go to that 75 or 85, I mean what tailings capacity do we have right now?

[Daniel Racine:]

We have to check that, Tanya. I don't by heart. But, it's quite long. I think it's right now if we would continue at the actual rate, we have over 10 years.

[Tanya Jakusconek:]

At your current rate?

[Daniel Racine:]

At the current rate, so that 6500 tons per day, let's say we are okay for 10 years.

[Tanya Jakusconek:]

Okay so I can do the math there. Okay, thank you so much.

[Daniel Racine:]

Yes. So, may be around eight years with increased capacity.

[Tanya Jakusconek:]

Okay.

[Daniel Racine:]

But that's also saying that we continue the same type of tailing. And then we won't. If we go dry stack, it takes a lot of -- a lot less place. And if we put -- if we go with placed, then we put about 40% to 50% back on the ground.

[Tanya Jakusconek:]

Okay. Okay, sounds good. Thank you.

[Daniel Racine:]

Thank you.

[Operator:]

Thank you. The next question is from Josh Wolfson from Desjardins Securities. Please ago ahead. Your line is now open.

[Josh Wolfson:]

Thank you. Looking at the 2021 guidance and adjusting out Chapada, looks like there's about 75000 gold equivalent ounces that would represent an increase from 2019 numbers. I think the company has already provided details for half of that representing upside from Malartic and Jacobina. Otherwise, I would have expected maybe net declines from El Peñón and Cerro Moro. So, is it safe to assume the other half 35,000 - 40,000 ounces of growth is really strictly driven by Minera Florida at this point?

[Daniel Racine:]

No, no. The 150 is right now around -- is 75,000 from Jacobina. And the other 75,000 ounces is a combination of Canadian Malartic and Florida. So, there is no decrease at Cerro Moro. There will be a slight increase at Florida. And then when we go ahead with the Odyssey and East Malartic -- at Malartic, it's 75,000 ounces Yamana only. It's on a 50% basis. That explains the 150. So, the 150 is a combination of 75 at Jacobina plus Canadian Malartic and Florida for the other 75,000 ounces.

[Josh Wolfson:]

Okay. Specifically for 2021 now where I guess Malartic guidance has already been issued for 350,000 ounces, so plus 20 over 2019. And then Jacobina I guess the company has already provided indications of upside of 15. Specifically for 2021, it's like there is still growth from Minera Florida, El Peñón, and Cerro Moro implied about 35,000 to 40,000 ounces which looks like it could only be driven from Minera Florida. Is that reasonable?

[Daniel Racine:]

No. It's a mix on all our operations, Josh. It's not only Florida. Florida is part of it. But, we see growth at other operation too. Jacobina, we are conservative in our numbers. So, we see more coming from Jacobina that's what we are seeing. And at Jacobina, we are assuming the actual grade. But, as we mention many time in the last quarter and this quarter again, the grade we are drilling is above 3 gm. And then we see our resources and reserve going up again this year. So, if we would assume the actual grade we see right now at the mill and in the future, that explain the difference just by itself. And then maybe to be clear on Jacobina, we don't have to go to 8500 tons per day. If we assume that the grade we are hitting right now, that's what we are going to have in the future, at 7500 tons per day we are already achieving that 225,000 ounces per day without increasing our permit and anything. So, there's many option at Jacobina by either grade or throughput.

[Josh Wolfson:]

Okay. And for the capital spending for Jacobina for the second phase, that $100 million, when would the timing of that spending occur and I guess when would the company make the decision to start that spending program?

[Daniel Racine:]

The spending will happen before 2021 and 2022 and it will probably be in two phases. The first one will be to bring from 6,500 to 7,500 tons per day and then in 2022 to take the 7,500 to 8,500.

[Josh Wolfson:]

Okay.

[Daniel Racine:]

And most of the capital will be in the second part of the answer so, in 2022.

[Josh Wolfson:]

Okay, that's helpful. If there could be additional disclosure for the 2021 corporate production guidance that would be helpful, I guess there's a lot of changes at Jacobina year-by-year.

[Daniel Racine:]

Yeah.

[Josh Wolfson:]

Great. Thank you very much.

[Daniel Racine:]

Thank you.

[Operator:]

Thank you. The next question is from Mark Llanes from Credit Suisse. Please go ahead. Your line is now open.

[Mark Llanes:]

Hi. Most of my questions have already been asked, but just to recall the debt maturity schedule I believe, it was 2022, '23, '24 and '27, are there any discussions at the moment to be able to retire those earlier?

[Daniel Racine:]

Mark, what we've said is obviously, first priority is revolver and then, beyond that we'll look at, preference will go to the near-term maturities, but that's a plan that's being developed and will be executed upon concurrent with the closing of Chapada.

[Mark Llanes:]

Okay. And then just a second question on Cerro Moro, on the silver grade, I know that you are mining above -- I mean processing above plan on the silver grade. Can you give me additional color on the silver grade profile for the rest of the year?

[Daniel Racine:]

Well, you are right, so far since we started to mine at Cerro Moro, we have better grade than expected, but for the rest of the year it should go to typical reserve grade, so, around 650 grams per ton.

[Mark Llanes:]

All right, thank you very much.

[Daniel Racine:]

And we were more in the 800 to 900 since the beginning of the production.

[Mark Llanes:]

Okay. Thanks.

[Operator:]

Thank you. The next question is from Mike Parkin from National Bank Financial. Please go ahead. Your line is now open.

[Mike Parkin:]

Thanks for taking my questions guys. I've got most of the details I'm looking for, I am just wondering with the Jacobina expansions, should we look for any unit cost improvements on a per tonnage basis with phase one or would it really be potentially more of a phase 2 change on those metrics?

[Daniel Racine:]

A small impact on phase 1, Mike, mostly on phase 2 there will be a huge impact. The impact on phase 1 will more on the cost per ounces and the cost per ton, because with almost same tonnage, will produce more ounces. The biggest impact will come from phase 2.

[Mike Parkin:]

Okay, any kind of in terms of magnitude?

[Daniel Racine:]

That's difficult right now to say, we're still doing the study, but we'll come back later this year to show the numbers.

[Mike Parkin:]

Okay. Thanks guys.

[Operator:]

Thank you. The next question is from Don MacLean from Paradigm Capital. Please go ahead. Your line is now open.

[DonMacLean:]

Good morning, guys. Good morning, Daniel. It's been a while since we've chatted. Some of us are just coming back to look at the name in more detail again, which is helpful, reduction in the debt coming ahead. It would be very helpful to get a list of the organic growth projects that you were referring to but in a priority sequence. And I don't know whether you can enlighten us a bit more on what the capital and the contribution would be, but just maybe prioritize them at the very least for us.

[Daniel Racine:]

That's pretty clear for us Don. Number one is Jacobina by far because it's giving us the best return on all our projects. Then sure, Canadian Malartic is a good project too, probably second. Then we have some improvement at the Florida and other mines we have too. Agua Rica is very important for the company because of the financial aspect of it. So, that's basically that is but number one is for sure Jacobina and number two Malartic.

[DonMacLean:]

And the Jacobina would include both phases?

[Daniel Racine:]

Yeah.

[DonMacLean:]

You were referring to the phase 1 is kind of a no --

[Daniel Racine:]

The phase 1 is very simple and then basically almost no capital. So, it's an easy one to decide.

[Don MacLean:]

And would phase 2 sort of stack up again at the top of the priority list?

[Daniel Racine:]

Yes.

[Don MacLean:]

Okay, great. Okay, that's helpful, thank you.

[Daniel Racine:]

Thank you.

[Operator:]

Thank you. The next question is from Anita Soni from CIBC. Please go ahead. Your line is now open.

[Anita Soni:]

The open pit at Cerro Moro, are you fully underground, right now?

[Daniel Racine:]

We didn't hear you, Anita.

[Anita Soni:]

Sorry. At Cerro Moro, in terms of the underground proportion of the ore feed, how much is that now?

[Yohann Bouchard:]

Yohann here speaking. We still have two years [of out of] mining with the open pit at Cerro Moro, so we, at this moment, about 25% is coming from underground and remaining from open pit. And we're planning to start the new mining zone -- underground mining zone, in May.

[Anita Soni:]

Sorry, in May, okay. And then secondly, on Canadian Malartic, what do you think is the timeline for Odyssey and East Malartic to start up? And secondly, the resource base that you have in Inferred category is that embedded in the Canadian Malartic inferred resources that you have in your reserve resource statement?

[Daniel Racine:]

For the first part of your question, like we mentioned a few time, we're doing the study right now that should be completed by late this year, early next year, then will come with our partner and announce exactly what we're planning to do. Development of it, if we see -- we gave a goal, we will start next year. And it should be completed by end of 2021 to have the first ore coming to the mill.

[Anita Soni:]

All right. And then secondly, the depreciation rates at Cerro Moro, was that booked on a production basis or is that booked on a sales basis, so given that you sold less than you produced, would we expect that to go higher next year -- I'm sorry next quarter when -- yeah.

[Daniel Racine:]

Sales basis, but it shouldn't change that much on a per-ounce basis, Anita. It's about $500.

[Anita Soni:]

Sorry, $500 per ounce or $500 differential, okay.

[Daniel Racine:]

$500 per ounce.

[Anita Soni:]

Okay. All right, thank you very much. Those were my questions.

[Operator:]

Thank you. There are no further questions registered at this time. I would like to turn back the meeting over to Mr. Racine.

[Daniel Racine:]

Yes, thanks everyone to joining our call. I have no further comments. Thank you, and have a good day.

[Operator:]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.