Yamana Gold Inc.
Q3 2017 Earnings Call Transcript

Published: 27 Oct 2017

[Operator:]

All participants please standby, your conference is ready to begin. 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 projections 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 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 third quarter 2017 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 12 PM Eastern Time. Replay information and the presentation slides accompanying this conference call and webcast are available on Yamana's website at yamana.com. I'll now turn the call over to Mr. Peter Marrone, Chairman and CEO.

[Peter Marrone:]

Good morning, ladies and gentleman. Thank you for attending this call. With us here this morning are Daniel Racine, our Executive Vice President and Chief Operations Officer; Barry Murphy, who is our Senior Vice President of Technical Services; and Jason LeBlanc, who is our Senior Vice President of Finance and Chief Financial Officer. Also here but not identified in this presentation are William Wulftange, who Managers our Exploration; Gerardo Fernandez, who Managers our Southern Operations; Yohann Bouchard, who Managers our Northern Operations. Ladies and gentlemen, let me begin by saying that as I hope is apparent we had a very strong third quarter with 257,000 ounces of gold, $1.4 million ounces of silver and just over 37 million pounds of copper from our six producing mines, which said in the past that while we provide guidance we also have budgets in the budgets often contain stretch objectives for internal measures of performance. So we risk adjust our budgets when providing our guidance and I'm comfortable saying to you that these production results were not only above our guidance but they were also above our budget. So it's a very strong quarter for us and it's a continuing theme, the strong quarters of we've had over the course of our last several quarters. We've introduced a new measure for cost reporting while we report all our costs on a co-product basis by metal, copper gold and silver. At the request of many of our shareholders and other market participants we also provide a by-product view of costs, supplying copper as a credit to gold and to silver. And are all in by-product sustaining costs per every ounce of gold was $729 for the quarter and for silver just over $12.20. For the second time this year for gold we've updated our guidance. We started the year with an original number of 920,000 ounces and again with our risk adjustment to budget as we continue to evaluate our budget and our forecasts are forecast looking better than our budgets. We came to the conclusion that we should upgrade our guidance. We upgraded it initially to 940,000 ounces in last night we upgraded our guidance again to 960,000 ounces of gold. We are also increased our guidance for silver to 5 million ounces and for copper to 125 million pounds and our cost constructed not change we indicated that we would be within our guidance for our cash costs and are all-in sustaining costs across all three metals. We've presented in the next several pages. In a different format what we've said before we take a six pillar approach to how we look to create value in this Company and those six pillars referred to operations, financial performance. The investments that we make we're calling a targeted investments here it refers to how we invest in projects and how we critically evaluate those projects before we develop them and then during the development cycle. What is our pipeline of new projects? What monetization initiatives we take and an important factor for the future of any mining company is exploration. On the operations have already touched on our strong performance for production I should highlight that a lot of that came from Chapada, certainly for copper but also for gold, El Peñón, Canadian Malartic and Gualcamayo. Our Gualcamayo had a six consecutive quarter of over 30,000 ounces of production. I should also say ladies and gentlemen that this is a summary of that which you will hear in greater detail throughout the course of this presentation. So strong production from these mines in particular we increased our guidance for all three metals. Our cash costs and all-in sustaining costs are in line. We continued with the optimization of our mines to create more predictability and sustainability. A focus of this company has become on maximization of free cash flow, a proper balance between production and costs. Sometimes if the throttle back on production to improve costs we took that approach is Jacobina and we succeeded. We've taken that approach more recently with El Peñón and we succeeded and we're taking that approach now with Minera Florida as you have heard and we're also looking at Gualcamayo and again Daniel was speak more to that. On the financial performance, Q3 results showcase a strong cash flow and an expected increase in cash flow. We have a step change in cash that's expected with Cerro Moro and that will coincide with the period of expansionary capital declining. During the course of the quarter and straddling into the fourth quarter we enhanced our short-term balance sheet resilience with certain gold and copper colors where with a floor price for much of our gold roughly 60% of our gold for Q4 and Q1 at $1300 per ounce so above the current gold price and we've also create a floor 285 per pound for copper. So we're getting the benefit of that copper price being about $3. We look at improved and improving our balance sheet. I want to mention five points on the balance sheet. These are questions that often come up and so I'd like to address those points. The first of us point is cash flow stability and cash flow growth. I want to emphasize that this is the most important to this Company. The best way to manage our balance sheet is to stabilize cash flow and then to increase our cash flow and we certainly see that in front of us. The second is to be risk and eliminate uncertainties and unquantifiable contingencies or contingencies that are difficult to quantify. It is a purposeful determination of commercial certainties over legal contingencies. This was a strong factor in the direction we took on the amnesty for tax assessments in Brazil. Jason will speak a bit more on that, and Daniel will speak a bit more on the opportunities. And that leads to the third point, which is the use of the balance sheet for opportunities. There is significant value ahead of us at Chapada, Canadian Malartic, Kirkland Lake, Monument Bay and others do not place the balance sheet heft that strengthen the shoulder of the balance sheet to support, secure our funds litigation even if it is a good case if the opportunities carry more value and we see opportunity this year that are carrying significantly more value. The fourth point is to monetize non-core assets in businesses only when it is warranted and only as a supplement to cash flows. I go back to point number one, which is that the important point on balance sheet management for this Company is cash flow stability and cash flow growth. We stand by our net debt reduction commitments and that includes the previously stated $300 million between 2016 and 2017, but we will not do that at the expense of value creation, Cerro Moro are being an example of that and opportunities to unlock value, Kirkland Lake being an example of that. We see far more value in Kirkland Lake than monetizing it at the present time. Could we? Yes. Should we? No. The fifth point is review the obligations and improve the terms. Look at the debt maturities and carry on the debt. An example of this is our most expensive debt which we will repay in 2018 and 2019. We intend to repay these amounts in 2018 and 2019. We will also look at alternatives that strengthen the balance sheet. We are some of the strongest bond markets in history and an investment grade rating that will only get better into the next year and years to follow. We will reduce total debt and net debt. We will honor our covenants. We plan to further improve our leverage after Cerro Moro development is completed to an intermediate term level of 2 and then below 1.5. Divestment opportunities add to the flexibility, although the focus again, I want to come back to point number one is on cash flow and cash flow growth. On targeted investments, we are looking at this a bit differently over the course of the last several years. Focus in the assets that match our core competencies, maximize opportunities and mitigate risk. Cerro Moro is an excellent example of that. Cerro Moro is a look alike to our Mercedes mine which we sold last year and it is very comparable to helping Yamana, very high grade and in terms of its geology, in terms of its mining method, and processing very similar. We want to develop assets at the right time, off cycle asset development in the right jurisdictions. Again, I go back to Cerro Moro as a casing point. We took on Cerro Moro during a time in Argentina that was perceived to be more difficult. Argentina has become a poster child for improvement in jurisdictions, and high quality jurisdictions to boot that are supportive of mining, and we are happy to be there and to be developing Cerro Moro through that down cycle, and now coming into the up cycle. And we want to be in development when not everyone else is in development, and that certainly coincides with what we are doing in Cerro Moro. We are targeting significant production growth in gold and silver between 15% and 20% for gold and almost 200% for silver. We have a portfolio that is tangible value accretion opportunities that includes exploration and I'll come back to that in a moment. And we focus on maximizing returns and cash flow accretion. We have a pipeline that is initially Cerro Moro, the Canadian Malartic extension project, and Chapada optimizations that includes the broader Suruca complex that Barry will speak to and Daniel will speak to in the case of the Chapada optimizations in the Suruca complex. That's the intermediate and short-term pipeline. We have a longer term pipeline. We look at that between five and seven years and that includes the possible development of Kirkland Lake in partnership Agua Rica, our Monument Bay project which we now consider to be a mine into the future, and we are now looking at how we take that through the various studies that ultimately conclude that we should be developing it. Deep covenants at Canadian Malartic, and of course our Suyai mine project in Argentina where we are beginning the process of reinvigoration of community relations. We prioritize our opportunities with the greatest potential and value accretion. By the time of our guidance next year, we will provide some further indication of how we fit those assets into the priorities in that pipeline. On the monetization initiatives, non-strategic assets are always - they are always under evaluation to potentially surface value. We look at all of the avenues to deliver value. These assets include Kirkland Lake, Agua Rica and Agua De La Falda. Now it may seen in consistent, if we're saying that it's in pipeline, how is it also in a monetization initiative and we look at it from the point of view, what delivers best value. We don't want to sell something. We want to develop it. We're a mining company. We should be developing these assets. But if we can bring value to the Company by a monetization initiative, we'll take advantage and look at that also. And again monetization initiatives are complement to the focus on maximizing cash flow and they follow full technical evaluations as we are doing with Kirkland Lake and Agua Rica. And finally under the six pillars and the creation of value accretion is exploration. We have significant exploration potential and optionality within our existing portfolio. The potential to enhance values at operating mines comes from exploration discoveries at Chapada. Canadian Malartic with not only Odyssey, but East Malartic. Gualcamayo is our oxide opportunities, but also with the covenants and other Sulphide opportunities. New discoveries in Minera Florida will take that mine to a production platform as we plan it to 130,000 ounces in the next several years and we've already seen the expiration successes followed by development that take a mine like Jacobina from a production platform several years ago of 75,000 ounces to running above our guidance of 130,000 ounces this year and now with a targeted line of sight toward 150,000 ounces in the next several years. And with that as a summary, ladies and gentlemen, let me turn it to Daniel, on our operations.

[Daniel Racine:]

Thank you, Peter. Good morning, everyone. As you have seen in our press release, we have continued to deliver operationally in the third quarter. We build on a strong first half and delivered increase production for gold, silver and copper. We produced over 257,000 ounces of gold, 1.4 million ounces of silver and 37 million pounds of copper. As Peter mentioned, based on our performance to the first three quarters, we have increased guidance by 40,000 ounces for gold, 260,000 ounces for silver and 5 million pounds for copper. In aggregate that means we are now expecting 960,000 ounces for gold, 5 million ounces - 125 million pound of copper and 5 million ounces of silver. We are tracking well to those targets. Again looking at the mine-by-mine basis, we have strong production year-to-date from Chapada, El Penon, Canadian Malartic and Jacobina. This performance is the result of our effort to improve the sustainability and predictability of our operation. We are seeing the benefit of our approach across most of our portfolio. Looking at cost, we are seeing good performance as well with operating costs for gold in line with the second quarter. The Yamana's six mine produce each ounces of gold at a cash cost of $672 and all-in cash cost at $874 per ounces. If we apply copper as a credit, we produce each ounces of gold at a cash cost of $496 and then all-in cash costs of $729. We are tracking very well to our guidance for all metals. I would like to highlight that for the first nine-month by product cash cost and by product all-in sustaining cash costs or $566 and $816 respective. Now I would like to briefly go through each of our six operations from some key highlights. Chapada continue to deliver quarter-over-quarter production increases. The strong production was driven in part by higher processing rate and continued increase in gold and copper great with additional or contributed from copper soon. Late in September, we commence commissioning of the cleaner circuit expansion. We expect to complete this work in the fourth quarter, actually it is completed now. Year-to-date, the mining sequence has call for extraction of additional ways and low grade ore. This material was stock pile and will provide leverage and optionality in periods of higher metal prices, particularly for copper. I'd like to pick up on something Peter mentioned. The decision by our Board to improve certainty by settling certain Brazilian tax matter is an important consideration giving the scope of opportunity and potential for investment we are seeing Chapada. We are in leveraging a mine life well in excess of 20 years. There is a significant exploration potential as we have discovered multiple new targets recently, including Baru, Formiga and Sucupira. We think there's a district of mineralization here much larger than originally planned for Chapada. Given this established and growing near mine exploration and potential as Chapada. We are evaluating the potential to expand the size and scale of our processing facility with an eye on increasing to both capacity. We are also seeing optimization potential and will continue to evaluate options as we look to maximize the value and cash we can generate from this property. And lastly, the Suruca oxide project is advancing, but we are now also considering recent drill result at Suruca Southwest and Suruca Sulphide located underneath the oxide deposit. We are now looking at the synergy potential of a broader Suruca complex. We will complete studies on this opportunity in 2018, which may lead to lower capital in 2018 on the oxide only project. El Peñón continue to delivered production increases for gold and year-to-date gold and silver production position us well to exceed guidance for both metals. We have increased production while across our trending towers original full-year expectation. With margins remaining strong and increased production we are generating additional cash from El Peñón. In the quarter we increase development which is improving current year production while answering mine flexibility to what production expectation going forward and in advance of 2018. Canadian Malartic continue this strong performance. Cars are tracking full-year guidance all-in cash costs of approximately 751 per ounces are impressive despite being impacted by the appreciation of the Canadian dollar. The Canadian Malartic expansion project is advancing according to plan. All key certificates of authorization has been obtained. The road bypass is complete and a bridge to off road and mining equipment across the highway is scheduled to be completed by year-end. In support of this work we have moved 10 million to 16 million on the 50% basis forward from 2018. At Gualcamayo the operation resume normal mine sequencing at September as remediation of the localized bit more failure was experience in the second quarter was completed. In the third quarter we're establishing access to high grade ore and began stacking it on the heap leach plant which should facilitate the return to higher recovery rates. As a result we are expecting the fourth quarter to have the highest quarterly production run rate of the year, positioning Gualcamayo to meet its 2017 production targets. In light of the remaining mine life of oxide inventory we are increasing the exploration effort at Gualcamayo. We are focusing on both increasing the oxide mine life and it testifying evaluation of the significant potential in non-oxide ore bodies such Deep Carbonates. At the same time we will be taking a similar approach as we did elsewhere in the portfolio recently to optimize the operation. We will focus on establishing a more sustainable production day's better cost structure and more significant contributions to free cash flow and return. We have applied this approach at similar a transform planned with success at El Peñón and Jacobina. While it may lead initially to less ounces of production ultimately those ounces will be higher quality. At Minera Florida production in the third quarter increased and was driven by higher mining rate with a record for all our mine being achieved in July. The result in the third quarter at Minera Florida are consistent with the transform of strategy we've put in place earlier this year to focus on productivity, dilution, grades recovery and operating cost. We are also directing development in exploration efforts toward establishing a growth platform in pursuit of the future strategic targets 130,000 ounces of gold per year. Jacobina the strong third quarter and production is expected to exceed full-year guidance at lower costs. Third quarter production exceeded 32,000 for the fourth consecutive quarter demonstrating the sustainability of improved result we've been seeing at the operation. Processing rate and feed grade continues to benefit from improvement in operating efficiency. As we've seen throughout the year so far productivity and cost gains are providing us the opportunity to source mineralization that is near to existing working and development but outside of the reserve block we are getting approximately 15% to 20% of meal feed from areas outside mineral reserve thereby providing increased upside optionality for the mine. Thank you. I will now turn the call over to Barry to discuss about Cerro Moro.

[Barry Murphy:]

Thanks, Daniel. I will be talking on Cerro Moro briefly and providing with an update on progress there. So the project continues to track against the plan in terms of both cost and schedule, and structural still is now elected in almost all areas and most of the mechanical equipment has been placed. The lining of the tailings facility was completed in September allowing the containment of the water needed for commissioning and start of activities. The construction focus has now moved to the installation of the piping, and the ramp up of electrical installations during October, November. Mechanical completion of the key processes plant facilities is still scheduled for the end of the year and quarter four will be characterized by the transition from construction to commissioning with the commissioning of some of the early systems taking place in December. Quarter one next year will be dominated by commissioning activities in preparation for ramp up in quarter two. The underground mine development is also progressing well for the total of 673 meters advanced to date in 2017. This is in addition to the 617 meters developed last year. The open pit operations will commence in January next year with the intention of creating a six-week stock pile ahead of start up in quarter two. The mining operation is not transitioned from the operation from the project phase to the operational phase. In terms of cost, we have spent $124 million year-to-date of a full cost cash expenditure of $178 million for 2017. To date, we have committed approximately 78% of the total initial capital, there's no material surprises in the contract costs. In line with our previous guidance, the total production in 2018 is expected to be 80,000 ounces of gold and 4.5 million ounces of silver, and the 2019 production is estimated to be 130,000 ounces of gold and 9.9 million ounces of silver. During the last quarter, we have completed the detailed mine planning and are now in the process of finalizing the production forecast and the operating budget for the forthcoming budget period is 2018, 2019 and 2020. In terms of our exploration objectives, 2017 marks the first year of a full-year program to have 1 million gold equivalent ounces to the Cerro Moro resource inventory. The drill program is returning positive results, confirming the continuity of mineralization and discovering the 1.5 kilometer Veronica structure linking Escondida and Esperanza mineral systems. Will that, I'll hand over to Jason.

[Jason LeBlanc:]

Thanks Barry. Turning now to our financial performance. We delivered revenue of $493 million for the quarter and no revenue was positively impacted by higher copper prices and sales volumes. Net earnings attributable to Yamana shareholder for the quarter were $43.5 million or $0.05 per share. Higher year-over-year earnings were driven by increased revenue and lower DD&A partly offset by the strength of our operating currencies. Mine operating earnings were $106 million for the quarter up $15.4 million from last year and almost double the level of Q2 this year. DD&A was $108 million for the quarter and as you've heard before, we are tracking higher DD&A year-to-date given our production is running well above plan. Expansionary capital is higher year-over-year from Q2 this year and Cerro Moro has started at highest 10 quarters. We will remain on schedule and budget at Cerro Moro. On the exploration front, we are tracking well the plan with approximately $23 million of capitalized exploration in the quarter. Looking at cash flows now. We generated just under $150 million in cash flows from operating activities. Cash flows for changes in income taxes and net change in working capital with $171.5 million during the quarter. Furthermore, working capital movement excluding Brio was a positive $19 million in the quarter. During the quarter, we also made $30.5 million in payments relating to Brazilian taxes. Peter and Daniel touched on this already, but it is worth mentioning again this was a decision that helps increase certainty as we head into next year with the pending new contribution from Cerro Moro. Furthermore, in Brazil Chapada continued to provide us with tremendous opportunities and optionality from ongoing exploration success in the Chapada district. Over time many of these opportunities may have been difficult to pursue if we continue to litigate these tax challenges with further uncertainty. We have manageable payments under the settlement totaling about $44 million during the fourth quarter and thereafter the payments are modest on an annual basis, especially when compared with our annual cash flows. Digging a bit deeper into cash flows, we saw a sequential production growth also reflected in our ability to generate cash, generate net free cash flow, which in the quarter was approximately $117 million. It was up significantly from both Q1 and Q2. As Daniel outlined, we are seeing a strong performance across our mines that translated into a $25 million increase in operating cash flow from Q2. So while our mines are delivering higher production, we are also managing our cost to ensure, we get the right balance to maximize cash flows. We had headwinds on foreign exchange all year, but this hasn't resulted in our cost being above planned. In fact over the three quarters this year, our cash cost have only varied a maximum of $17 per ounce from the highest to lowest cost quarters and between Q2 and Q3 of that variance was only $1. This shows we are focused on controlling costs. And about the production cost is the key to generating consistent cash flows. You probably seeing this graph before, but I wanted to speak to it again because we think at the key point. There's a seasonality in our portfolio with production in the second half of the year above that in the first half, and we see the same thing in financial performance. This year we're expecting that trend to continue with second half cash flow exceeding first half levels. Obviously metal prices can impact this and with Cerro Moro and deconstruction, we took the prudent measure of putting in place some price protection to underpin our cash flows into 2018. Through Q1 of 2018, we have callers on 285,000 ounces of gold that guarantee $1,500 per ounce and provide price participation up to 1,414 per ounce. We took a similar approach with copper and have callers in place for 45 million pounds over the first half of 2018 that provide protection down to $2.85 per pound and participation up to $3.33 per pound. Looking at this holistically, these option contracts will provide price force to the majority of our planned gold and copper production over the coming quarters that is above our 2017 budget assumptions. This will also underpin our cash flows to a critical time at Cerro Moro. We are well positioned to benefit from the investments in growth that we are making and to begin harvesting cash with the expected step change in cash flow beginning in 2018. Closing out my section, it's worth remembering the relatively short timeframe until the start-up of this contribution from Cerro Moro and the associated decrease in expansionary capital. We've been spending on growth in recent quarters, but that will pivot to cash harvesting next year. We have planned for this growth spending by positioning our balance sheet in recent years with significant debt reduction efforts to accommodate the spending plan at Cerro Moro. As already mentioned, we have also limited our sensitivity to commodity prices during the finalization of construction. Coming up, we have manageable debt repayment schedule and a step changing cash flow beginning in 2018 that will be the driver for net debt reduction. We are still targeting a leverage ratio of 1.5 times in the intermediate term, a growing cash flow generation will deliver this objective, but we also have a significant - we also have to give significant optionality through our efforts to rationalize and create value from our non-strategic asset. I will now turn the call back over to Peter.

[Peter Marrone:]

Ladies and gentlemen that's our formal presentation. So perhaps if we can open up the call to any questions.

[Operator:]

Certainly, thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question is from Dan Rollins with RBC Capital Markets. Please go ahead.

[Dan Rollins:]

Yes, thanks very much. Good to see another - good quarter from you guys. Consistency is nice to see. Just wondering on Suruca, could you maybe provide a little bit of color, what's been changing there, obviously that small oxides deposit I think was going to do around 20,000 ounces for you. But with the Sulphide and the regional exploration success, are you looking at sort of a standalone production facility there or are we looking at going back to a few years ago when maybe that ore was going to be put through the larger mill Chapada?

[Barry Murphy:]

Hi Dan, it's Barry here. So the oxide-only Suruca deposit intention is to treat that through a heap leach, a standalone heap leach facility at the Suruca site with the discovery and identification of these other resources in Southwest Sulphide. And as Daniel mentioned, the sulphides are beneath the oxide, so there is an opportunity to go back to what you're referring to which is a separate CIL or CIP plant attached to the Chapada operation. We've got some work to do to define whether that will be economic, but that work will take place during the process of 2018. So, yes it is looking at opportunity to put all the oxide and the sulphide through CIL or CIP plant close to Chapada.

[Dan Rollins:]

Okay. Perfect. And then just with respect to Kirkland, obviously, both yourself and [indiscernible] decided not to monetize that. Could you maybe just touch based on what's happened on the exploration front to really let you the team there to rethink monetizing those assets. Obviously, we haven't seen a lot of news flow in there since the acquisition, but I was wondering what's been changing there that sort of peaked the interest of both parties?

[William Wulftange:]

Good morning. This is William Wulftange. You are right, the Kirkland Lake there's not has been a lot of news at Kirkland Lake, this year we've been focusing on getting some studies completed on Upper Canada where we expect to add some additional resources to mineral the inventory. We've been working around the surface at Upper Beaver testing some new surface targets just to the East of the main deposit, but near the surface and have had some pretty good success there. We've tested along the AK structure for some new conceptual ideas to find mineralization there with mixed results and essentially target developing out elsewhere. So there has been a lot of news to generate out of Kirkland Lake, but we still see a very strong potential for that in the future. There's still a lot of exploration to do.

[Peter Marrone:]

Dan, I'd like to supplement that. I think the starting point is we're carrying an inventory on a 100% basis more than 6 million ounces, the published number is 6.2 million ounces in all resource categories. So it's a big number and if we look at these districts and the number of opportunities, a number of deposits more than 6 million ounces in resources already, Upper Beaver already advanced the advancement of Upper Canada in amalgamated Kirkland. This parallel zone that Bouch referred to and we touched on in a previous announcement at Upper Beaver. These are all the things that went into the formulation and thinking at a partnership level that perhaps where we are getting great price discovery and an opportunity to monetize. Kirkland Lake, we should take a step back and we should critically evaluate the value of this - the real value of this. We already know that the net asset value is well in excess of what was in that price discovery with initial offers, but we think that we can do better than that. And so while there hasn't been very much reported by way of growing results some of it is interpretation of what we already have and what was previously been said, some of it is this parallel zone at Upper Beaver and a big portion of it also is - this concept of centralized plant is only a recent concept. So between Barry and Yohann and Daniel and our counterparts with our partner, our conclusion was we should spend a little bit more time exactly understanding how we do this and how do we get 200,000 to 250,000 ounces of gold production coming from this complex. And that's the plan into next year.

[Dan Rollins:]

Okay. And just with respect to price discovery, it's not an asset we talked about a lot, but Agua Rica, obviously you're looking at changing how to mine that and potentially build out a standalone facility. I think the last few times you've try to do price discovery in either political environment in Argentina wasn't favorable or we're entering periods of large capital cost overruns and challenging metal prices. But what is been the level of interest from third parties with respect to a potential investment in Agua Rica and when do you think it would be realistic to have some type of formal agreement put in place there?

[Peter Marrone:]

It's always it's interesting that you touched on history with Agua Rica. You might remember that we had a deal with a company that was a former partner in when Alumbrera, when Xstrata was still in existence before its acquisition. Xstrata had done a deal with us and it was part of a competitive process we had multiple offers. Xstrata was the best offer I'm relying on public information. But we indicated at the time that they were paying in installment payments $310 million and we were getting 65% of the gold on that deal. We had been paid an initial $50 million on that deal so we did get paid on that deal. And I should also have mentioned that they also undertook the work to complete an update to the feasibility study. Now it's rough to ballpark what the value of that is but we estimate that it's somewhere in the range of $40 million to $50 million of additional work that includes drilling in metallurgy. Since the acquisition of Xstrata clearly and as you mentioned at the time the erosion of the environment in Argentina, we were asked for an extension to a further installment payment in our conclusion was that we were not prepared to do. Now why we didn't do that is because we now had the complete work of a feasibility study in a large open pit and we're beginning the evaluation of a selective underground mining model. So where we find ourselves today then is one, we have demonstrated that Agua Rica is a sellable project, two as we've demonstrated that there's a considerable amount of value both from that deal and from the work that's been done. So we have two paths for potential partners in Agua Rica. One is a larger open pit that requires more capital to be spent, a better option is the integration into Alumbrera, but it can stand as a standalone project and another is a selective underground mining where less copper would be delivered and less gold would be delivered, but also the CapEx is a fraction of the CapEx for the larger project. And we're now in a process with two of the international investment banks on looking at opportunities to bring a monetization event for this company but what we're really looking for is also an event that would mature Agua Rica to development. To see it differently we'd like to continue to stay involved. We'd like to retain some partnership interest in Agua Rica particularly if the plan is to go with a smaller selective underground opportunity. And so we're looking at all of that. I think that Agua Rica going to your last question is probably the best most immediate example of high value that can be created for this company on the monetization front while we continue to retain some value as well. And with the process is so undertaken the number of parties there are in the data room, the level of interest that has been expressed the improvement to the environment in Argentina. The two plans that are available to us, the smaller plan and the larger plan that gives that optionality to more participants we think that - but sometime between now and the first quarter of next year perhaps early into the second quarter of next year. We will have completed this strategic process.

[Dan Rollins:]

Okay. Great. Thanks very much. All the questions I have.

[Operator:]

Thank you. The next question is from Andrew Kaip with BMO Capital. Please go ahead.

[Andrew Kaip:]

Hi, good morning Peter and Daniel and teams. Congratulations on a decent quarter as well. Look my questions are regarding La Florida and I wondering if you can give us a bit more indication of what the key issues you are dealing with that resetting for the long-term La Florida, what should we be expecting you to be doing to get back up to that that intermediate our long-term goal of 130,000 ounces. So what are the obstacles and then what is the timing on getting to that goal?

[Peter Marrone:]

I would like to pass this to Daniel or to perhaps Gerardo. But Andrew I think you hit the nail on the head. We were planning to produce 105,000 at this mine and frankly wouldn't produce more than 105,000 ounces and that was our guidance at the beginning of the year. We will be below guidance on this particular operation. Now we're above what we have said at the beginning of the year on recoveries and on grade but the total production will be lower will be in the range of 90,000 to 95,000 ounces with a trajectory to get 130,000 ounces in our expectation is probably by 2020. We're get there and perhaps Gerardo you can discuss with Andrew what you see as the milestones to get there.

[Gerardo Fernandez-Tobar:]

Good morning, Andrew. We discussed during there, there was a side bases in average tour, but we have switched from beet combine from tailings and ore to exclusively feed from the underground mine with higher grade and aiming for higher recoveries at the plant. That ramp up is working well. I would say this in terms of barriers it took us a little bit longer than we anticipated to ramp up just to feed from underground. But during the course of the year, we realize that the exploration opportunities at but that was and there was exploration needed to be addressed during this year. So we've started development and switch, they have put of development from the mine to where the new zones, so we can decongest the mine and think on a more a medium-term long-term for Minera Florida instead of continued development around the same core mine. In terms of the future to get there, we the critical path is on exploration, of course we're having good results that's it continues. The development that was a new zone we started this year. We are taking a deepen approach to perhaps what we indicated in terms of [indiscernible] in developing a straight to but I was from 15 infrastructure or need to us going impairment to that, but we don't have to develop or need us right away. So that will come later in 2018. So we are relevant with the core of the new zones where they better greater. And we also have to clear some permitting non-related to our neediness which is we announced as cleared, but to change in the strategy in general for Minera Florida is in all operation you has several permitted for years we want to consolidate all of them into one document, one new environmental assessment that will allow us to simplify or compliance for the future. Also provide flexibility in light of the exploration potential we see at Minera Florida.

[Peter Marrone:]

And Andrew as you're aware of the current historical mining is most distant from the plant. So between the Hornitos tunnel these new discoveries, the existing mine and the modifications to the plant, I'll share with you my personal observation. This is like an entirely new mine, and so looking at it from that point of view, we're looking at the consolidation of everything here including permitting as Gerardo mentioned that will require a slow and steady approach on exploration, on development although as Gerardo, you mentioned before we are already expect to be [indiscernible] early next year and the permitting part and all of that to existing to roughly 2020.

[Andrew Kaip:]

We should expect news on [indiscernible] in 2018 moving towards development and then an indication probably later in 2018 regarding the contribution there?

[Peter Marrone:]

Correct.

[Andrew Kaip:]

Okay, great. Thank you. Thank you very much.

[Operator:]

Thank you. [Operator Instructions] The next question is from David Hudson with CIBC. Please go ahead.

[David Hudson:]

Good morning, Peter and team. Thank you very much for the update. A kind of couple questions, maybe the first one for Barry if that's okay. Looking at Cerro Moro, it's quite good development work on the underground together with construction. I'm just wondering if you've touched the ore body yet either from your open pit work or from your underground development.

[Barry Murphy:]

Hi, David. I will hand it over to Gerardo in a minute for more color if necessary. But we had touched the ore body underground. And on the surface, the ore strikes the surface. So this is practically no and pre-stripping required for the open pit. And that Gerardo, we would you like to add to the underground work?

[Gerardo Fernandez-Tobar:]

Yes, with underground we have first door in several levels. We are in the position with main ramp for having the first final [indiscernible] of the mine. I really developed and prepared. So I guess your question gone about reconsolidation, we're seeing the grades we expect and we take that ore body.

[David Hudson:]

Okay, and as far as the ore body goes, it was way you predicted it to be you didn't find any splitting of the [times] that it at as anticipated.

[Peter Marrone:]

It's been as anticipated. One of the things that I think through the last two, three years has been done in a similar approach them our sales is to investment drilling and definition has been drilling 20/20 on the over parts of their body 20/20 meters. It's a good spacing for this time of deposit. So we are not seeing any surprises in terms of positioning or place of living.

[David Hudson:]

And the times that if touch so far what kind of width are we talking about?

[Peter Marrone:]

We are looking at 1.5 to 3 meters in terms that width. We've started doing this split blasting. So we've been able to mind with less dilution that we anticipated. We are training to cruse as you can imagine at this moment during this year with the support from people from us beyond. So we are on that process.

[David Hudson:]

It would look similar to what we had seen recently at El Peñón with the narrower vines and the split blasting?

[Peter Marrone:]

It will look wider than El Peñón.

[David Hudson:]

Okay. Just switching over to Chapada, if that's okay. We have been anticipated grades this quarter. If there's still an expectation that next year will be moving into low grade portion of the all party with highest strip?

[Yohann Bouchard:]

Yohann here on the line. I would say next year we going to have about the same grade and this year the plan is still to focus more on got possible moving the low stock and lower grade on surface and process the higher grade tons.

[David Hudson:]

Okay and the strip ratio similar to what we think seeing or stepping up a bit?

[Yohann Bouchard:]

As going to be above the same then this year.

[David Hudson:]

Right. Thank you very much.

[Operator:]

Thank you. The next question is from Tanya Jakusconek with Scotiabank. Please go ahead.

[Tanya Jakusconek:]

Yes, good morning, everybody. Maybe a question for Daniel on El Peñón, Daniel can you talk a little bit about what's happening to the cost structure there and could be you know the costs are a bit higher than I expected this quarter and I'm just wondering what's going on there and how do the cost look as we go into the next several years?

[Daniel Racine:]

Yes, this quarter was higher as we explained because of we've decided to do extra development to have a higher production for this year. And also you know consolidate next year production. So we mentioned that - and I mentioned in my pardon and it's our MD&A. So it was a one quarter event. So next quarter will be back to the cost we were in Q1 and Q2 and then we should be very close to our guidance for the full-year. So it's a decision just to produce more answers this year and make sure that our plan next year is more easier to achieve.

[Tanya Jakusconek:]

So on the development came through your operating costs or not sustaining capital?

[Daniel Racine:]

Exactly.

[Tanya Jakusconek:]

Okay. And just going - can you remind me what the sustaining capital is going to be then just for now that you've gotten a mine to we will have at study state for development underground. What's the sustaining capital rate that I should be thinking about it them at the operation?

[Daniel Racine:]

Jason.

[Jason LeBlanc:]

Tanya, this is Jason. We got $35 million this year on sustaining. So I think it's pretty good number.

[Peter Marrone:]

Yes, should be similar next year about the same amount of development and so we're going to have - we're going to do more this year but next year will be a back to around $35 million.

[Tanya Jakusconek:]

Okay. And then may be just kind of banker Kirkland and all some of the other assets that you have I think you mentioned we are going to have more information on what you think some of these assets can do next year? Is that correct?

[Peter Marrone:]

Yes, for Kirkland Lake Tanya where - we clearly were discussing that with our partner it's a partnership decision. But that is part of what as we go through the budgeting process as a company as they go through their budgeting process and as the partnership then provides its budgeting expectations. We're looking at what we should be spending on exploration on further studies. Those studies will include this is centralized plant concept, but also further improvements to [indiscernible].

[Tanya Jakusconek:]

Okay. But in terms of some of the capital operating numbers for this asset, when will we have an idea of that?

[Jason LeBlanc:]

Tanya, regard to all that right now it's little early to say, we'll provide that update closer to when we provide our guidance.

[Peter Marrone:]

Tanya, we have not completed, again we're being very sensitive to discussions with our partner, and we've not completed what the budget should be for exploration or for other studies. But I would say to you that in ballpark at a high level, we should expect that into next year we will be providing an updates to resources, we will be providing periodically indications for further drilling. I would strongly expect that there will be a budget for exploration next year on Kirkland Lake and we will be providing some update by the end of the year on some of the studies to which I referred and in that then we should have some numbers on expected operating costs and expected capital costs.

[Tanya Jakusconek:]

Okay. I look forward to that. Thank you.

[Operator:]

Thank you. The next question is from Steven Butler with GMP Securities. Please go ahead.

[Steven Butler:]

Good morning, guys. Just on Chapada. You talked about the significant optimization potential of the asset and you've been talking like about this for some time guys, which is fine. In terms of the reserves that are there at 600 odd million tons, I assume we're including in there Sucupira [indiscernible], I'm not sure about Baru. Maybe Baru is in there. I assume Formiga is not in there or maybe not even in resource maybe you can elaborate on your potential to where you see any low hanging fruit to add to the reserve base, although it already is still is a big reserve, would you still justify an expansion of the mill based on the current reserve or you need to see further reserve increases? And maybe elaborate on why you would put a CIL circuit in?

[Peter Marrone:]

We are considering an expansion of the plant independently of increases in reserves. As you said, there is a large reserve base. We've got more than 20 years of mine life at Chapada. And what we're evaluating is what's the required capital, what's the throughput that is an optimal throughput that may reduce mine life from that more than 20 years, but it brings forward production for copper and for gold and that brings forward value. So that's something that we will be evaluating into 2018. And part of the reason in doing that is because it's always a good idea to bring forward production if you can comparing that to the CapEx and one of the returns, but we're also seeing the opportunity for increases in reserves and resources on some of these other areas that you mentioned. There is Baru, Sucupira, Formiga, Suruca Southwest. You are aware, we did not touch on this earlier, but Suruca Sulphide already has roughly 800,000 ounces in resources. And so there's a big complex here and multiple opportunities. To go to a bit more of the specific of your question, I would expect that by the end of this year we will show an increase in resources and perhaps an increase in reserves after what we mined. And certainly by the end of 2018, we'll be able to do that as well.

[Steven Butler:]

Okay. So Peter, why slow down - I guess reference to Daniel talking about Suruca in terms of slowing down less capital, maybe can you elaborate on what is the plan for Suruca, heap leach or is it perhaps on [indiscernible]?

[Peter Marrone:]

Maybe before Steve to complete on Chapada, the Chapada mill was build to process 19 million tons per year. We're going to be closer to 23 million tons this year and next year without investment, so it was first phase optimization of the actual plant and then we succeeded doing that. Now we see that we're building stockpiles, so what's the next step is to look at an expansion. Looking at an extension, thinking about Suruca mainly sulphide and oxide instead of building - Barry mentioned it clearly, instead of building a heap leach pad for 40,000 ounces per year plant at Suruca then still need to put the CIL plant at Chapada for the sulphide and then we've decided or maybe we should step back and look at the complex because there's also Suruca Southwest included in there. Yes, maybe if you put all these answers together, it's better to put a CIL or CIT plant at Chapada and wait a bit before spending money on the oxide. So this is what we're going to do in 2019 instead of starting to build a mine or an open pit operation and heap leach at Suruca, maybe we should wait a year and see is it still the best option or we should include everything in a complex and mine and process everything at Chapada. We have already all the facilities, all the people and then our all infrastructure, right there at Chapada instead of building a new mine.

[Peter Marrone:]

So we haven't made a decision, not to pursue the Suruca oxides, that continues. And as Barry said in prior calls and with our Investor Day, we're continuing with the studies that complete at the end of this year. So I would say it's fair to say that by the time, we deliver on our guidance early next year, roughly by February next year. We'll be in a better position to say, look this is what the complex looks like for Sulphide, Suruca Southwest, Suruca oxides and this is an approach that we will be pursuing. If we choose to go the route of where we're on, which is the path we're on, which is a Suruca oxides, and we would have a small heap leach spend the capital into 2018 in a part of 2019 and get that roughly 40,000 ounces of production per year for a five-year period. If we choose the alternative course, it will be because it delivers better value and better returns and we will look at a CIL plant or CIP plant processing the oxides and Sulphide. The Sulphide is below the oxides and also Suruca Southwest and of course the extension of that to the northeast as well that we haven't talked about, but we will and will see what level of CapEx is required for that and a level of production. It will be a higher production perhaps a modestly higher CapEx. We won't be spending on the heap leach, but we will be spending on the plant. And - but it will likely mean that we will be deferring the 40,000 ounces the beginning in 2019 to 2020 and we will have less capital to spend in 2018 and a part of 2019. Those are the two options that we're looking at and we'll have a better picture of that early next year

[Steven Butler:]

Okay, so look for more early 2018, Peter you're saying?

[Peter Marrone:]

Yes.

[Steven Butler:]

Okay, thanks for the clarification.

[Operator:]

Thank you. The next question is a follow-up question from Andrew Kaip with BMO. Please go ahead.

[Andrew Kaip:]

Hi, just follow up on David's questions about Cerro Moro. You didn't indicate whether you were from an open pit perspective whether you had been began pioneering of the open pit. And then I guess the other question I have is, what is your - what should we be expecting from stockpiling advance of commissioning the plan?

[Peter Marrone:]

Okay. We are in the final phase of the weaving process for the open pit contractor. We anticipate the mobilization in November - late November of this year and start break in the ground in December. In terms of stock pile, we are planning to have at least two months of material before we start commissioning. We do have a high grade stockpile business now from the underground. As Barry mentioned, the open pit don't have with stripping main structure of crops, especially the beats where we start. So we will be accessing ore from the first weeks of operation there.

[Andrew Kaip:]

Because you got the [indiscernible] you don't have a lot of strip, presumably you're going to be dealing with some oxides begin with some of the open pit. I'm just wondering what the recovery response is going to be from that material that you start off with?

[Daniel Racine:]

Yes, the first part of the ore body is what we call [Gaelic Zone], there is no really a difference in terms of recovery through the deposit. I think the main challenge of the high grade. We do expect to have a high content of plea in the first part of that when we experience that when you're on in the beginning. But [indiscernible] we have and operations readiness is able to handle that amount of plea and we have pressure also from the underground to blend - you've to prevent issues with them sequentially.

[Andrew Kaip:]

Okay, thanks very much.

[Operator:]

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

[Peter Marrone:]

So ladies and gentlemen, thank you for that in for making the time. I would like to complement the operational management on an excellent job on not only a decent quarter, but very, very high quality quarter for production and costs across all metals and of course our technical services team for the development of Cerro Moro and our other studies. I'd like to leave you with three thoughts. We have significant precious metals production growth. I mentioned earlier that between 15% and 20% for gold and up to 200% for silver. We see the production growth coming from Canadian Malartic, a bit from El Penon, Jacobina and of course Cerro Moro. Part of what we're evaluating at Cerro Moro, because of the optimizations and improvements that we've made to the mine plan. Barry touched on this a little bit is what is the production expectation for the mine in 2018 and 2019. We've guided 80,000 ounces at the beginning of this year for next year. We're evaluating that at this time. We're preparing our budget for 2018, 2019 and 2020 and what we can say to you as presently these budget show that we're on track for the guidance we gave at the beginning of this year for next year. The cost of margin improvements will lead to increases in cash flow and free cash flow. I know that some of you look at free cash flow after expansionary capital. Jason mentioned a number that is before expansionary capital we would expect that the free cash flow number is lower as we build out several more but that free cash flow number will increase dramatically and we were really it was recently brought to our attention and I'll leave you with this final thought but in 2018, 2019 in the next several years, we will be generating a net free cash flow that is a disproportionate to our market capitalization, to say differently we - the ratio of free cash flow to market cap is one of the highest in the industry and that is really good. It means we will be generating some significant free cash flow as our cash flow increases with these opportunities are coming to production and as our CapEx decreases very significantly beginning by the middle of 2018. So that ladies and gentlemen thank you very much for making the time on this call.

[Operator:]

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