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Edited Transcript of YRI.TO earnings conference call or presentation 26-Jul-19 1:00pm GMT

Q2 2019 Yamana Gold Inc Earnings Call

Toronto Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Yamana Gold Inc earnings conference call or presentation Friday, July 26, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Racine

Yamana Gold Inc. - President & CEO

* Gerardo Fernandez-Tobar

Yamana Gold Inc. - SVP of Corporate Development

* Jason LeBlanc

Yamana Gold Inc. - Senior VP of Finance & CFO

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Conference Call Participants

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* Don MacLean

Paradigm Capital Inc., Research Division - Senior Analyst of Gold

* Ralph M. Profiti

Eight Capital, Research Division - Research Analyst

* Tanya M. Jakusconek

Scotiabank Global Banking and Markets, Research Division - Analyst

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Presentation

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Operator [1]

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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 risk, uncertainties and factors, which may lead to actual financial results and performance being different from the estimates contained in the forward-looking statement, please refer to Yamana's press release issued yesterday announcing second quarter 2019 results as well as the management 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 12:00 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 would now like to turn this call over to Mr. Daniel Racine, President and Chief Executive Officer. Please proceed, Mr. Racine.

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Daniel Racine, Yamana Gold Inc. - President & CEO [2]

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Thank you, operator. Thank you all for tuning in, and welcome to our second quarter conference call. With me on the call today is Jason LeBlanc, our CFO. Our full management team is with us in the room and will be available for the Q&A portion of the call.

We introduced a new slogan earlier this year, the beginning of what's next. In the beginning -- and we're beginning to see what it looks like: Lower debt, increased free cash flow, organic growth, greater financial flexibility. I'll talk more about all of these. And while we're building a company that can succeed throughout the cycle, the recent increase in gold and silver only adds to our momentum. One thing that hasn't changed and that will never change at Yamana is our commitment to health, safety, environment and community relation.

During the quarter, our total recordable injury frequency rate was 0.6, a 40% improvement from the second quarter of 2018. We did not have any significant environmental or social incident at our site during the quarter. Our ultimate goal remains 0 harm, and that means 0 health and safety, community and environment incident across all our sites.

We now conduct regular opinion survey about the company's ESG performance in our host communities. The result show high level of trust and acceptance of our activities, which is very encouraging, but something we don't take for granted. We will continue to engage closely with our community partners to maintain their trust and support.

The second quarter was a strong one for Yamana. Earnings per share was $0.01 and adjusted earnings per share, $0.02. Cash flow from operating activities before change in net working capital adjustment were $156 million. This exclude deferred revenue from our copper advanced sales program of $24.9 million. Free cash available before dividend and debt repayment during the quarter was $51.2 million.

Our 2019 production forecast of 1.01 million GEO ounces reflect the sale of Chapada and increased guidance from Jacobina. All-in sustaining cost and cash cost during the quarter were in line with guidance.

As you know, exploration is the lifeblood of any mining company, which is why we will increase exploration spending by up to $10 million for the remainder of 2019. Our focus will be on expanding mine life at Cerro Moro, El Peñón and Minera Florida, and increase in grade at Jacobina to grow production at low cost. We're targeting grade of 3 grams per tonne or better at Jacobina. At Canadian Malartic, exploration continues for underground potential.

Subsequent to the quarter end, we completed sale of Chapada for a total consideration of over $1 billion, including initial cash consideration of $800 million. We used that upfront payment immediately to repay debt just like we said we would. $385 million went to repay our revolving credit facility. The remaining $415 million is being offered to prepay senior notes issued in March 2012 and June 2013 on pro rata basis. $462 million was tender under the offer as of July '18, positioning us well to achieve our goal of meaningfully lowering our debt. Our debt-reduction initiative to date immediately lower our net debt-to-EBITDA to 1.5x, and we continue to target 1x by the end of 2021.

Even before the Chapada sale closed, we moved quickly to reduce corporate overhead by aligning G&A cost to our remaining portfolio of asset. These reductions simplified our organizational structure, while further strengthening our balance sheet and financial flexibility.

During the quarter, we provided an update on the phased expansion plan at Jacobina and increased 2019 guidance for the mine to 152,000 ounces from 145,000 ounces. Phase 1, which is a year ahead of schedule, involved a modest plant optimization that will increase production to 170,000 ounces per year at very minimal cost. Phase 2 involve a larger increase in plant capacity in the range of 7,500 to 8,500 tonnes per day that will gradually increase production to at least 200,000 ounces and up to 225,000 ounces by year 2023. These forecasts are at current reserve grade and we are, as mentioned, targeting higher grade. We are excited about the potential of this mine, which I should point out is coming out of a second straight quarter of record production.

Subsequent to the quarter end, we announced the pre-feasibility study result of Agua Rica project. The results reaffirm Agua Rica as a long-life, low-cost project with robust economics and opportunities to realize further value. This includes converting economic-grade inferred mineral resources and expanding throughput scenario to increase metal production and returns. We continue to evaluate various strategic option to maximize value for the project. I'll talk more about Agua Rica shortly.

This slide lays out some of the strategic step that we've taken to reposition ourselves for financial flexibility. Because of these steps, we're not only generating free cash, we've positioned ourselves to use this cash to maximize value and increase return. How? I've already talked about the Jacobina expansion and the Agua Rica project, but we have a number of other compelling growth opportunities in our portfolio.

At Canadian Malartic, we're evaluating several deposits east of the mine open pit. These opportunities have the potential to provide new sources of ore for the mine existing mill. Extraction is expecting to be by way of underground mining. We are conducting an internal study to evaluate potential production from mining these underground zone as well as synergy with the open pit production. Further evaluation throughout additional drilling would be followed by updates to resource delineation and engineering initially involving Odyssey and East Malartic, although these areas of mineralization and [potential] extend beyond these areas.

At El Peñón, we completed approximately 39,000 meters of drilling in the second quarter, which was ahead of plan. Exploration is focused on converting inferred mineral resources to [measure an indicated] resources at a number of existing veins.

We're also testing new veins in the Salada Laguna deposit, and we're testing for new inferred mineral resources in the core mine area. El Peñón, I should mention, is celebrating its 28th year of production this year. It's an amazing operation that has produced over 5 million ounces of gold. And while it's a [mature] mine, we believe El Peñón still has a lot more to give.

To continue to pursue an aggressive drill program at Cerro Moro, to delineate near [future] target and test major near-mine and regional structures, an increase in reserve would unlock opportunities to expand the existing processing plant and transition to grid power, which would increase production and reduce operating cost. Approximately 10,600 meter were drilled at Cerro Moro in the second quarter, improving our progress to 55% of planned drilling for the year.

Turning to second quarter operation highlights, we produced 258,000 GEO ounces during the quarter, including 233 (sic) [233,000] ounces of gold and 2.2 million ounces of silver. Copper production was 31.2 million pounds. Canadian Malartic produced 84,311 ounces in the quarter and remain on track to meet its 2019 production forecast for 330,000 ounces. Jacobina, as mentioned, posted its second straight record quarter producing 38,951 ounces. It was the mine's 11th straight quarter of 30,000-plus ounces of production. Cerro Moro produced 44,751 GEO ounces and continues to be well positioned to meets its production plan for the year. Feed grade was normalized during the quarter as mine ore was consistent with plan. GEO production at El Peñón was 44,231 ounces, in line with plan. Production at Minera Florida of 16,293 ounces was impacted by a period of reduced productivity in the quarter due to negotiation for collective bargaining agreement with several unions. Agreement has since been reached with all unions.

Year-to-date production is tracking well to the 2019 guidance. As previous years, production is weighted towards the second half of the year especially for El Peñón and Minera Florida.

Looking at our costs, our all-in sustaining cost of $936 per GEO ounces and cash cost of $668 GEO ounces year-to-date are in line with our guidance range.

As mentioned last week, we announced the results of Agua Rica pre-feasibility study and those results were very positive. Proven and probable copper mineral reserve increased by 21% to 11.8 billion pounds, while gold mineral reserve increased by 12% to 7.4 million ounces. Initial mine life is anticipated at 28 years, and annual production for the first 10 years is increased to 533 million pounds of copper equivalent production. Cash cost decreased to $1.29 per pound and all-in sustaining cost were lowered to $1.52 per pound for the first 10 years. And net present value increase at $1.935 billion with an increase after-tax IRR of 19.7%. What is clear is that this is a compelling project with exceptional value.

We believe there is these opportunities to make the projects even more compelling. To that end, we will conduct a review of strategic and value-creating alternatives to further improve projects economics. The review will be followed by a full feasibility study. I should also note that permitting for the project has already begun. We look forward to advancing Agua Rica and updating you on our progress.

And now I will hand it off to Jason to talk about our financials.

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Jason LeBlanc, Yamana Gold Inc. - Senior VP of Finance & CFO [3]

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Great. Thank you, Daniel, and good morning, everyone.

Starting with some financial highlights. We delivered $464 million in revenue in the second quarter, up from $436 million in the same quarter last year. Included in that revenue was the sale of concentrate inventory at Cerro Moro, which contained approximately 17,000 ounces of gold and 815,000 ounces of silver. With silver grades now normalized at Cerro Moro, the furnaces are operating within their design capacity.

G&A expense was notably lower year-over-year as we've been reducing our overhead recently. Furthermore, as Daniel mentioned, you will see the optimization of our cash G&A to an annual rate of about $60 million.

Net earnings attributable to Yamana equity holders were $0.01 per share and on an adjusted basis, $0.02 per share for the quarter.

Turning to cash flow through the quarter. Cash flow before net change in working capital was $156 million during Q2. I'd like to note that this is the final quarter where our cash flows will be impacted by deferred revenue from the copper advanced sales program as we made the last delivery under this program in Q2. Cash flows from operating activities before net change in working capital would have been $181 million after adjusting for the impact of these advanced copper sales.

Moving down the cash flow statement. During Q2, we had normalized free cash flows, adjusting for the copper advanced sales program and then available for debt reduction and dividend payments of about $51 million. In Q3, we'll have proceeds from Chapada included in our financial results, and similar to this normalized treatment, we'll adjust out those Chapada proceeds when presenting cash flow generation for Q3.

Lastly, we had a reduction in net debt during Q2 of $13 million, which is a trend we continue to expect in coming quarters. Beyond the one-time reduction of debt from the Chapada disposition proceeds, we are focused on delivering regular free cash flow and further reducing our debt levels. The further benefit post-Chapada and not reflected in our unit cost reporting of cash cost and ASIC per unit is the avoidance of stockpiling costs, which were a significant capital outlay and a drain on company resources. Although Chapada had lower unit cost metrics, it also required large stockpiling investment, which is now avoided. In fact, that stockpiling investment would represent over $50 equivalent cost per ounce on a consolidated basis.

When we rolled out our guidance at the start of the year, we had assumed a gold-silver ratio of 82.5:1, which was quite high by historical standards, but was the level of respective spot gold and silver prices at that time. Year-to-date, we've been surprised by the underperformance of silver and the gold-silver ratio reached a high of [about] 93:1 by the time we closed the Chapada transaction.

As you can see on this slide, the GEO ratio has only exceeded 90:1 a few times in the last decade. In each time, that ratio has reverted lower quite quickly. The current instance is no exception. The silver price has been recovering and the GEO ratio has declined to about 86:1 currently. Our updated guidance of 1.01 million GEO units assumed a conservative ratio of 93:1 for the second half of the year, which means there is potential upside in our full year GEO production numbers.

I also wanted to highlight the appreciation in value of our gold price instrument since we announced the Chapada transaction back in April. Under the terms of the instrument, we will receive up to $125 million over the next 5 years if the gold price exceeds the threshold shown in this slide. The value of this instrument has steadily increased since we announced the transaction and the gold price is averaging about $1,400 per ounce since the closing on July 5, which is the reference date for the instrument. We are bullish on gold and this instrument provides great leverage to the gold price. Beyond the operational cash flows we'll be generating, the gold price instrument would provide a further kicker to free cash flows with the potential payments above the referenced gold prices.

Wrapping up the financial overview is an update of our debt position. On closing the Chapada transaction, we repaid what was outstanding on our revolver with a portion of the proceeds and announced a cash tender offer for $415 million of our senior private and public notes.

Last week, on the early tender date for those public notes, we received early tenders in excess of this amount, so we are assured of meeting our short-term gross debt reduction objective. We will provide a final update on August 7 to announce the split of private and public notes tendered to the offer and their redemption dates on the priority waterfall. We expect further net debt reductions to follow in the near to medium term as we continue to generate free cash flow. As a result, we are confident in our ability to meet our leverage target of 1x by 2021 or potentially sooner.

With that, I'll turn the call back over to Daniel.

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Daniel Racine, Yamana Gold Inc. - President & CEO [4]

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Thank you, Jason. We have, as I said at the start of my remarks, embarked on a new era at Yamana. It is an era that will be defined by improved financial flexibility, increased free cash flow generation, sound execution of our organic growth opportunities and superior return to our shareholders. We have already delivered the numbers, a number of catalyst in recent months as you can see from this slide and there are more to come. We will be updating mineral reserves and mineral estimates for Jacobina and providing an exploration update for the operation in the third quarter. We will provide a broader exploration update for our operation in the third quarter.

We will be holding our investor tour of Jacobina from October 1 to October 3. The result of the Jacobina pre-feasibility study are expected in the first quarter of 2020. The result of the East Malartic and Odyssey internal study expected in the first quarter of 2020. And most importantly, we will continue to deliver on production and cost, and we will continue to deliver on free cash flow.

And with that, we'll be happy to take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Ralph Profiti of Eight Capital.

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Ralph M. Profiti, Eight Capital, Research Division - Research Analyst [2]

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I have 2 of them please, Daniel, one on Jacobina and one on Agua Rica. So at Jacobina, it sounds like things are going well and getting the mineral reserve grade up towards 3 grams a tonne. Can you talk a little bit about the drilling strategy as it pertains to getting very -- from infill versus step-outs? And into the new reserve update, do you anticipate moving the cutoff grade at all? How sensitive is the orebody to cutoff grade?

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Daniel Racine, Yamana Gold Inc. - President & CEO [3]

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Okay. So I'll answer part of the question and maybe Henry or Yohann will -- can complement.

So at Jacobina, we -- anything we drill now is above 3 grams. So as we extend down towards down on our [rig] system, it seems that we see an upgrade. So the first step is, first, to transfer some of the inferred resources that we have right now. We have a lot of ounces in inferred to reserve grade to reserve and then we're successful to achieve that, and you're going to see when we release our update on R&R at the Jacobina in the third quarter. So that's the first step. So now we're mining all the time at reserve grade or above reserve grade.

One of your question -- part of your question was on cutoff. We don't change the cutoff at Jacobina. We have maintained the same cutoff. It's just that the grade is -- the grade we're drilling is higher and then we're hitting also thicker zones.

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Ralph M. Profiti, Eight Capital, Research Division - Research Analyst [4]

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Excellent. Excellent. Okay. Daniel, on Agua Rica, can you give us some examples of these value-creating opportunities that you're seeing? Not looking for firm numbers, but across the industry, you're seeing things like autonomous trucking ore sorting and the use of technology. Are there any particular opportunities that get you most excited?

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Daniel Racine, Yamana Gold Inc. - President & CEO [5]

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Yes, (inaudible) Gerardo Fernandez.

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Gerardo Fernandez-Tobar, Yamana Gold Inc. - SVP of Corporate Development [6]

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Yes, we -- in the next phase in the value-seeking (inaudible), options that give us more [value on.] In a mine like this throughput is one of the main levers to achieve that. But to your point, due to the special location and haulage profile, transportation is one of the main costs, and we are going to be looking at alternatives for that. Electric trucks is one of them, our semi-autogenous truck that could improve the productivity and safety on that. So I think we have it tabled in the next stage. We do need to take samples in order to do that, so that would probably would be for feasibility, and not for the next stage of value-seeking. But it's something we're looking at, especially for improving the profile of the ore. We are doing blending right now in order to improve the impurity going into the -- the mills before it gets there.

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Operator [7]

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(Operator Instructions) The next question is from Tanya Jakusconek of Scotiabank.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [8]

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Maybe one financial question and then just on the technical side. Jason, just on the working capital adjustment for the Chapada sale, what number are we expecting to see in the Q3 cash flow statement?

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Jason LeBlanc, Yamana Gold Inc. - Senior VP of Finance & CFO [9]

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Yes. Tanya, same as I mentioned before was $33 million that goes with the sale. So that's what you'll see.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [10]

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Okay. So it is still the $33 million, there's been no adjustment for that?

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Jason LeBlanc, Yamana Gold Inc. - Senior VP of Finance & CFO [11]

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No.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [12]

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Okay. Perfect. And then just for Daniel. How do you see the El Peñón and Minera Florida ramp-up in Q3, Q4? Like, are we seeing a progression in those mines' performance or are they evenly split?

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Daniel Racine, Yamana Gold Inc. - President & CEO [13]

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No. At El Peñón, the big difference is the grade increase you're going to see in Q3 and then Q4. So we're going to go back to more reserve grade than what we saw in Q1 and Q2 where we had to process some of the stockpile. So now we're pretty well advanced on what we have to do on development and then you're going to see -- that's the big difference in Q2 with El Peñón.

And then on the Florida, it's the same thing. We're going to focus on exploring -- exploration, basically, on the new zones. And then also the production, you'll see a big increase. So we're not worried to achieve the guidance on Florida. We knew it would be a lower Q first half than the second half at Florida.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [14]

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Okay. So are you just saying that your Q3, Q4 for both of these assets are going to be similar at both of these mines? So both of these quarters are similar, the grades will be the same?

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Daniel Racine, Yamana Gold Inc. - President & CEO [15]

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Yes. You'll see Q3 and Q4, especially Q4. As you know, at Yamana, Q4 is always our strongest quarter over the year and then that will be, again, the best quarter of the company this year will be Q4 for both. But even starting in Q3, both mines will see an improvement.

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Tanya M. Jakusconek, Scotiabank Global Banking and Markets, Research Division - Analyst [16]

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Okay. And then just maybe on the optimization of the asset base. I think there was a comment in there that with the sale of the Chapada mine, you could see your costs and all-in sustaining costs move up 3% to 5% just with this removal of the asset. So maybe what you're doing for optimization on the asset base?

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Daniel Racine, Yamana Gold Inc. - President & CEO [17]

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Well, we took that as a challenge, Tanya. We know that there would be cost increase because of the Chapada $30 per ounces. But that are our GMs, all 5 of them, they know it's important for us. And then on the -- also on the G&A side of the company, we have done quite a lot in the past month to reduce our G&A. But at each mine site, they're looking at opportunity. There's 2 ways, you know, is to reduce cost or increase production. And then we're looking at both ways of achieving our guidance. I mentioned that earlier this year, that we won't change our guidance despite of the sale of our lower-cost Chapada, and that's what we want to do.

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Jason LeBlanc, Yamana Gold Inc. - Senior VP of Finance & CFO [18]

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Tanya, maybe just to round out that thought process as well, I think it's [also look at,] and I made reference to it in some of my remarks today, that we have said before, there was that large stockpiling cost, which was a real burden on free cash flow generation and that avoidance of that stockpiling more than offsets the math on Chapada. And further to that, Chapada, that number point in time, as we've talked about before, and we forecast out in coming years with declining gold grade, that's a very different number than that $30 per ounce where it becomes, let's call it, neutral order of magnitude because of the lower grade and the lower units of production there. So I think to look forward, very much not an issue.

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Operator [19]

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The next question is from Don MacLean of Paradigm Capital.

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Don MacLean, Paradigm Capital Inc., Research Division - Senior Analyst of Gold [20]

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Just a quick one for you, Jason. If we look at Page 16, the debt sheet, can you give us what the profile you think will look like by the end of this year?

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Jason LeBlanc, Yamana Gold Inc. - Senior VP of Finance & CFO [21]

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Short answer is no, Don, because we've got tenders out there right now and the ultimate profile is going to be determined on the final tender amount and there is a -- it's a very formal priority waterfall that's set up. So in a couple of weeks' time, we will know that profile, I would say just broadly speaking, our approach generally in the past has been to retire shorter-term debt first. We like the idea of having a lot of runway before we deal with debt repayments. I think that's -- will very much be the case with this result. And to the extent that doesn't [perfectly] optimize for that strategy on this, we would, with free cash flows, post -- [post] that transaction, carry on that process of improving that profile and reducing debt as well.

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Don MacLean, Paradigm Capital Inc., Research Division - Senior Analyst of Gold [22]

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Okay. So you'll be focusing primarily on that 22, 23 [mark?]

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Jason LeBlanc, Yamana Gold Inc. - Senior VP of Finance & CFO [23]

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Yes. I think that's a fair assumption. Yes.

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Operator [24]

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This concludes today's conference -- I'm sorry. This concludes today's question period. I would now like to return the meeting back over to Mr. Racine. Please proceed.

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Daniel Racine, Yamana Gold Inc. - President & CEO [25]

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Thank you, operator. Thank you, everyone, for attending our call. Stay tuned to our third -- for our Q3 conference call. We'll have very good news coming on the stream in this quarter and enjoy the rest of the summer and have safe vacation. Thank you very much. Bye-bye.

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Operator [26]

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Thank you, Mr. Racine. This concludes the conference. Please disconnect your lines at this time. We thank you for your participation.