Annual gold and copper production that exceeded the company's upwardly revised guidance were just two of several reasons 2018 shimmered for Yamana Gold (NYSE: AUY). The company also celebrated the first six months of commercial mineral production at its newest high-grade gold and silver mine, Cerro Moro, a period during which that mine's production exceeded guidance at costs below expectations.
Will the year ahead be as lustrous as the one just past? Let's grab our shovels and dig into what we know so far.
Image source: Getty Images.
Unearthing the production forecasts
Thanks, in part, to record output from Canadian mines Malartic and Jacobina, Yamana reported gold production of 941,000 ounces in 2018. Not to be overlooked, its silver production of 8.02 million ounces and copper production of 129 million pounds also exceeded revised guidance.
Although management forecasts that 2019 gold and copper production will drop slightly from 2018 levels -- to 940,000 ounces and 120 million pounds, respectively -- silver production is expected to increase to 10 million ounces. Consequently, on a gold equivalent ounce (GEO) basis, management forecasts year-over-year growth. Whereas Yamana produced 1.06 million GEO in 2018, management projects 1.1 million GEO in 2019.
Although Yamana has several operating mines in its portfolio, investors should keep a close eye on Cerro Moro, which management contends will play a large role in the company's ability to generate stronger cash flow. In 2019, management forecasts Cerro Moro will produce 130,000 ounces of gold and 6 million ounces of silver.
Keeping an eye on costs
Yamana had a lot to celebrate last year on the expenses front: It reported all-in sustaining costs (AISC) on a co-product basis of $816 per gold ounce and AISC on a co-product basis of $10.81 per silver ounce -- results that beat expectations and improved on the 2016 and 2017 figures. Consistent with the World Gold Council's recent note regarding cost metrics, however, Yamana will henceforth present its AISC in terms of GEO. So in regards to 2019, management forecasts AISC per GEO of $920 to $960. Should the company achieve the midpoint of this guidance, it would be a slight increase from the $931 that it achieved in 2018.
Image source: Getty Images.
On a more granular level, investors should look for an uptick in sustaining capital expenditures. Whereas the company reported sustaining capex of $167.3 million in 2018, management expects those outlays to rise to $182 million in 2019. On the other hand, the company foresees its expansionary capex dropping from the $169.3 million it reported in 2018 to $95 million in 2019. The Canadian Malartic Extension Project should represent the single largest capital budget item in 2019, at $34 million.
Chapada continues to glitter brightly
Located in Brazil, Chapada is a gold-copper mine that began producing in 2007, and has a strategic mine life of approximately 20 years. In Q2 2018, Yamana announced a comprehensive plan to expand operations at Chapada, and in 2019, investors can expect to see several developments that illustrate how management intends to continue deriving value from the asset.
To begin with, investors should expect to hear of the completion and commissioning of the Phase 1 plant-optimization project sometime around midyear. According to management, this work should improve gold and copper recoveries by about 2%. In addition, investors should look for the completion of feasibility studies for Phase 2, a plant expansion, and Phase 3, a pit wall pushback, in mid-2019.
Management estimates, based on work completed so far, that Phases 2 and 3 could help the company to achieve sustained annual gold production of 100,000 ounces to 110,000 ounces, and 150 million pounds to 160 million pounds of copper, until at least 2034. For context, management forecasts 2019 gold and copper production of 100,000 ounces and 120 million pounds, respectively. Speaking further to the opportunity afforded by this multiphase approach at Chapada, management stated on the recent conference call that the expansionary work provides "an opportunity to deliver significant cash flow increase and cash flow return and does not include the gold-only potential."
The lustrous takeaway
Although investors will be watching Yamana in 2019 to see if it succeeds in meeting its mineral production and cost guidance, it's more important to focus on its cash flow statements over the coming quarters. The company's operating cash flow has dwindled from $652 million in 2016 to $404 million in 2018, but based on management's contention that the development of Cerro Moro will increase the company's ability to generate cash flow, that metric should be poised to head higher again. With operations ramping up at the mine, the company should start to reap some of the benefits of the newest addition to its portfolio. Moreover, success at Cerro Moro is even more relevant since management's near-term strategy is to eschew acquisitions in favor of organic growth opportunities.
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