Yamana Gold Inc.
Q1 2016 Earnings Call Transcript

Published: 5 May 2016

[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 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 first quarter 2016 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

[Peter Marrone:]

Thank you very much operator for that and thank you very much to those who are in attendance on our call. As we have done in previous occasions and particularly where this call coincides with our shareholder meeting which is planned for later this morning, I'll take the opportunity to go through our formal presentation, although we have all of our management here answering any questions. We have Buch here, Barry, Daniel, Gil, Gerardo, Chuck, Jason and Ross. So all of our operational management, financial management and exploration management. Let me begin this call by saying that we announced a promotion last night. Daniel Racine has been promoted to Executive Vice President and Chief Operations Officer. We're very, very pleased with this, this is part of the operational improvements and centralization of operations oversight to our corporate head office. So we are very thankful with that action being taken and we are very pleased that Daniel has accepted that position. Daniel has 30 years of experience in in mining. While he is a qualified engineer in several places, the most important thing for us is that he has 30 years of operational experience, and not just as an engineer but in operations. The brass tack of operations. Since we're very pleased with that improvement to our bench strength. Let me move into our presentation and let me give a few of the operational highlights. 308,000 ounces of gold, $590 cash costs, all in costs of $804 per ounce. That was slightly lower than what we'd indicated in a press release at the end of the quarter. Production for silver, 1.9 million ounces and then all-in cost of $10.64 per ounce. Production met and exceeded budget expectations across all metals for gold, silver and copper. In copper we produced just under 26 million pounds at a co-product cash cost of $1.54 per pound and I will remind everyone that we apply copper as a byproduct credit separately to gold and to silver, and we treat our gold and silver production and costs distinctly. We had significant production increases compared to Q1 of 2015 across several of our operations. Jacobina was up a full 61%, Canadian Malartic 8%, Pilar 14%, Fazenda Brasileiro 54%. I'll speak in turn with some of those operations and what it means to our shareholders and to us as a company. Costs were in-line with our expectations, despite local currencies being stronger on average than we assumed in our guidance. I want to make a point are on that. This is not the result of currency improvements in currency tailwinds, clearly there was some of that. However, the improvement to the cost structure quarter-over-quarter and year-over-year was the result of significant efforts made in 2015 that began to bear fruit in 2016. One cannot deny that the currencies provided some tailwind but let me give some indication. The Canadian dollar was flat to our assumption for our budgets, the Brazilian real was well below our budget, the Argentine peso was slightly below our budget assumptions, as Chilean peso was well below our budget assumptions. On balance then, we had currencies that were stronger in the quarter than what was forecast when we provided our guidance and that is the underpinning of our budget. The conclusion of all of which is that the costs were in line with expectations, not only because of currency improvements quarter-over-quarter but as a result of significant operational improvements. Let me deal with some of our operations at Chapada. We produced 21 million, 21,000 ounces of gold, 59,000 ounces of silver, and as I mentioned, just under 26 million pounds of copper. Our concentrate grades and recoveries were in-line with our plan although they were below Q1 of 2015 and let me explain the reason for that. We utilize stockpiles during January and February, offset the rainy season impacts, this was all planned. We're advancing the operational improvement efforts in the first quarter - in the first half of the year to increase recoveries in throughput. And we expect the second half of the year to be significantly better than the first half of the year. As a result of sequencing, moving away from stockpiles and into the - ores coming from the pitch, and also as a result of some recovery improvements that we announced at the beginning of the year that will begin to be implemented - and begin to improve recoveries by the end of the second quarter of this year. We expect that the ratio of second half to first half copper production in particular, to be disproportionately in favor of the second half at a ratio of about 45

[Operator:]

Thank you, Mr. Marrone. [Operator Instructions] Our first question is from Dan Rollins with RBC Capital Markets.

[Dan Rollins:]

Yes, thanks very much. Peter, I was wondering if you - if the team has done any analysis just on the impact of stronger currencies - I know you mentioned that you could see some impact from the currencies but you've also had a lot of optimization and efficiency gains that have sort of mitigated the potential currency headwinds. If we're to look at guidance - if you're to run your numbers, the original guidance, how much lower on your cash costs would you've been if you assume to 4.2 right now? Just trying to figure out what those operational gains have given you on a cost savings basis, you're taking out the currency moves.

[Peter Marrone:]

So the volume was a bit faulty when you were asking the question but if I understood your question correctly you were asking if we had looked at our original budgets at the beginning of the year and we tracked to what we assumed for our currencies and for example; on the Brazilian real, what would have been the further improvement to our costs from the $804 per ounce. We have to calculate the exact number but as a ballpark, I would say to you that we would have been at least $20 to $25 better and that's consistent with what we've said at the beginning of the year and in our Investor Day presentations in terms of the sensitivities to currencies across the board. The Brazilian real would have had the most impact on those improvements and interestingly the greatest impact would have occurred at Pilar and Fazenda Brasileiro.

[Dan Rollins:]

And then just roughly, across your Brazilian units, what portion of your cost structure is denominated in real?

[Peter Marrone:]

On our Brazilian operations is in the range of 80% as an average.

[Dan Rollins:]

Okay. So if we continue to see strength and we get down to the low end of your new currency hedge or the options in there, you could see some pressure on corporate cash cost but on the other side if copper stays where it is, you get the benefit of lower - the improvement on the byproduct cash cost?

[Peter Marrone:]

We think that currencies will continue to stay - the Canadian dollar as demonstrated that it is in-line with our budget. It went to a higher level but it's come back down to a point that's consistent with our budget. We think that will continue. The Brazilian real is, it's a bit of a judgment call but the best way to deal with judgment call is to say try to mitigate your risk. And so we took roughly 40% of our costs, so BRL510 million and we've created a color of 3.4 to 4.13 for the next year. We think that was a prudent move in terms of protecting on the downside. From a personal perspective, I struggled a little bit with the currency and it's strengthening to the U.S. dollar because one should think that with the weakening of its economy, with the potential impeachment of its President with the political Malaysian turmoil that is a result of all of that, one should think that the currency would weaken. So I stand resolved that I think that the currency will be at least what we averaged in the first quarter of BRL3.9 to the dollar and perhaps as we get BRL4.2 to the dollar which was our original budget. But we've taken this action to put this color in place to protect on the downside and still give us a significant amount of upside protection on that 40% of our costs.

[Dan Rollins:]

Okay. And then maybe just on the exploration front. I know as you put out some pretty strong wording on the Odyssey using the words blowout on this new structure. Can you give a little bit of color on - is that a game changer for the Odyssey deposit and what type of - what's the size of that potential implications on your thinking there because I know it's about two gram a ton deposit that you're looking at originally. Does this influence the grade or just sort of makeup bigger deposit to bring in down the road?

[Peter Marrone:]

Dan, it's too soon to say, it's clearly an exploration success, one can't deny that but it's too soon to say what the contribution would be. At the end of the day we're not an exploration company, we have to develop the way to mine it and to mine it effectively and to contribute to the cash flow of each of our operations, so it's too soon to say. However, we will provide more guidance over the course of the next quarter on the exploration impact and by the end of the year and into 2017 on what it means from an engineering point of view and from a contribution to Canadian Malartic. So it would be too soon to say what that contribution is, however, if one looks at the trend line, the continuum, the starting point has to be a quality exploration discovery and in our view, a quality exploration discovery that continues to get better at an existing operation brings you down that continuum to production far faster than something that is grassroots and greenfield. So we think this is definitely an important contribution to net asset value and to enter it into possible production to Canadian Malartic but it's too soon to say what that contribution is.

[Dan Rollins:]

Okay. And then just one cleanup question for me, just on an accounting side. I know it wasn't large impact on their cash flow this quarter but the deferred revenue from the stream sales will grow over the next couple quarters. Is that adjusted for in cash flows from operations above the working capital or after working capital - that non-cash that deferred revenue component?

[Peter Marrone:]

I'm going to pass that Chuck. So the question Chuck in order to - the audio is not very good but the question I think was, how do we adjust for that deferred revenue above or below the line for cash flow?

[Chuck Main:]

Cash flow from operations is not including cash flow from the deliveries into the streams.

[Dan Rollins:]

Okay, so that's adjusted in the working capital line?

[Chuck Main:]

Before working capital.

[Dan Rollins:]

Before working capital. Okay, great. Thank you, that's very helpful.

[Operator:]

Thank you. Our next question is from David Haughton with CIBC. Please go ahead.

[David Haughton:]

Yes, good morning Peter, and thank you. A question on Chapada, saw some pretty encouraging directions there with the retro fit that you've done, both on throughput and potentially on recovery. Just with the throughput, can you see that going up to the 60,000 tons per day kind a level?

[Chuck Main:]

What's being asked and again, I apologize for the audio. To the best for the benefit it was in the room but what's being asked is, do we see the throughput potentially increasing to 60,000 tons per day. That's the target by the end of the year. But bear in mind that we're always optimizing for output, right. So balance to VAD [ph] and entering the - which all depending on the oil mix when we be optimizing for recovery or grinding finer or by throughput, but that's our target.

[David Haughton:]

So the second part of the question is, where do you see the recoveries heading for gold and copper? The couple recoveries in the quarter were better than expected and I'm just wondering where you're targeting going forward?

[Chuck Main:]

As Peter mentioned in Q1, this will be a range and this year we're stronger, more range than comparable to the previous year. We reply more on the stockpile and that stockpile - some of that is out there, it will be oxidized so that affected overall recovery. So overall, we were expecting with a retrofit and we were not completed in Q1, it just - did finish the first line at the end of March and we continue the second one now in Q2. We expect to see - we saw a gap between the old line and the new line of throughputs - $0.72 recovery regardless of the oil type. So that's we are projecting going forward and it will vary according to the blend but we are seeing in the benefit and the gain [ph].

[David Haughton:]

All right and what about for the potential recovery of the gold drilled in?

[Chuck Main:]

Our expectation for gold was more conservative, within the range of 1% to 2%. We are in the process of sterilizing the deed [ph] and probably it's easier to measure right now. When - now we are starting feeding more from corpus who where we have high grades of gold which is not out there or oxidized. We're able to assess that potential. We expect that was always above the 50% of the gain in recovery of copper and I would say that we probably have an upside on copper recovery more so that in gold but we expect to have that gain regardless for gold.

[David Haughton:]

Right. So just putting some numbers on this, could use see copper going to 85% on average and gold moving up towards the 60% level?

[Chuck Main:]

Yes, can you repeat gold?

[David Haughton:]

85%.

[Chuck Main:]

Copper is nearly 84% to 85%.

[David Haughton:]

And gold 60%?

[Chuck Main:]

Gold would be 58% to 60%.

[David Haughton:]

Okay. All right, thank you. Gerardo, just a cash flow question now, just a clarification on what's in and out of the cash flow because it's - you've got some busy ins and outs right now. So it looks like the payment to RDM was made in the first quarter. And we're still waiting for the Altius in flow in the second quarter, is that a fair assessment?

[Gerardo Fernandez:]

We have concluded the Altius deal. That was a one or two days ago, so we'll have that - those funds in our treasury. And perhaps David, we could clarify something else as well. We board on our credit line at the end of the quarter to complete the transaction, to complete the purchase. And as you may have commented, we know that several have commented, what do we intend to do with the Altius funds. We would pay down that revolving - the borrowing on the revolver which was always the intention. So to say differently, the Altius transaction was funding the purchase of RDM which just happened to be that it did not coincide with a formal closing of the purchase of RDM and the formal closing of the purchase of the - of the completion of the Altius deal.

[David Haughton:]

So it's just unfortunate timing with the end of the quarter. One out in Q1 one in Q2?

[Peter Marrone:]

That's correct. So we'll bring that revolver back down by the same amount that we board on it with the Altius funds that are now in our treasure.

[David Haughton:]

Excellent. Thank you guys.

[Operator:]

Thank you. Our next question is from Steve Carsen [ph] with National Bank Financial. Please go ahead.

[Unidentified Analyst:]

Good morning. Could you talk a bit about the oxide discoveries in your mine at Gualcamayo, something they were discovered like last week. Could you just add a bit of color on that please?

[Peter Marrone:]

Let me pass that Buchs [ph].

[Unidentified Company Representative:]

Sales mapping the sampling of the area surrounding the Gualcamayo QDD main pit identified several areas, a couple which were known and a couple which were new that ran fairly good multi-gram grades over 10-meter intervals. We've - since gone up there, completed the mapping and we initiated drilling to test these areas. These are immediately adjacent to the pit, on target as named Cerro Condor except the very top of the ridge. We feel that if we can produce some continuity to the materialization in this area it will - vastly help the mining in the future of Gualcamayo. We also have some resources at the Las Baucus [ph] target which is about 4-5 kilometers away from the main pit that were now infill drilling. So we believe we'll be able to convert a number of those ounces into mineable reserves with this work that we're completing this year.

[Peter Marrone:]

And Las Bachus is on the road that leads to the pit would be closer to plant.

[Unidentified Analyst:]

Got it, okay. Over to Chapada, maybe a question for Gerardo Fernandez. The higher copper production plant for H2, is this going to spread out across Q3 and Q4. It sounds to me it could be more back-end loaded into Q4?

[Gerardo Fernandez:]

Q3-Q4 pit.

[Unidentified Analyst:]

Got it. Okay, thank you. Lastly, with respect to some of the outlook and the strategy noted in the press release. There was a point that I'm just trying to reconcile indicating that - you said at this point in time, no producing assets are considered to be non-core and for sale. And then later in the press release, there is an indication that no plants are finalized yet in respect of asset monetization initiatives. So I'm just trying to reconcile those two comments.

[Peter Marrone:]

Let's clarify it, if we were not clear and transparent in what we're trying to say, let's try to be clear. We thought we were but sometimes that gets missed as one evaluates things. I should say also in a press release and our apologies, because something - sometimes things do get missed. In the front line of a press release we said we produced 308,000 million ounces of gold, that should be 208,000 ounces otherwise we would have produced more gold than it's ever been produced in the world, perhaps the universe and ten universes. It would be a record and we would have said that we had a record production. So our apologies for that. And again, Steve, if we were not clear on that point that you raised, let's be clear. I've said consistently that nothing is for sale and everything is for sale, that it depends on circumstances, it depends on price on offer by comparison to value in company, and also market perceptions of value and it depends on use of proceeds. And so if we look at our Brio division, the conclusion late last year is to withdraw from that potential sale in which we had engaged. And then part of the reason for that, is that we believe that we can get far more value inside the company, far more value reflected in consensus views of these of these assets. And part of the reason for that was because of the very significant improvements operations, and the improvements to cost that it occurred and the new discoveries that would further improve that particular Pilar and the increase in proven or probable reserves at Fazenda Brasileiro. So that highlights the point that really nothing is for sale at this point, we think it's steady as she goes and perhaps if we can make one more observation on the strategic direction. Our conclusion is that it's easy to talk about the corporate transactions, acquisitions and dispositions; the harder part is demonstrating that we have a competency in being able to mine and being able to deliver on development-stage projects. Pilar was not a success for us in 2014 and it began to become a success in early '15 and we believe that by the end of '15 and into 2016 it has demonstrated its real wherewithal. We certainly are getting the type of production from it that we anticipated to be able to get at high quality costs. We think that the same will be true for RDM, and the same would be true for C1 Santa Luz once we've completed those technical studies. We're taking a slow and steady and prudent approach to do that. But the conclusion to all of that is that we think we drive far more value for shareholders by demonstrating competency in development of assets and in operations of those assets rather than packaging something and then putting it out for sale. So yes, it is a change to the philosophy of the company but it is something that has been evolving through '14 and '15 and into 2016 which is that we should be demonstrating our wherewithal, our bench strength our operations and on technical services and on exploration, the continuity of all of those that we think drives best value for shareholders.

[Unidentified Analyst:]

Perfect, thanks Peter.

[Operator:]

Thank you. [Operator Instructions] Our next question is from Anita Soni, Credit Suisse. Please go ahead.

[Anita Soni:]

Good morning guys, just a couple of technical questions. At El Penon…

[Peter Marrone:]

And I apologize, Anita, but we're really having audio difficulties. Maybe if you - if I could ask you to speak a bit more loudly.

[Anita Soni:]

Sure. So a couple of technical questions at El Penon and at Mercedes, there is more ore that is being processed than if been mined. And I think that's a consistent trend over the last eight quarters. I'm just wondering, do you have built-up stockpiles or what's going on there? Are you just getting maybe positive reconciliation and you're just tracking the tons mined to what it would have expected in geological model, I'm not quite sure what's going on.

[Peter Marrone:]

At El Penon, I always try to be use - so that's the issue always for the year. At Mercedes, Anita we basically have no stockpile so it's an increase in the better than planned and the process.

[Anita Soni:]

So at Mercedes you're getting more tons than you had anticipated when you mined or just tracking what you had expected if that's what was going on?

[Peter Marrone:]

Yes, Anita.

[Anita Soni:]

So just going back to El Penon, it was I think that was saying that you don't have - it's stockpiled material that you're processing through or is that's what's going on or you creating stockpiles?

[Peter Marrone:]

And we creating stockpiles or are we processing more stockpiles, what accounts for the difference of processed in mine.

[Anita Soni:]

Because they are less mined than it's processed.

[Peter Marrone:]

Yes, in Q1 you have less mined than processed. Now in Q2 we covered that stockpile going forward is delivering more over than the plant can treat to have months of stockpile by the end of the year. That's is the study at El Penon and has worked well in the past so we are recovering our flexibility both in the stockpile and underground development for all of them mines, in particular, for El Penon. So it will reverse through the year where we're going to be mining more than we process.

[Anita Soni:]

All right. Okay, thank you very much. That was all for me.

[Peter Marrone:]

Thank you, Anita.

[Operator:]

Thank you. Our next question is from the Shericoff [ph] HSBC. Please go ahead.

[Unidentified Analyst:]

Hi Peter and team, congrats on solid results. Just one question from me as a follow-up to the previous one. What are your thoughts on monetizing CI and has that changed and I know nothing has been finalized as you stated in your press release. But what sort of interest are you getting for those assets from potential investors?

[Peter Marrone:]

I'm glad you asked the question, I was going to try to pick up on it later on the call before concluding the call. When - I said earlier that, I referred to the Brio Gold and improvements to quality and alike. But I also wanted to say is that we are in a very unique position at Yamana because we have in our portfolio, perhaps different from a lot of our peers. Far more assets that are on our balance sheet that I describe as a dormant assets, they could deliver some very significant value; [indiscernible] is as an example, Suya [ph] is an example of that. Down six storeys an exploration asset in Argentina, that is an example of that. So we have exceptional opportunity for looking at what we should be doing either for the development of assets or possible monetization. So I don't want to leave you with impression that we wouldn't monetize something. I want to leave you with the impression that we have a portfolio of assets that we're constantly looking at on whether we should be developing or taking other actions. On your specific question on CUI, I don't know if what you're asking is coincidence or if it is something that you're hearing in marketplace, but we are getting an impressive amount of. inbound calls coming from people who are interested in wanting to take a look at CUI possibly for an acquisition of CUI. Interestingly, at least for me, more interestingly, that level of interest is coming from Argentine's and from people in other parts of South America. So it seems as if there is a paradigm shift that has occurred in Argentina because of the new government and adding to which is a reflection on the part of provinces and the national government that mining should be promoted. And in that context it is giving renewed view on whether or not an asset that is in a jurisdiction that does not have a mining law but CUI should be looked out for possible acquisition.

[Unidentified Analyst:]

And on Agua Rica, if you may, if you could comment on that, have you - is there any progress, obviously, it's a large project and either you need a partner or sell a large portion of it to monetize it rather than develop it as they'd been nearly as much interest or at least some sort of an indication on that?

[Peter Marrone:]

Clearly, interest for sure and with the size and scale of that asset, one of the larger copper Molly Gold assets in the world, clearly it's a different type of or group of person, individual or company that would be interested but clearly there is a significant amount of interest. And particularly, that interest has grown as a result of these three or so things. The first is, our update through the studies that we've done in late 2014, early 2015. The second is the improvement through the political landscape in Argentina. And the third interestingly is the elimination within just a couple of weeks perhaps of the new President coming into power, the export tax which is 10% on copper concentrates; the elimination of that alone, we calculate represents about $300 million improvement to value at Agua Rica. So it's very significant. And while it increases the value of the asset, it also has made it far more interesting on the part of third-parties to take a look at it, to see what they and we can do with it. Our interest in our Agua Rica is its development. However, we're a gold mining company and we see the logic - the compelling logic of having multiple parties. If we had a wish list we would say we would monetize a significant portion of it and we would retain a residual interest. We have 12.5% of Alumbrera, we would be very interested in maintaining somewhere between 10% and 20% of the combination of Alumbrera and Agua Rica.

[Unidentified Analyst:]

Thank you.

[Operator:]

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

[Peter Marrone:]

Ladies and gentlemen, thank you very much for making the time. Thank you for the comments that were made by some on them very respectable and strong quarter. We think it was that bodes well and for ten's well for the rest of the year. It is the result of some really impressive and significant hard work that has been done by operations, technical services and exploration groups. And perhaps if I can conclude by saying that we have a shareholder meeting this morning, and we look forward to your participation either in person or by webcast. Thank you very much. Operator Thank you, Mr. Marrone. The conference has now ended. We thank you for your participation.