Yamana Gold Inc.
Q4 2014 Earnings Call Transcript

Published: 12 Feb 2015

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Yamana Gold's Q4 2014 Financial Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. I will now turn the call over to Ms. Lisa Doddridge, Vice President, Corporate Communications and Investor Relations.

[Lisa Doddridge:]

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 list of risks, uncertainties and factors which may lead to our actual financial results and performance being different from the estimates contained in our forward-looking statements, please refer to our press release issued last night announcing our fourth quarter and full year 2014 results, as well as our Management's Discussion and Analysis for the same period and other regulatory filings in Canada and the United States. Throughout the presentation when speakers use the term ounces, they will be referring to gold equivalent ounces, unless otherwise stated. Gold equivalent ounces include silver production at a ratio of 50 to 1. I would like to remind listeners that as of 2015, we will no longer be converting silver ounces to our gold equivalent. I would like to remind everyone that this conference call is being recorded and will be available today replay beginning at 12 PM Eastern. Replay information and the presentation slides accompanying this conference call and webcast are available on our website at yamana.com. I will now turn the call over to Mr. Peter Marrone, Chairman and CEO.

[Peter Marrone:]

Ladies and gentlemen, first of all welcome and thank you for joining our call this morning. I am joined on the call with the following members of our management we have Lisa of course, we also have Chuck Main, our Chief Financial Officer; Darcy Marud, our Executive Vice President of Enterprise Strategy; Gerardo Fernandez, who manages our Southern Operations; Daniel Racine, who manages our Northern Operations; Barry Murphy is also here who manages our Technical Services; and Bill Wulftange, who you’ve met before manages our Exploration. This morning there seems to be a lot of activity with lots of conference calls with some of our peers and in light of that and in order to permit for more questions, we decided this morning that I would speak on behalf of management and provide the presentation. Management is here of course for any of your questions and to answer those questions, and hopefully this will allow us with a forum for a longer question period. We recorded annual production of over 1.4 million gold equivalent ounces in 2014 with a new quarterly record in Q4 of over 405,000 ounces. We continued with efforts to mitigate our costs with all-in costs of $807 per ounce and declined throughout the year, we established a Canadian platform with our purchase and integration of a high quality Canadian portfolio most notably a high quality Canadian Malartic mining Quebec. We’ve made new exploration discoveries at our core mines. Our focus was on our primarily portfolio and cornerstone assets. We also recognized where we struggled with certain development stage projects in 2014. We expected responsibility for our failures and we then began a process for remediation and reclamation of value. We applied our lessons learned on development stage projects towards the plans for the development of our next project Cerro Moro and we streamlined our management. We have improved the quality of our people, departments and processes; and in the process we also reduced our overhead costs. Our attempt is to build confidence through the continuity and stability of our cornerstone assets and the delivery of new cornerstone assets A little bit of perspective on those cornerstone assets. We’ve guided in early 2014 on Chapada, El Penon, Gualcamayo, Mercedes, Minera Florida and Jacobina with a number that you see to the left. The actual production of the numbers that you see to the right and as you see we met and exceeded almost every expectation on each of these cornerstone assets in 2014. Where we did not meet expectations in 2014 was in certain development stage assets and as I have mentioned we recognized where we struggled with those, we expected the responsibility for the lack of success on those and we’ve now begun a process of remediation and reclamation of value. However, I hope I can impart this message. The cornerstone assets continue to perform. They remain intact and they deliver the best value for our company. While our all-in costs $107 per ounce for the year, if we look at the cornerstone assets they were $747 per ounce. In addition to all of that we guided to produce 134 million pounds of copper Chapada again consistent with our guidance. And to summarize it nothing has changed for our cornerstone assets, they continue to form as we expect. Overall then as I mentioned, 1.4 million ounces, 405,000 ounces in the four quarter that is a record production for the Company, we have up until 2014 gone with a gold equivalent standard of 50 to 1. If I break that down then we have 352,000 ounces of gold or for the year 1.2 million ounces and 2.7 million ounces of silver in the quarter and for the year it is the little over 10.1 million ounces. We produced 35 million pounds of copper and for the year 133.5 million pounds of copper. Our cash cost on our byproduct basis using copper only as a credit were $484 per ounce and all-in costs as I mentioned were $774 per ounce. Now again in the fourth quarter to be clear and so that we're not confusing the numbers. For the year our cornerstone assets produced gold at an all-in cost of 747 per ounce and our entire operations in the fourth quarter produced gold at $774 per ounce. We saw declining cost structure throughout the year and the cornerstone assets delivered better than what we had as a very good cost structure in the fourth quarter. On some of the operations, Chapada starting with Brazil and in Chapada copper and gold equivalent production was 3% higher year-over-year mostly as a result of Corpo Sul beginning to contribute production. The in-pit crusher continued commissioning in Q4 and we will get the full benefits of that in 2015 beginning in the middle of the first quarter of 2015. We have various optimization plans in progress mostly from true recoveries and get the benefit of new discoveries. We have planned recovery increases of over 5% as a result of these optimizations and we will continue with our efforts at defining and looking to the benefits of these new discoveries at Santa Cruz and Sucupira with grades that are higher than what we currently have and that are close to plant. In the case of Jacobina Q4 and full year production was above 2013 levels. We had a 13% increase in grade for the year. Our cash costs are the lowest level of the year and 16% below the fourth quarter of 2013. Jacobina is beginning to get the benefits of changed management oversight, managing the assets through our southern operations and from Santiago in particular and the improved development plan and quality assurance that comes from those efforts. In the case of El Penon and moving to Chile. In El Penon, Q4 production was the highest level of 2014 and an increase of 5% over Q3. Q4 cost benefited from improved gold grades and we continue with our focus new discoveries. The Ventura discovery is consistent with previous higher grade vein structure and will continue to delineate that and to identify it's potential in 2015. At Minera Florida we recorded annual production, Q4 production was the highest level of 2014 from higher gold grades and recoveries and throughput. Cash cost decreased 17% year-over-year. In the case of Argentina our Gualcamayo operation. Annual production increased 50% over 2013, Q4 production increased 32% over Q4 of 2013. QDD Lower West contributed 63% higher gold grades for the year and we continued with our focus on new discoveries. Almost all of our resources at Rodado are new they are already above 2.4 million ounces, open in most directions and they are under evaluation this year for development. Coming to Canada and to Mexico. Beginning with Canadian Malartic, production increase 2% and costs decreased 7% over Q3 of 2014. [mill] processing was a record average of over 53,000 tonnes per day during the fourth quarter. We advanced plans for longer-term throughput and production increases. And we believe that Canadian Malartic is interesting but it has systemic and inherent cost mitigators with diesel and the dollar depreciation and devaluation in particular. We also continue with our focus on new discoveries, Pandora is a high value car get, as are the areas in Kirkland copy lake. At Mercedes, costs improved 6% over the fourth and costs improved 7% over the third quarter of 2014. We increased gold in several recoveries which was mostly the result of improvements to the thickener tank. We need more focus on defining ore bodies and throughput at Mercedes. We underutilized the plant in 2014 running below capacity but that will be progressively improved. In the case of the assets that we are now incorporating into Brio Gold Brasileiro, Pilar and C1 Santa Luz. We announced the creation of this 100% wholly owned subsidiary with a dedicate management that allows better focus on these assets that are not core to this company while focusing the efforts of our core management or cornerstone and core assets. Q4 production increased 10% over Q4 2013 and the full year production increased 47% over 2013. We have the first full quarter of commercial production from Pilar in the fourth quarter. The fourth quarter grade and recoveries both increased roughly 36% over Q4 of 2013. Q4 cash cost decreased 17% over Q4 of 2013. Pilar's production is increasing and the coincides with cost improvements. And improvements in inputs to cost will further improve the cost structure of that mine. Local currency is now over 40% better than it was at the beginning of 2014. Maria Lazarus is satellite deposit that is being advanced because it provides better ore contribution to Pilar's production. C1 Santa Luz, we put it on care maintenance to protect its inventory of ounces in the ground as we identified the optimal processing configuration and mining approach to reinitiate operations. We have conducted metallurgic test work and a drilling program is being defined for 2015. Our intention through Rio is for the startup of C1 Santa Luz again into 2016 and we are on track to be able to do that. Last night we also announced that we made a construction decision on our newest and next best project to high-grade Cerro Moro deposit some of the project highlights, initially we thought we would be a 700 tons per day in our feasibility study, we undertook detailed engineering and further progress of our efforts and we have come to the conclusion that the most optimal point is 1000 tons per day. We are progressing with the single-stage plant construction versus the initial plan of a two-phased approach. We believe this provides lower risk on execution and for the delivery of ounces, it also provides for higher number of ounces. Our initial plan was 150,000 ounces per day and this allows us to be able to capture more than 200,000 ounces per year. The estimated total capital investment is approximately $398 million of that 133 million is sustaining capital and 265 million is the initial capital for startup of operations. Mostly the difference between feasibility study and where we’re today is the increase due to throughput uplift from 700 tons to 1000 tons recognizing also the in-country experience that we had to factor into our project estimate mostly from other company experiences in the areas in which Cerro Moro is located. The increase in contingency and provision and owners team to make sure that we’ve got it right. So what is that mean then we are in production, life of mine production will average at an annual of 102,000 ounces of gold and 5 million ounces of silver with an average annual production in the first to three years of 135,000 ounces of gold, so roughly 33,000 ounces more than the average for the life of mine and 6.7 million ounces of silver or 1.7 million ounces more than the life of mine. Life of mine cash costs are expected to be below $400 per ounce for gold and below 550 per ounce for silver, all the in costs are expected to be below $557 per ounce of gold and below $7.80 per ounce of silver. We have a plan for the increase in mineral in new resources. We already have an increase in mineral resources this year which will ultimately convert to mineable reserves. We have a payback at this project that is expected to be within three years and a comparison on the CapEx just for reference that 265 million compare to the 220 million indicated on our call last April for the uplift to a 1000 tons per day, so while it represents an increase in the expected CapEx the overall CapEx over the life of mine is comparable to what we had indicated at the time and recognizing as I mentioned also the in-country recent experience of some of our peers and one in particular and to take in that into account in our CapEx estimates. You should expect that we will spend roughly $30 million into 2015 of that CapEx and most of that will be in the fourth quarter. On our costs, the trend continues to be very friendly to us with a decrease in cost structure. For the year 2013, we had a cost structure of 830, a $14 all in that decline $807 for 2014, but we think more indicative of that is the second half of 2014 at 791 with the start of improvements to diesel other in puts currencies with the improvement operations we began to get the benefits of an improvement to our cost structure. We guided 825 to 875 all-in costs and we were below that in the second half of year well below that. We should expect to see some of the benefits of what began as improvements to the inputs at the end of the year and into the second half of last year into 2015. On the financial side we’ve already talked about the production, on the sales we sold 402,000 ounces in Q4 and of the 1.4 million produced we sold 1.266 million ounces into 2014. A production of copper was 35 million pounds as I mentioned and 133.5 million for the year and we sold 33.8 million in the quarter and 123.5 million for the year. Our adjusted earnings were a loss of $0.02 per share in the quarter and they were $0.05 for the year. Our cash flow however was $0.20 for the quarter and $0.79 for the year. What is interesting when we look at these numbers and rolled down a bit closer is the production and the sales don’t match, much of the difference comes from the fact that only 1.3 million ounces of the 1.4 million was commercial production last year, not contributing to cash flow. So of the production expectations for 2015 we would expect not only an increase in production in 2015 but all of that contributing to cash flow because all of it is commercial production. We took certain impairments in 2014, 2014 was a year of reconciliation for us, we needed to reconcile certain things as I mentioned at the beginning of this that we did not do right, and so those impairments have impacted our earnings but we think that we now have a better reflection of the book value of these assets and their potential going forward. Cash and available credits were $781 million. Our DD&A for the year was $504 million. Our corporate G&A declined from 2013 to $122 million we expect further improvements to G&A this year and next year. Our exploration expense was 20 million and our capital expenditure was 666 million and again that will decline into 2015. We completed an equity raise of roughly US$230 million at beginning of this year and that further improves what is already a robust balance sheet. Moving into 2015 and the years to follow we expect to see a production increase in 2015, '16 and 17 on gold and a production of silver from the 2015 levels into 2017. Most of that contribution will come from the startup of operations at Cerro Moro sometime in the middle of the year. Now for [reference] using our historical gold equivalent and this represents 1.5 million ounces in 2015 and that increases to 1.664 million ounces in 2017 or to put in percentage increase terms this represents an 18.8% increase over the 2014 production levels. And as I mentioned before what is interesting to us about this is that this production certainly in 2015 and '16 is entirely commercial production contributing to our cash flow. When we move to our cost structure we are guiding for costs of $800 per ounce to $830 per ounce on the gold side and for sliver $10.30 per ounce to $10.50 per ounce. And perhaps these are conservative estimates they were set in the fourth quarter of last year and they do not take into account -- well they take into account inflationary pressures under various jurisdictions in which we operate. They do not take into account recent input improvements mostly on diesel, products related to oil and of course to currencies. In terms of other guidance components for 2015 we talked about all-in costs on a byproduct basis and on a co-product basis you see as we have shown here. Our expansionary capital declined significantly from the levels of 2014 we expected to spend $90 million to $140 million. We have created a budget that allows us to pull certain levers depending on metal prices to go from $90 million to $140 million and if we see that metal prices are weak then we would stay to the lower level. The same with our exploration budget $70 million to $98 million. Our G&A is expected to be $120 million that is a decline from 2014 and we will see further improvements in that 2016 as we further rationalize and streamline the management of our offices in Sao Paulo in particular which is not reflected in the 2015 numbers. Depletion, depreciation and amortization is expected to be $570 per ounce and the DD&A is expected to be $395 per ounce on gold and $6 on sliver. Our cornerstone mines in 2014 were at $747 per ounce which was 7% below the average. As I mentioned only 1.33 million ounces was contributing to cash flow in 2014 which increases by over 12% in 2015 and we're confident that this guidance on costs should be bettered if the inputs remain where they are today by comparison to when we budgeted for these costs. Our mineral reserves and resources. On the gold side we see an increase in the mineral reserves and resources. M&I resources grew by 18% excluding assets acquired in 2014, so if we take the Canadian Malartic M&I exclude that from the total that you see here we still had an increase in M&I in the company of 8%. Overall gold M&I increased by 32% and silver by 25% and inferred for both by approximately 6%. Almost all of our mines saw depletion of reserves, also saw increases of resources at comparable or greater significance. And we're increasing our exploration spend this year towards the objective of upgrading resources. We spent less in 2014 because of uncertainty in markets and our own internal challenges all of which are now behind us and have been dealt with and we're moving forward in 2015 with a robust package of mineral reserves and resources, an increase in resources and a plan to increase our reserves by the end of the year. So with that ladies and gentlemen and we will open up the line for questions.

[Operator:]

[Operator Instructions]. The first question is from Andrew Quail from Goldman Sachs. Please go ahead.

[Andrew Quail:]

Thanks very much for the call and congratulations on a solid quarter. I have got a couple of questions. Firstly on Cerro Moro looks like a pretty good project with all the economics. Just on the up front CapEx of 265, can you break that down with the US dollars and local currency? And what you guys are seeing sort of trends in inflation numbers or deflation numbers on both?

[Peter Marrone:]

Barry, if you want to address that? The local currency and then what we see is the potential inflation or the impact?

[Barry Murphy:]

Sure Andrew, the 265 is about 75% local currency the balance being in U.S. dollars, and the give me a moment to tell you what the forecast is on the currency movement and we assumed in 2015 that Argentinean peso to the US dollar in 2015 of 10.5, 2016 of 13.5, and 2017 of 14.5.

[Andrew Quail:]

And of that 24% of the U.S. dollar, you guys seeing any sort of deflation or impact of that or is that sort of pretty much get size constant?

[Peter Marrone:]

I think, we -- sorry Andrew, let’s make sure that we have understood the question, the split between local currency and U.S. dollar, the US dollar would be the US dollar, we're not going to see any benefit of devaluation of the local currency.

[Andrew Quail:]

Down to -- we don’t know on the actual CapEx of the number, like one lead item that you guys have been buying?

[Peter Marrone:]

I see, so should we expect some improvements as a result of what’s happening in the industry generally. And I think all addressed that. I think we’re seeing some benefit coming from decreased activity in the extractive industries but equally what we’ve attacked to do is balance that with the efforts in Argentina. You’ve heard me say before that I think Argentina is improving, has an improving socioeconomic and geopolitical state certainly from a mining company’s perspective. But what we try to do is we attract the counterbalance the improvement in the industry generally with recent experiences in country. As you all aware one of your peers a bigger operation for sure were going at a 1000 tons that is more than 4000 tons but that experience led to an increasing capital costs, so we took that as an opportunity to say let’s build that experience into what we’re planning to do. So I wouldn’t expect that we’re going to get some significant benefit coming from the improvement to the extractive industries with some of the long lead time items because I would say that we’re going to get the potential negative impact of that from having to engage in this development in the country. Now I think it will improve. We have done in the CapEx estimate is taken the recent in-country experience and absorb that into our cost structure.

[Andrew Quail:]

Okay, thanks for that. You’ve also talked about on exploration your budget for this year sort of somewhat between 70 million and 98 million, can you break that down what will go through the P&L sort of what would be capitalize and what would be expensed?

[Peter Marrone:]

At the 70 level it would approximately 15 to the P&L and so then if you scale it up would be the same proportion, if you move that up to 98.

[Andrew Quail:]

And last one, you guys are -- what sort of you guys put any hedges in place with your energy so any of your diesel cost what sort of [indiscernible] you guys have some of your peers have hedged big portions of that, if you guys done any program like that?

[Peter Marrone:]

No not yet, we’re happy we have not because of some of those peers have did that from what we can see did that a sustainably higher prices, so we’re not looking that but clearly there is a significant amount of volatility oil prices. We see less of that volatility in diesel but we have seen some improvements to diesel costs certainly in some of our operations and that’s very true to Chile and Canada in particular. As you know diesel is subsidized in Brazil and so we would not get the negative impact of increases in diesel costs but we also don’t get the entire positive impact of decreases in diesel costs. But Canada and Chile for sure we’re seeing some significant improvement and we’re now looking what we can do to improve or to solidify those improvements by looking at some hedging strategy. We have not done it to-date and we’re happy that have not.

[Chuck Main:]

And Peter, I could just add to that when we did the budget, we were using our own $80 crude prices so we’ve got some benefits to reap from the basically the budget number.

[Peter Marrone:]

That’s a fair point and on the Canadian side, Andrew, interestingly, it is a windfall effect or double waning effect because it’s not just crude -- and the impact to diesel that is improved but it’s also the dollar. And the dollar’s weakness and dollar’s weakness impart as a result of oil prices coming down. And we budgeted on our Malartic City $0.85 and already at $0.78 to $0.79.

[Operator:]

Thank you. The next question is from Anita Soni from Credit Suisse. Please go ahead.

[Anita Soni:]

Hi, thanks, Peter. Could I get perhaps this might be better for the Analyst Day but could just walk us through some of the way you’re doing your cost now? I am just little bit confused on the what’s being applied when you calculate your AIC?

[Chuck Main:]

I think generally on the cost side, I think the first point is and as Peter pointed out, we're moving away from the GEO to having a cost per gold, cost per silver and cost for copper. When we do our all-in sustaining cost and our cash costs our headline items is on a byproduct basis. So what we're doing is we're taking the copper margin, the revenue minus the copper cost and then splitting it between the gold and the silver which on a relative revenue basis which if you just take gold and silver that’s roughly 9010. So that's how we then come up with the byproduct cost. As far as the definition of all-in sustaining cost it's the same as that's always been it's our cash cost, our G&A, our expense to exploration

[Peter Marrone:]

And the attribution and need of the split between gold and the silver which is I think in part of your question is also on a revenue -- comparative revenue contribution basis between the two metals.

[Anita Soni:]

So what you are doing is basically a gold all-in sustaining cost and a silver all-in sustaining cost for you like distributing the sustaining capital between the two as well and then the applying the copper margin to both of them on metal basis, is that a good way to think about it?

[Chuck Main:]

That's correct. On a comparative revenue contribution basis.

[Operator:]

[Operator Instructions]. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Marrone.

[Peter Marrone:]

Well ladies and gentlemen thank you for that. We did promise that we would have a more brief meeting than normal. I will mention and Needham mentioned an Analyst Day -- there is an Investor and Analyst Day that is planned for later day. The result of that is that we will have a more fulsome and detailed presentation that will be available on our website as of this afternoon. So we would encourage everyone that is interested in learning about your Yamana in more detail to look at that presentation when it is posted on our website later today. The summary of what we see here and referred to and the detailed presentation is what will be available later this afternoon. So thank you for making the time on the call and we look forward to this call for the first quarter.

[Operator:]

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