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Yamana Gold Inc (AUY) Q1 2019 Earnings Call Transcript

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Yamana Gold Inc  (NYSE: AUY)
Q1 2019 Earnings Call
May. 02, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

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 the amount of estimated future productions, cost of productions, capital expenditures, future metal prices, and the costs of timing of 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 press release issued yesterday announcing first quarter 2019 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 12.00 PM 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. Daniel Racine, President and CEO.

Daniel Racine -- President and Chief Executive Officer

Thank you all for tuning in. And welcome to our first quarter conference call. With me on the call today is Jason LeBlanc, our CFO. All members of our management are with us in the room and will be available for the Q&A portion of the call. We had a strong first quarter, both operationally and from a sustainability standpoint.

Our total recordable injury frequency rate declined to 0.6 during the quarter from 0.72 in the first quarter of 2018. We did not have any lost time injury at any of our operation in the latest quarter. While we are pleased with executing on our One Team, One Goal: Zero vision, we also recognized the importance of being prepared. To that end, we had an emergency response exercise at Jacobina during the quarter to test the preparedness of the mine, the community, and supporting authorities for serious incident. The exercise went well and while we hope we never had to implement our emergency protocols, we will continue to hold such exercise to ensure we're ready for any scenarios.

Our first quarter production of 272,000 GEO ounces exceeded expectation, while all-in sustaining costs of $930 per gold equivalent ounces were in line with expectation. Year-on-year production rose 29% led by record production at Jacobina and a 6% increase at Minera Florida. We had also benefited from new contribution from Cerro Moro. Our 2019 mine-by-mine outlook for production and cost is unchanged.

During the quarter, we announced the integration agreement for Agua Rica, which represents a significant step toward the optimization of this compelling project. We took another important step when we announced the sale of Chapada to Lundin Mining for more than $1 billion. The agreement includes $800 million of upfront cash consideration, plus up to $125 million based on gold price, some of which is immediately monetizable. It also include a $100 million in cash contingent on the development of a pyrite roaster by Lundin, and a 2.2% net smelter return royalty on gold production from Suruca, that is also monetizable.

The strategic benefit of the transaction are many, not the least of which is significantly improved financial flexibility. The upfront cash payment will be allocated toward debt reduction with repayment of our outstanding revolver, the first priority, followed by repayment of near and medium-term debt. The sale will also facilitate doubling of our annual dividend to $0.04 per share and we anticipate additional increase from cash flow. The sale will also allow us to redirect cash flow that would have been allocated to Chapada toward value-enhancing opportunities at Jacobina, Malartic, Cerro Moro and Agua Rica. These are organic opportunities to grow higher-margin production by more than 150,000 GEO ounces per year. We expect development costs for these production to be lower than the Chapada phased expansion plan. And again, because it's an important point, we will fund this development with cash flow from operations. I'll talk more about these opportunities in a moment.

Following quarter end, we arranged for the sale of approximately 27,000 GEO ounces in precipitate inventory from Cerro Moro for about $34.5 million. A second sale is expected in June valued at more than $10 million. Jason will talk more about this sale later in this call.

Operating results for the quarter were solid, both with respect to production and costs. On an unadjusted basis, our net loss was $4.1 million or nil per share. On an adjusted basis, we earned $0.02 per share. Cash flow from operations before net change in working capital adjustment was $103.2 million. This exclude deferred revenue from our copper advanced sale program, totaling to $25.1 million. Copper production during the quarter was 28.1 million pounds. On a by-product basis, taking copper as a by-product credit, our GEO cash costs and all-in sustaining costs were $526 and $665 (ph) respectively.

Turning to our production result, the benefit from Cerro Moro is clear with over 2 million ounces of silver and 38,500 ounces of gold during Q1. Looking at the 270,000 ounces, Gold equivalent ounces production total, 236,000 ounces in the quarter was gold and silver production came at 3.02 million ounces, both are significant increase from the year earlier period and both are tracking well to guidance.

Speaking quickly to unit costs for the company, we are within the guidance range for the year on all metrics. Turning to the operation, production of 83 at Malartic -- production of 83,670 GEO ounces at Malartic met expectation. Grades were in line with plan and recoveries were similar to the first quarter of 2018. The Barnat expansion project is advancing on plan with contribution expected later this year, more meaningful contribution to come in 2020 and 2021.

Our exploration programs are evaluating deposits east of the mine existing open pit, including the Odyssey, East Malartic, Sladen and Sheehan zones. We're evaluating underground scenarios for Odyssey and East Malartic zone with studies showing potential to increase production by 75,000 ounces per year. Additional drilling from underground access points, resource delineation, and engineering will be required to advance East Malartic and Odyssey toward development decisions.

The permit allowing the development of an underground ramp at the Odyssey project was received in December 2018. At Chapada, production was in line with expectation with 21,520 ounces of gold and 21.8 (ph) million pounds of copper. Several initiatives help mitigate the effects of rainy season contributing to a 37% year-over-year increase in ore mined. During the quarter, the mine focused on the waste movement in preparation for a push-back scheduled in the second quarter of 2019. Cost control initiatives coupled with the decline in the Brazilian Real versus the US dollar helped to drive lower year-on-year costs. We expect the sale of Chapada to close early in the third quarter of 2019.

As mentioned, Jacobina continues to deliver exceptional production. High grade and processing rate contributed to record quarter of 38,617 ounces. Costs benefited from higher gold equivalent sales optimization initiatives and the depreciation of the Real. During the quarter, we completed 2,600 meters of drilling with a focus on defining new inferred mineral resources at grades higher than the life of mine model in the Morro do Vento and Canavieiras sectors. To date, drill results are promising with several holes at significantly higher than reserve grades.

We are evaluating a two-phase approach to expand production at Jacobina beyond 150,000 ounces per year. Phase one considers a plant optimization to sustain processing capacity at 6,500 tons per day which would increase production to 165,000 to 170,000 ounces per year. This phase require very modest capital and is expected to be implemented by mid-2020. Phase two considers a plant expansion to between 8,000 and 8,500 tons per day to achieve production of more than 225,000 ounces per year.

Cerro Moro produced 63,000 gold-equivalent ounces in the quarter, with 38,471 ounces of gold and 2.02 million ounce of silver. The operation is on track to meet 2000 production guidance. As was the case last year, elevated mills feed grade continues to create capacity constraints at the mine furnaces resulting in precious metals precipitate.

Subsequent to the quarter end, we arranged for the sale of some of this inventory which Jason will talk about more in a moment. We believe there are more reserves to be added at Cerro Moro and then we've launched an aggressive drill program this year to find them. 8,200 meters of exploration and drilling was complete in Q1. An increase in reserve would unlock opportunities to expand the mines processing plant and support construction of a power line which would lower operating costs.

At El Penon, production of 46,000 GEO ounces in Q1 exceeded expectations, grade of 3.56 grams per ton were in line with expectation. Underground mine development activities that took place in Q1 are expected to increase access to higher grade gold and silver in the second half of this year. We completed nearly 21,000 meters of drilling in the first quarter with the focus on converting inferred mineral resources to measured and indicated category.

At Minera Florida, production of 19,654 ounces of gold benefited from higher grade from the PVS and Pataguas zone, partly offset by lower mill throughput. Costs metrics improved by more than 10% year-on-year due to higher sales, cost control initiatives and a decline in the Chilean pesos. The updated life of mine plan which emphasizes higher tonnage and ramp up of production is expected to begin in the second quarter. 12,500 meters of drilling was completed in the first quarter. The focus on drilling was to convert inferred mineral resources to measured and indicated mineral resources at nine veins within the core mine.

Before I turn it over to Jason to discuss the financial, I want to add a final point about Agua Rica. The recent signing of the integration agreement for the development and operation of Agua Rica was a significant step forward for the project to unlock value, leveraging the existing infrastructure and facility at the Alumbrera mine would enhance Agua Rica economics and reduce the project's complexity and environment footprint. As I said at the start of my remarks that this is a compelling project that give me, you some sense of just how compelling. Preliminary studies show the potential for mine life in excess of 25 years at average annual production of 520 million pounds of copper equivalent metal for the first 10 years of an estimated 25-years mine life. A pre-feasibility study is imminent and a feasibility study is expected to be completed in 2020. Agua Rica represents a significant monetization opportunity and we look forward to updating you as it develops.

I'll now hand it over to Jason to talk about our financials.

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Thank you, Daniel. And good morning everyone. We delivered $407 million in revenue in the first quarter, compared to $455 million in the same quarter last year. Revenue was impacted by lower gold and copper prices partly offset by higher year-on-year silver sales. Despite the decline in revenue, gross margin increased by $10 million over last year underpinned by operational results and cost improvements.

Net earnings attributable to Yamana equity holders was $0.00 per share. This includes certain non-cash and other items that may not be reflective of current and ongoing operations. Notable among these items was a $20.2 million non-cash tax on unrealized foreign exchange losses related to the weakening of our operating currencies versus the U.S. dollar. Excluding these items among others, adjusted earnings in the quarter would have been $0.02 per share.

Cash flow before net change in working capital was $103.2 million during Q1. As Daniel mentioned though, this excludes deferred revenue from our copper advanced sales program. When adjusted for the program, cash flows from operating activities before net change in working capital would have been $128.3 million, up from $84.1 million for the prior year quarter. As a reminder, we will have our last delivery under the copper advanced sales program in Q2, which is about $25 million.

As anticipated, Q1 had a large working capital outflow with the seasonal nature of our operations and accrual cycle. But in Q1, we also had the impact of further precipitate inventory build up and non-reversal from Cerro Moro. Furthermore, with weaker local currencies, we had a non-cash impact from FX of about $10 million that went through working capital in the quarter. I'll speak to you shortly, but we'll see a big reversal of the precipitate inventory in Q2. These items also impacted our net debt and net free cash flow compared to year end. With increasing cash flow and the reversal of these impacts beginning in the second quarter, we expect near-term improvements in cash flow and net free cash flow.

Our Q1 operating cash flow is definitely not a representative run rate for the year. G&A expenses during the quarter were $21.5 million, down from $26.5 million a year ago. We are also implementing a plan for further G&A savings that will begin later in the year after closing of the Chapada transaction. The precipitate inventory build up at Cerro Moro resulted from above-plan silver grades and a positive grade reconciliation. This created capacity constraints at the mine's furnaces since start-up. As Daniel highlighted earlier, we have arranged for the sale of approximately 27,000 gold equivalent ounces in Cerro Moro precipitate inventory, which will be reflected in gross revenue and cash flow of approximately $34.5 million in the second quarter.

We expect to make an additional sale of precipitate in June of approximately $10 million following which we expect inventory levels to be maintained. We have ordered an additional furnace to better manage any further capacity constraints and we're currently assessing whether it will be installed or whether the flexibility of selling gold and silver in precipitate forms is a better solution to manage inventory.

The sale of Chapada will allow us to significantly improve our balance sheet. With the proceeds of the transaction, we will be reducing our gross debt levels by repaying our revolver and shorter tenure fixed term debt. Upon closing of the transaction which is expected in the third quarter, our net debt-to-EBITDA ratio will decline to 1.5 times. But looking ahead, we expect our net debt-to-EBITDA ratio to decrease to 1x by the end of 2021.

Our stronger balance sheet, but more precisely, the greater financial flexibility it affords, is a key catalyst for what's next for Yamana. This includes the pursuit of near-term value enhancing organic growth projects, greater commitments to our exploration efforts and opportunities to improve shareholder returns.

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

Daniel Racine -- President and Chief Executive Officer

Thank you, Jason. To conclude, I will highlight several key points. Post Chapada, we will be left with the portfolio of high-quality precious metal assets with number of compelling opportunities for growth. This sale allows us to significantly and immediately improve our balance sheet. This in turn would allow us to make a meaningful return of cash flow -- of cash to our shareholders through our dividend increase while also providing us with financial flexibility to pursue our organic growth opportunities using cash flow from operation.

Finally, I would like to remind everyone that we have our AGM this morning at 11:00. And with that we'll be happy to take your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions). We have a question from Ralph Profiti from Eight Capital. Please go ahead. Your line is now open.

Ralph Profiti -- Eight Capital -- Analyst

Thanks operator. Good morning. I'd like to ask two questions. Firstly, on the expansion at Jacobina, because you've talked about higher reserve grades and higher mining grades coming, should we be thinking about Phase 1 though as more of improvements around things like dilution around the pillars, mining methods? I'm just trying to get a sense of splitting the two phases, what actually is going on particularly in Phase 1 to get us those extra ounces.

Daniel Racine -- President and Chief Executive Officer

Here we have hard time to hear you Ralph, but I thought it was on Jacobina. For Phase 1 is basically putting the mill at 6,500 tons per day with the actual reserve grade. So there's no change in grade. It's minimal capital, it's just some optimization on screening and stuff like that. So it's fairly easy to achieve. Phase 2 is basically 25% is some mill tweaking and then about the rest is, you know, increasing our underground capacity to reach 7,500 or 8,000 and then at the end 8,500 tons per day. So it's fairly easy, the mine is already achieving most of the tonnage. And then Phase 1 will be completed by this time next year.

Ralph Profiti -- Eight Capital -- Analyst

Okay. Yeah. Thanks for that. Jason around the precipitate sales, have you locked in those prices already? Does that happen through derivative contracts? How does the pricing mechanism for receiving those revenues work?

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

No, there's -- there's no locking of the prices. So we mentioned in May, there, so we will be exposed to gold prices like our normal course sales would be. When it comes -- it is very similar to what we would do on our concentrates, on the actual sale where we would lock in the prices at the point of sale. So, I'd expect those to be a couple of weeks out.

Ralph Profiti -- Eight Capital -- Analyst

Okay. Got it. Thanks guys. Thanks very much.

Operator

Thank you. The next question is from Tanya Jakusconek from Scotiabank. Please go ahead. Your line is now open.

Tanya Jakusconek -- Scotiabank -- Analyst

Great. Good morning everybody. Maybe the first one for Jason. Can you just talk to us about what the net contribution to revenue would be from the precipitate because there's other factors in there? I think there's tax implication and royalties are, and then obviously a cost for treating the precipitate.

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Sure. You know, Tanya, I would assume, it's very similar to what we would do with our dore sales. So that would be in the range of probably a little under 2% of gross proceeds would be a reasonable cost to apply for, you know, payable metals, treatment refining charges, logistics etcetera. So, really from our perspective no different than a dore sale,

a little bit more intensive to manage but from a cost perspective it's a very efficient.

Tanya Jakusconek -- Scotiabank -- Analyst

All right. So, if we take out, assuming 98% is coming to you that would been in that ballpark.

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

That's good. Yeah.

Tanya Jakusconek -- Scotiabank -- Analyst

Okay, perfect. And then when do you expect that working capital to change, or you know to obviously get those moneys back through the year? When are you expecting that reversal?

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

It would be pretty evenly balanced throughout the year Tanya, not to be too precise about it. Obviously, Q2 we're going to have a big windfall from that precipitate that I mentioned. Then we would expect normal course on that. Beyond that it would be the normal kind of sequence on the other working capital type items.

Tanya Jakusconek -- Scotiabank -- Analyst

Okay. So if we were to take the precipitate add of the Q2 and then evenly distribute whatever is remaining for Q3, Q4 that would be a good enough assumption.

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Yeah that would be fair.

Tanya Jakusconek -- Scotiabank -- Analyst

Okay.

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Tanya, the other thing I want to highlight now just while we're on the point of working capital, is on the Chapada sale, as you know, is part of these -- on asset sale like that we will have a working capital transfer, I guess, with that sale to the purchase and sale agreement provides for a commitment to move $33 million of working capital basis that purchase and sale agreement to Chapada. So that would be part of a working capital movement outside of what I just mentioned for the year.

Tanya Jakusconek -- Scotiabank -- Analyst

Okay. And that would be in Q3?

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

That would be Q3, yes.

Tanya Jakusconek -- Scotiabank -- Analyst

Okay. Perfect. And then maybe one for Daniel, just on that Jacobina again and it's to do with Phase 2. I'm just wondering, I know that you've mentioned that you're permitted to 7,500 tons a day, and you said of the $100 million capital, I think 25% would be in the mill tweaking, the rest would be in the underground. What has to be done on the tailing side?

Daniel Racine -- President and Chief Executive Officer

On the tailing side, we are OK for now. We have to think about the future. And part of the study is to look at either a dry stack tailing or paste fill. As you know, we're mining in Jacobina now for many years, there's many open stop there. And then it will make sense to probably switch to a paste fill, but we're -- the guys are studying right now we have to do some test on the material we have from the tailing to see what's the best options. But eventually, we'll switch to a very different type of tailing that we have right now.

Tanya Jakusconek -- Scotiabank -- Analyst

And then if you were to go to that 75 or 85 I mean, what tailings capacity capacity do we have right now?

Daniel Racine -- President and Chief Executive Officer

We have to check that, Tanya. I don't know by heart, but it's quite long. I think it's right now if we would continue at the actual rate, we have over 10 years.

Tanya Jakusconek -- Scotiabank -- Analyst

At your current rate?

Daniel Racine -- President and Chief Executive Officer

At the current rate. So at 6,500 tons per day, let's say, we're OK for 10 years.

Tanya Jakusconek -- Scotiabank -- Analyst

Okay. So I can do the math there. Okay. Thank you so much.

Daniel Racine -- President and Chief Executive Officer

Yeah. So maybe around eight years would it increase capacity.

Tanya Jakusconek -- Scotiabank -- Analyst

Okay.

Daniel Racine -- President and Chief Executive Officer

But that's also saying that we continue the same type of tailing. And then we won't, if we go dry stack, it takes a lot of a -- a lot less place. And if we put -- if we go with paste, then we put about 40% to 50% back underground.

Tanya Jakusconek -- Scotiabank -- Analyst

Okay. That's it. Thank you.

Daniel Racine -- President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from Josh Wolfson from Desjardins Securities. Please go ahead. Your line is now open.

Josh Wolfson -- Desjardins Securities -- Analyst

Thank you. Looking at the 2021 guidance and adjusting out Chapada, looks like there's about 75,000 gold equivalent ounces that would represent an increase from 2019 numbers. I think you know the company has already provided details for half of that representing upside from Malartic and Jacobina. You know, otherwise, I would have expected maybe net declines from El Penon and Cerro Moro. So, is it safe to assume the other half, 35,000-40,000 ounces of growth is really strictly driven by Minera Florida at this point?

Daniel Racine -- President and Chief Executive Officer

No, no, the 150,000 is right now around it's 75,000 from Jacobina and the other 75,000 ounces is a combination of Canadian Malartic and Florida. So, there's no decrease at Cerro Moro. There will be a slight increase at Florida. And then when we go ahead with the Odyssey and East Malartic -- at Malartic, it's 75,000 ounces Yamana based on the 50% basis.

Josh Wolfson -- Desjardins Securities -- Analyst

Okay.

Daniel Racine -- President and Chief Executive Officer

That would explain the 150,000. So, 150,000 is a combination of 75,000 at Jacobina plus Canadian Malartic and Florida for the other 75,000 ounces.

Josh Wolfson -- Desjardins Securities -- Analyst

Okay. Specifically for 2021 now, where I guess Malartic guidance has already been issued for 350,000 ounces.

Daniel Racine -- President and Chief Executive Officer

Yes.

Josh Wolfson -- Desjardins Securities -- Analyst

So plus 2020 over 2019, and then Jacobina, I guess the company has already provided indications of upside of 15,000. Specifically for 2021, it looks like there is still growth from Minera Florida, El Penon and Cerro Moro imply of about 35,000 to 40,000 ounces which looks like it could only be driven from Minera Florida. Is that reasonable?

Daniel Racine -- President and Chief Executive Officer

No. It's a mix on all our operations Josh. It's not only Florida. Florida is part of it. But we see growth at other operations too. Jacobina, we're conservative in our numbers. So, we see more coming from Jacobina, that's what we're saying. At Jacobina, we're assuming the actual grade. But as we mentioned many times in the last quarter and this quarter again, the grade we are drilling is above three grams and then we see our resources and reserves going up again this year. So, if we would assume the actual grade that we see right now at the mill and in the future that explain the difference just by itself.

Josh Wolfson -- Desjardins Securities -- Analyst

Okay.

Daniel Racine -- President and Chief Executive Officer

And then maybe to be clear on Jacobina, we don't have to go to 8,500 tons per day if we assume that the grade we are hitting right now, that's what we're going to have in the future. At 7,500 tons per day, we're already achieving that 225,000 ounces per day without increasing our permit and anything. So there's many option at Jacobina by either a grade or throughput.

Josh Wolfson -- Desjardins Securities -- Analyst

Okay. And for the capital spending for Jacobina for the second phase that $100 million, when would the timing of that spending occur. And I guess when would the company make the decision to start that spending program?

Daniel Racine -- President and Chief Executive Officer

The spending won't happen before 2021 and 2022 and it would probably be in two phases. The first one will be to bring from 6,500 to 7,500 tons per day. And then in 2020 to 7,500 to 8,500.

Josh Wolfson -- Desjardins Securities -- Analyst

Okay.

Daniel Racine -- President and Chief Executive Officer

Most of the capital will be in the second part of the answer. So in 2022.

Josh Wolfson -- Desjardins Securities -- Analyst

Okay that's helpful. If there could be additional disclosure for the 2021 corporate production guidance that would be helpful. I guess, there's a lot of changes at Jacobina year-by-year.

Daniel Racine -- President and Chief Executive Officer

Okay. Yeah.

Josh Wolfson -- Desjardins Securities -- Analyst

Great. Thank you very much.

Daniel Racine -- President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from Mark Llanes from Credit Suisse. Please go ahead. Your line is now open.

Mark Llanes -- Credit Suisse -- Analyst

Hi. Most of my questions have already been asked, but just to recall the debt maturity schedule, I believe, there was 2022, 2023, 2024 and 2027, are there any discussions at the moment to be able to retire those earlier?

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Mark, what we've said is obviously first priority is revolver and then beyond that we'll look at preference will go to the near-term maturities. But you know that's a plan that's being developed and will be executed upon concurrent with the closing of Chapada. So --

Mark Llanes -- Credit Suisse -- Analyst

Okay. And then just second question on Cerro Moro, on the silver grade, I know that you are mining above -- I mean processing above-plan on the silver grades. Can you give me additional color on the silver grade profile for the rest of the year?

Daniel Racine -- President and Chief Executive Officer

But you're right so far since we started to mine at Cerro Moro, we have better grade than expected. But for the rest of the year it should go to a typical reserve grade. So, around 650 grams per ton.

Mark Llanes -- Credit Suisse -- Analyst

All right. Thank you very much.

Daniel Racine -- President and Chief Executive Officer

We were more on the 800 to 900 since the beginning of this production.

Mark Llanes -- Credit Suisse -- Analyst

Okay thanks.

Operator

Thank you. The next question is from Mike Parkin from National Bank Financial. Please go ahead, your line is now open.

Michael Parkin -- National Bank Financial -- Analyst

Thanks for taking my questions guys. I've got most of the detail I'm looking for, just wondering with the Jacobina expansions, should we look for any unit costs improvements on a per tonnage basis with Phase 1, or would it really be potentially more of a Phase 2 change on that, on those kind of metrics?

Daniel Racine -- President and Chief Executive Officer

A small impact on Phase 1 Mike. Mostly on Phase 2 there will be a huge impact. The impact on Phase 1 will be more on the cost per ounces than the cost per ton because we're on the same tonnage, almost same tonnage we will produce more ounces. The biggest impact will come from Phase 2.

Michael Parkin -- National Bank Financial -- Analyst

Okay. Any kind of sense of magnitude?

Daniel Racine -- President and Chief Executive Officer

That's difficult right now to say. We're still doing the study. But when -- we'll will come back later this year to show the numbers.

Michael Parkin -- National Bank Financial -- Analyst

Okay, thanks guys.

Operator

Thank you. The next question is from Don MacLean from Paradigm Capital. Please go ahead, your line is now open.

Don MacLean -- Paradigm Capital -- Analyst

Good morning guys. Good morning. Daniel, it's been a while since we've chatted. For some of us who are sort of just coming back to look at the name in more detail again was this helpful. reduction in the debt coming ahead. It'd be very helpful to get a list of the organic growth projects that you're referring to but in a priority sequence. And I don't know whether you can enlighten us a bit more on what the capital and the contribution would be? But just to maybe prioritize them at the very least for us.

Daniel Racine -- President and Chief Executive Officer

But it's pretty clear for us. Don, number one is Jacobina by far, because it's giving us the best return on all our projects, then for sure Canadian Malartic is a good project to us, probably second, then we have some improvement at Florida and other mines that we have to. Agua Rica is very important for the company because of the financial aspect of it. So that's basically the list, but number one is, for sure, Jacobina and number two Malartic.

Don MacLean -- Paradigm Capital -- Analyst

And the Jacobina would include both phases that you are referring to?

Daniel Racine -- President and Chief Executive Officer

Yes.

Don MacLean -- Paradigm Capital -- Analyst

The phase 1 is kind of a normal --

Daniel Racine -- President and Chief Executive Officer

Don, phase 1 is very simple and then basically almost no capital. So it's an easy one to decide.

Don MacLean -- Paradigm Capital -- Analyst

And would phase 2 sort of stack up again at the top of the priority list?

Daniel Racine -- President and Chief Executive Officer

Yeah.

Don MacLean -- Paradigm Capital -- Analyst

Okay great. Okay that's helpful. Thank you.

Daniel Racine -- President and Chief Executive Officer

Thank you Don.

Operator

Thank you. The next question is from Anita Soni from CIBC. Please go ahead. Your line is now open.

Anita Soni -- CIBC World Markets -- Analyst

You had an open pit at Cerro Moro, are you fully underground there now?

Daniel Racine -- President and Chief Executive Officer

We didn't hear you Anita.

Anita Soni -- CIBC World Markets -- Analyst

Sorry, at Cerro Moro, in terms of the underground proportion of the ore feed, how much is that now?

Yohann Bouchard -- Senior Vice President, Operations

Yohann here speaking. We still have two years, a lot of mining with the open pit at Cerro Moro. So we -- at this moment about 25% is coming from underground and remaining from open pit. And we're planning to start the new mining zone, underground mining zone in May.

Anita Soni -- CIBC World Markets -- Analyst

Sorry, in May. Okay. And then secondly on the Canadian Malartic, what do you think is the timeline for Odyssey and East Malartic to start up? And secondly, the resource base that you have in inferred category, is that embedded in the Canadian Malartic inferred resources that you have in your reserve resource statement?

Daniel Racine -- President and Chief Executive Officer

For the first part of your question like we mentioned a few time, we are doing the study right now, that should be completed by late this year, early next year. Then we will come with our partner and announce exactly what we're planning to do, development off of it. If we see we give a go, we'll start next year. And then it should be completed by the end of 2021 to have the first ore coming through the mill.

Anita Soni -- CIBC World Markets -- Analyst

All right. And then secondly, the depreciation rates at Cerro Moro, was that booked on a production basis, or is that booked on sales basis? So, given that you sold less than you produced, would we expect that to go higher next year, sorry next quarter when the -- yeah?

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Sales basis, but it shouldn't change that much on a per ounce basis Anita. It's about $500.

Anita Soni -- CIBC World Markets -- Analyst

Sorry $500 per ounce, or $500 differential.

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Yeah, $500 per ounce.

Anita Soni -- CIBC World Markets -- Analyst

Okay. All right. Thank you very much. Those are my questions.

Operator

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

Daniel Racine -- President and Chief Executive Officer

Yeah. Thanks everyone for joining our call. I have no further comments. Thank you, and have a good day.

Operator

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

Duration: 50 minutes

Call participants:

Daniel Racine -- President and Chief Executive Officer

Jason LeBlanc -- Senior Vice President, Finance and Chief Financial Officer

Ralph Profiti -- Eight Capital -- Analyst

Tanya Jakusconek -- Scotiabank -- Analyst

Josh Wolfson -- Desjardins Securities -- Analyst

Mark Llanes -- Credit Suisse -- Analyst

Michael Parkin -- National Bank Financial -- Analyst

Don MacLean -- Paradigm Capital -- Analyst

Anita Soni -- CIBC World Markets -- Analyst

Yohann Bouchard -- Senior Vice President, Operations

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