Yamana Gold Inc.
Q3 2015 Earnings Call Transcript

Published: 30 Oct 2015

[Operator:]

Ladies and gentlemen, thank you 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 2015 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 O’clock P.M. Eastern Time. Replay information and the presentation slides accompanying this conference call and webcast are available on Yamana’s website at yamana.com. I will now turn the call over to Mr. Peter Marrone, Chairman and Chief Executive Officer.

[Peter Marrone:]

Operator, thank you very much for opening the call and for those statements. Let me begin by saying that we have several members of our management team here this morning. We have Chuck Main, who is our Chief Financial Officer; and one of the speakers today Daniel Racine, our Senior Vice President of Northern Operations who will speak to those operations; Gerardo Fernandez, our SVP of Southern Operations who will speak to those, Butch Wulftange, who will speak to our exploration effort. We also have here Greg McKnight and Darcy Marud, Toronto, our Executive Management Team. If there are any questions or comments at the end of the presentation and you’d like to address at any of the members of management please feel free to do so. Gentlemen and ladies we have to find the main pillars of our strategy and plans as these. Focusing on our core assets, monetizing our non-core assets, continuing to improve our balance sheet and advancing production and growth opportunities, executing against these pillars is the key to demonstrating the meaningful value and potential that we see in this company. And today, we are going to discuss our progress in Q3 and particularly our progress as it relates to executing against this strategy and this plan. Our core assets offer the greatest potential for value creation and as such they warrant focus of management’s time and efforts. Our core assets include as you heard me say before Chapada, El Peñón, Canadian Malartic, Gualcamayo, Mercedes, Minera Florida and Jacobina. Clearly, the overwhelming value in these core assets as carried by our cornerstone assets, which are El Peñón, Chapada and Canadian Malartic. In Q3 operational performance of these core assets continued to demonstrate the quality and additional potential of these assets. We delivered a 9% increase in production at these assets as compared to Q2. The production increases occurred across the majority of these assets. These increased compared to Q2 include the following

[Daniel Racine:]

Thank you, Peter. Good morning everyone. Canadian Malartic achieved its fifth consecutive quarterly production record. Production in the quarter was higher and at a lower cost than the second quarter as a result of higher grade recoveries and throughput. Throughput in the quarter was slightly higher than the planned target for the second half raising above 53,000 ton per day. Cash costs in the quarter were significantly lower compared to the previous quarter and were positively impacted by the increased production at higher grade and the depreciation of the Canadian dollar. At Mercedes gold and silver production were both higher than the second quarter of this year. Gold and silver cash cost were lowered compared to the previous quarter aided by the depreciation of local currency as hedges denominated in Mexican Pesos expired in the second quarter. We continue to advance plans to improve the dilution control and further improve the cost structure at Mercedes. Initiatives underway include transitioning, some mining areas from bulk mining to a more selective mining method. Optimizing, drilling accuracy and improving drilling and blasting practices. We expect gold and silver production to be at higher level in the third quarter as the result of our efforts to improve dilution control continues. I will now turn the call over to Gerardo.

[Gerardo Fernandez:]

Thank you Daniel, good morning everyone. Chapada continued to deliver our expectations in the third quarter after having a strong first half of the year. Gold production in the quarter were 6% higher than second quarter and was the results of higher grades and higher throughput. Gold production in the quarter exceeded targets was also higher in the third quarter of 2014. Copper production in the quarter was slightly higher than the second quarter of this year despite planned lowered copper rates. Throughput at Chapada increased compared to the second quarter due to more efficient flow of material through the crushers, as well as an improved core blending and stability of the feed. The increase in throughput result in approximately 6,200 dry metric tons of concentrate inventory in excess of plan and as result of the fixed schedule of shipments. The inventory that was not sold during the quarter increased with the value of - in the quarter of $9.3 million. These inventories expected to be sold in the fourth quarter. Also gold and silver production at Chapada are expected to further increase and copper production is expected to be in line with the third quarter. The operational and procurement improvement programs starting in the first half of the year are expected to continue to improved costs and overall performance at the site. At Jacobina operational performance during the third quarter was consistent with plan a significant improvements in production and cash costs compared to the first half of 2015 were delivered. Compared to the previous quarter gold production increased by 32% and cash costs decreased 27% due to higher peak rates. Gold rates in the quarter were consistent with expectation and averaged 2.59 grams per ton represented a 40% compared to the average grade for the first half of the year. Developments in higher grade areas continue to advance with third quarter production and gold grade levels expected to continue in the fourth quarter and onwards. The elimination drilling an improvement of grade control procedure as well as cost control measures continue to support the turnaround at Jacobina. Cash costs at both Chapada and Jacobina are expected to benefit from the exploration in the fourth quarter of cash denominated in Brazilian Reais. In the absence of this hedges third quarter cash costs for Chapada and Jacobina will have improved by $51 and $49 respectively. El Peñón, we continued to transition in the third quarter from the periphery areas of Bonanza, where grades have been more erratic. Mining and processing of ore from this lower grade areas resulted in lower production and higher cost as additional development has been down to get accessed in new zones. As such we begin mining high grade areas have seen by the improvement in grade in the third quarter compared to the second quarter of this year. Grades and tonnages are expected to further improve support in our production in excess of 50,000 ounces of gold in the fourth quarter. This level of production is expected to continue into next year. Cash costs are also expected to improve in Q4 and into next year as production increases in addition to the impact of operational and procurement improvements initiated in the first half of this year. El Peñón delivered another strong quarter [or in] strong first half for this year increased gold production at lower cost compared to both the second quarter of 2015 and the third quarter of 2014 was a result of increased gold rate and throughput. Gold production continues to track above target for the year. Silver production and cost were impacted as mining continue in lower silver grade areas during the quarter, which is expected to be compensated by significantly higher silver grades in the last quarter. In the fourth quarter gold production is expected to be in line with the quarterly average for 2015. At Gualcamayo, third quarter production was in line with the targets representing a 70% increase compared to the second quarter. Production benefit from improved recoveries of inventories in the heap leach offset by lower grades, which were in line with the mine plan. In the quarter the open pit started in a new phase area which we started with lower rates as we go deeper in this area and grades will go higher. Lower grades impacted cash costs and we are partially offset by the depreciation of the Argentinian peso. The expansion of the ADR plant is now complete and is expected to further increase production beginning in the fourth quarter. The plant fourth quarter production increase expected to positively impact cash cost and production is expected to meet or exceed the expectations. The producing mines of the Brio Gold portfolio continued to meet or exceed target at production and cash cost level this year. At Pilar, production in the third quarter was in line with the second quarter as cash costs that were 14% lower. Maria Lazarus, satellite deposits began production in August and our full production is expected to continue with approximately by 25,000 ounces of gold per year. At Fazenda Brasileiro, production and costs improved compared to second quarter by 21% and 16% respectively. Increased production at lower costs were due to higher throughput, higher grade and higher recoveries. For both Pilar and Fazenda Brasileiro, we have seen a sequential quarter-over-quarter cost reduction that reflects operational improvements at the sites and the depreciation of the Brazilian Reais. We expect this trend to continue in the fourth quarter. The result to date support production in excess of annual guidance at cash cost approximating or better than full-year guidance of $703 per ounce. At C1 Santa Luz, the modified process flowsheet was identified and a five month detailed metallurgical testwork program was completed. The modified process flowsheet allows for the processing of the carbonaceous minerals at C1 Santa Luz and the overall weighted average recoveries are expected to be approximately 84%. From operational perspective, Brio Gold is well positioned for our monetization event to be completed by the end of the year. I’ll turn the call over to Butch.

[Butch Wulftange:]

Thank you, Gerardo. Let me comment on a few exploration highlights here. Chapada, the newly discovered Sucupira mineral body continued to expanding growth exploration and infill drilling during the third quarter. The mineral body now extends over 1.8 kilometers from end-to-end from the edge of the Cava Norte pit to the southwest, and is characterized by a high grade core surrounded by a lower grade halo, and it is very near existing infrastructure. At Jacobina, drilling continued at Canavieiras North and South, Morro do Vento and João Belo mines, concentrating on infill and exploration for deep extensions of the Main Reef horizon. Infill results commonly return above reserve grades over mineable thicknesses at all deposits. The Main Reef exploration holes that we started to share should cut the target horizons in the fourth quarter and we are anxiously awaiting those results. At Fazenda Brasileiro, drilling has advanced at E388 East target the recent discovery with grades above the mine averages and should add substantial outsource to that mines of reserves. Result continues to support the potential for mineral resource expansion as well. At El Peñón infill drilling of the recently discovered Ventura vein continues to support economic potential of the target. At Minera Florida of positive results have a number of targets continue to support the objective to upgrade mineral resources and mineral reserve replacement. At Monument Bay of the core drilling program was reinitiated in August and approximately 1,000 metres have been completed in five holes during the third quarter. The total program is approximately 5,700 metres of core - excuse me approximately 5,700 metres of core were reevaluated re-logged as part of the old core assay program we collected approximately 2,200 samples to be sent for gold analysis and approximately 650 samples sent for tungsten analysis. I will now turn the call over to Charles Main.

[Charles Main:]

Thank you, Butch. Good morning to everyone. In the third quarter we continue to deliver financial performance as our portfolio is on track to achieve annual gold production guidance. Revenues in the third quarter were approximately $449 million and were impacted by continued declines in metal prices. Our adjusted loss for the quarter was approximately $20 million or $0.02 per share. We continue to believe the financial performance of our company is better demonstrated by cash flow rather than earnings. In the third quarter we generated approximately $128 million or $0.13 per share in operating cash flow. When we look at our cash structure we are seeing continued stability at low levels as we focus on delivering on plant production increases. Our all-in sustaining cash cost on the by-product basis for gold were lower than the cost structure we established last year and below that first half of the year. When we look at our core operations we see further improvement as we are able to deliver each ounce in the third quarter at all-in sustaining cost of $728 per ounces. Our cash costs in the quarter continued to be impacted by lower by-product credits due to the ongoing decrease in costs of prices. Our cash costs we’re also negatively impacted by hedges denominated in Brazil Reais. I will provide more detail on the impact of these hedges in minute and wanted to raise it here because all of these hedges will offer at the end of the fourth quarter and we expect our cost structure to be positively impacted beginning in the first quarter of next year. We expect to see further improvement in our cost structure in the fourth quarter as production increases and we continue to implement operational efficiencies and other improvements at a cornerstone assets. In addition, we continue to pursue opportunities to further reduce our G&A and other expenses. Our balance sheet remains stable quarter-over-quarter at the end of the quarter our cash balance was $138 million this increase of approximately $20 million more than the end of the second quarter and we had available credit of approximately $705 million. Our net debt at the end of the quarter stood at approximately $1.75 billion which is up slightly from the second quarter of this year but does not include the $148 million cash we received from the streaming transaction we closed after quarter end. Depreciation and depletion in the quarter was approximately $133 million which is flat year-over-year and up slightly from the second quarter reflecting increased production. Corporate G&A was approximately $29 million in the quarter representing a 11% decrease from the second quarter of this year. The reduction G&A is the result of continual implementation of cost-saving initiatives across our business. Our exploration expense for the quarter was approximately $7 million. Total capital spent in the quarter was $103 million, a 48% decline from the previous year and in line with the capital spent in the second quarter of this year. Our ability to maintain the stability of our balance sheet despite lower metal prices is a result of our continued focus on operational execution and the improvements we have delivered across our portfolio. As I mentioned previously the net debt position of $101.75 billion at the end of the third quarter excludes the immediate $148 million in cash we received after the quarter end for metal purchase agreement. We've applied the proceeds from this transaction 100% to paying down the balance owing on a revolving credit facility. On a pro forma basis the result is the balance owing on a revolving credit facility of $147 million and the net debt position of $1.6 billion. This compares to revolver balance of $410 and net debt of $1.9 billion at the beginning of the year. We have made significant steps in reducing our debt levels and we're not done yet. We are currently advancing plans to meet our strategic objective of reducing the balance owing on a revolver to zero and are targeting to achieve this by year-end. I would like to again highlight our manageable debt repayment schedule is important to look at the schedule and specifically the modest repayments over the short-term to better understand our debt position and the strength of our balance sheet. Over the next two years we have approximately $115 million in principle repayments due. We expect to fund this manageable amount of through our cash flow generation and we note that we do not have any significant debt repayments due before 2020. And as we previously mentioned we continue to work on our asset sales including the monetization of Brio which would add to our cash balances. I would now like to turn to fourth quarter expectations and what we expect going forward and into next year. We expect to deliver further increases in gold production in the fourth quarter. A strong second half is consistent and established characteristic of our portfolio and this year in particular we’ve planned the largest quarterly increase to take place in the fourth quarter. The largest contributions to these planned quarter-over-quarter increases in gold production are expected from El Peñón, Gualcamayo, Mercedes and Chapada. On the cost side I would like to provide additional color on the impact of the Brazilian Reais hedges that I mentioned earlier. On a year-to-date basis our Brazilian Reais to U.S. dollar exchange rate as average 2.9 compared to the market average of 3.17 a difference of 8.5%. The effect of these hedges were even more pronounced in the third quarter were average Reais range rate of 3.13 Reais to the dollar or in a 11.5% difference compared to the average market rate for the quarter. This means in the absence of the hedges our cash cost at Jacobina would have been $124 per ounce lower and at Chapada gold and copper cash cost would have been lower by $51 per ounce and $0.20 per pound respectively. The effect is expected to be even larger when we look at the current exchange rate of 3.9 Reais to the dollar. As the hedges will a lot and should the weakness in the Brazilian Reais persist and depreciate for as we expect to see cash cost at Jacobina and Chapada fully benefiting to starting in 2016. The weakening of the currencies in the countries and which we operate will benefit our cost structure. The Reais as decline 49% since the beginning of the year. It declined 27% alone in the third quarter we also saw positive developments during the third quarter in that the Chilean peso declined 9% during the third quarter while the Canadian and Mexican peso declined both declined 7% in the third quarter. So we should see these impacts into Q4, but a much larger impact in the Q1 as the Reais hedges expire. For the full-year in 2015 we expect gold production of approximately 1.3 million ounces, silver production of 9.6 million ounces and copper production of over 120 million pounds. All-in sustaining cost of the second half our forecast at $820 per ounce of gold as we continue to focus on operational improvements and other cost reduction initiatives. Our expansionary capital spending is expected to be near the low end of the previously provided range of between $90 million and $140 million. We also expect sustaining capital and exploration to be below the previous guidance of $265 million and $98 million respectively. Overall we're on tracking well and overall guidance metrics heading into the fourth quarter. I’ll now turn the call back to Peter.

[Peter Marrone:]

So ladies and gentlemen then before concluding this presentation and the given the time why don’t we open the call up to questions.

[Operator:]

Thank you. We will now take questions from the telephone lines. [Operator Instructions] And the first question is from David Haughton from CIBC. Please go ahead.

[David Haughton:]

Good morning Peter and team, thank you for the update. I’ve got three questions. The first one is fairly simple. When do you expect the streaming deal to close and you receive the cash?

[Peter Marrone:]

The streaming deal has closed and we have received the cash. We’ve received $148 million and there is another $4 million that is pending is a very small amount that's why I indicated the $150 million, the actual number is $152 million, but $148 million has already been received.

[David Haughton:]

Excellent. The second question relates to Mercedes, you are looking that transitioning from both mine to more selective mining. I presume that sort of cost versus grade trade off and I’m wondering when do you expect to approach the reserve grade of about 4.8 grams?

[Peter Marrone:]

Good question. With the new mining method that we are already doing so we changed our drilling drill so we had some bed drills before, now we are drilling with smaller drills and we already see the impact of lower dilution, so Q4 but more next year will be very close to the reserve grade.

[David Haughton:]

And then Daniel just looking at the throughput you can maintain the 2000 tons a day kind of rate with the more selective mining?

[Daniel Racine:]

Yes.

[Peter Marrone:]

Okay, very good. And then moving over to Gualcamayo, you’ve got the ADRs in place. What do you expect for the throughput what we’d say ADR now operational?

[Gerardo Fernandez:]

Good morning, David. In terms of processing throughput it will be the same, the ADR is lowest to have an increase flow through the heap and sensibility to have this metal out the heap leach. So our first objective was to reduce the inventory in the heap, on doing so the production levels should increase by about 1000 ounces per month.

[David Haughton:]

Okay, so all up it looks like you’ve got the capacity there about 20,000 tons a day, should we be thinking about that as a steady statement?

[Peter Marrone:]

That’s correct. I think that tons per day effects they made out of the heap leach.

[David Haughton:]

Okay, and would you expect an improvement on the metallurgical recovery I saw that in the third quarter was a step up from the second quarter, but that was a bit normalized?

[Peter Marrone:]

That’s correct.

[David Haughton:]

Okay. And also while still there, you had mentioned that you are slowing down your underground development. I wonder what implications that has for your underground production and what sort of processing right you got on that?

[Gerardo Fernandez:]

Good question. On the underground we were doing and the second half of this year was needed in 2017, so on the current market conditions we decided to slow down the development and give priority to other projects. So it doesn’t affect the short-term even next year at all.

[David Haughton:]

Okay, so I’ve been assuming just sort of ballpark that your underground production rate was about 4000 tons a day, is that reasonable?

[Gerardo Fernandez:]

Let me answer with the exact amount. During Q3 we have a step up and we mined 264,000 tons during the quarter at a grade of 2.6 grams per ton.

[David Haughton:]

Okay.

[Gerardo Fernandez:]

And Q4 we expect to continue with a level of production and going into next year, we're going to transition to more a bulk mining methods, so at least we will sustain those levels, actually we’re trying to improve it.

[David Haughton:]

Okay, thank you for all those answers, appreciate it.

[Peter Marrone:]

David, just to pick up on a point, we were looking again you asked a very good question, what I said in my portion of the presentation is the balance between production, short-term, middle-term and long-term and proper capital management, proper balance sheet management, to pick up on what Gerardo had said, this approach to our underground does affect production in 2016 it relates to 2017. So our view was how to improve the economics of Gualcamayo in the short term without adversely affecting the opportunity for development and for getting ounces of production from that underground into the intermediate and the longer-term. It's part and parcel of what we were also saying about Cerro Moro. We anticipate that with the completion of elections in Argentina and with the stated commitments of the candidates for presidency to the devaluation of currency, we anticipate that there will be a windfall in 2016, we would like to capture that. So rather than aggressively spending on capital for the availability of ounces in 2017 with that underground, our preference is to improve the economics of Gualcamayo, shorter-term and come back to how we develop some of that underground into 2016 for 2017 and the years to follow.

[David Haughton:]

Thank you, Peter.

[Operator:]

Thank you. [Operator Instructions] Mr. Marrone, there are no further questions at this time.

[Peter Marrone:]

We'll assume from that, that our friend at CIBC asked all the pertinent and good questions. But again if there are any other questions or comments that anyone has that they would like to take on offline with any of our management will more than happy to make people available. Perhaps, if I can conclude this presentation by saying the following, I said it before I think it’s important to say it again, we see four aspects to delivering value, the value drivers, delivering on guidance, demonstrating quality production and prudent growth effecting plan to debt productions following on already realized debt reductions, demonstrating increasing cash flow and EBITDA with optimizations, production increases and cost improvements. We said on our Q2 call that Q3 was our inflection point on operational improvements and sustainability of cash flow along with flat to down debt. We expect to see in Q4 and further into 2016 and the years to follow, our production to increase, our cost to further decrease, the cash flow and EBITDA to increase, leverage to significantly decrease and then of course free cash flow to increase. So this is the right step in the right direction moving into Q4 and we look forward to that catch-up at the end of our Q4 into early next year. Thank you very much ladies and gentlemen.

[Operator:]

Thank you, Mr. Marrone. The conference has now ended. Please disconnect your lines at this time. And thank you for your participation.