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Yamana Gold Inc (AUY) Q2 2019 Earnings Call Transcript

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Yamana Gold Inc  (NYSE: AUY)
Q2 2019 Earnings Call
Jul. 26, 2019, 9:00 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 amount of estimated future production, costs of production, capital expenditures, future metal prices, and the cost and timing of the development of new projects. For a complete discussion of the risks, uncertainties and factors which may lead to actual financial results and performance being different from the estimates contained in the forward-looking statements, please refer to Yamana's press release issued yesterday, announcing second 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 would now like to turn the call over to Mr. Daniel Racine, President and Chief Executive Officer. Please proceed, Mr. Racine.

Daniel Racine -- President and Chief Executive Officer

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. 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 build safety, environment and community relations.

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 zero harm and that means zero health and safety, community and environment incidents across all our sites. We now conduct regular opinion survey about the company's ESG performance in our 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 was $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 repayments during the quarter was $51.2 million. Our 2019 production forecasts of 1.01 million GEO ounces reflect the sale of Chapada and increased guidance from Jacobina. All-in sustaining costs and cash costs 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 Penon, 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 the sale of Chapada for 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 a pro rata basis.

$462 million was tendered 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/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 costs to our remaining portfolio of assets. These reductions simplify 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, involve 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 planned capacity in the range of 7,500 tons to 8,500 tons per day. That will gradually increase production to at least 200,000 ounces and hope 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 has a long life, low cost project with robust economic opportunities to realize further value. This includes converting economic-grade inferred mineral resources and expanding throughput scenarios to increase metal production and returns. We continue to evaluate various strategic options to maximize value for the project. I'll talk more about Agua Rica shortly.

This slide lays out some of the strategic steps that we've taken to reposition ourselves for financial flexibility. Because of these steps, we're not only generating free cash. We're positioned ourselves to use this cash to maximize value and increase return.

How? I have 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 that 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 update to resource delineation and engineering initially involving Odyssey and East Malartic, although these areas of mineralization and possession extend beyond these areas. At El Penon, 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 measured and indicated resources at a number of existing veins. We're also testing new veins in the satellite Laguna deposit, and we're testing for new inferred mineral resources in the core mine area. El Penon, I should mention, is celebrating its 20th year of production this year. It's an amazing operation that has produced over 5 million ounces of gold. And while it's a major mine, we believe El Penon still has a lot more to give. To continue to pursue an aggressive drill program at Cerro Moro to delineate near-future targets and test major near-mine and regional structures. An increase in reserve would unlock opportunities to extend the existing processing plant and transition to grid power, which would increase production and reduce operating costs. Approximately 10,600 meters 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 during the quarter, including 233,000 [Phonetic] 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 of 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 and continues to be well positioned to meet its production plan for the year.

Feed grade was normalized during the quarter, as mine ore was consistent with the plan. GEO production at El Penon 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 union. Agreement have since been reached with all unions.

Year-to-date production is tracking well to the 2019 guidance, as previous year's production is weighted toward the second half of the year, especially for El Penon and Minera Florida. Looking at our costs, our all-in sustaining costs of $936 per GEO and cash costs of $668 per GEO year to date are in line with our guidance range. As mentioned last week, we announce the result of Agua Rica Pre-Feasibility Study, and those results were very positive. Proven and probable copper mineral reserves increased by 21% to 11.8 billion pounds, while gold mineral reserves increased by 12% to 7.4 million ounces. Initial mine life is anticipated at 28 years. Annual production for the first 10 years is increased to 533 million pounds of copper equivalent production. Cash costs decreased to $1.29 per pound and all-in sustaining costs were lowered to $1.52 per pound for the first 10 years, and net present value increased at $1.935 billion with an increased after-tax IRR of 19.7%. What is clear is that this is a compelling project with exceptional value.

We believe that these opportunities make the project even more compelling. To that end, we will conduct a review of strategic and value creating opportunities to further improve project's economy. 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 over to Jason to talk about our financials.

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

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. Including the net 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 flows for 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 to 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 will have proceeds from Chapada included in our financial results, and similar to this normalized treatment we will adjust 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 costs and AISC 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 the gold/silver ratio of 82.5 to 1, which was quite high by historical standards, but was a level of respect of spot gold and silver prices at that time. Year to date, we've been surprised by the under performance of silver and the gold/silver ratio reached a high of about 93 to 1 by the time we closed the Chapada transaction.

As you can see on this slide, the GEO ratio has only exceeded 90 to 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 to 1 currently. Our updated guidance of 1.01 million GEO units assumed a conservative ratio of 93 to 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 and 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 five 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 with gold prices averaging about $1,400 per ounce since the closing on July 5th, which is a reference date for the instrument.

We are bullish on gold and this instrument provides great leverage for the gold price. Beyond the operational cash flows we will be generating, the gold price instrument will provide a further kicker to free cash flows with the potential payments above the reference gold prices.

Wrapping up the financial overview, here's an update of our debt position. On closing the Chapada transaction, we repaid what was outstanding on a 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 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 based 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 one turn by 2021 or potentially sooner.

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

Daniel Racine -- President and Chief Executive Officer

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 a number of catalysts 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 at Jacobina from October 1st to October 3rd. 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 is expected in the first quarter of 2020. And most importantly, we will continue to deliver on production and costs and we will continue to deliver on free cash flow.

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

Questions and Answers:

Operator

Thank you, Mr. Racine. [Operator Instructions] The first question is from Ralph Profiti of Eight Capital. Please proceed.

Ralph Profiti -- Eight Capital -- Analyst

Good morning, thanks for taking my questions. I have two of them, please Daniel, one on Jacobina and one on Agua Rica. So at Jacobina, it sounds like things are going well in getting the mineral reserve grade up toward 3 grams a ton. Can you talk a little bit about the drilling strategy as it pertains to, you know, getting there from in-fill versus step-outs and into the new reserve update? Do you anticipate moving the cut-off grade at all? How sensitive is the ore body to cut-off grade?

Daniel Racine -- President and Chief Executive Officer

Okay, I'll answer part of the question and maybe Henry or Yohann can complement. So, at Jacobina, anything we drill now is about 3 grams. So as we extend down, toward down on our reef 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 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 last question was on cutoff, we don't change the cutoff at Jacobina. We have maintained the same cutoff. It's just that the grade we are drilling is higher and then we're eating also thicker zones.

Ralph Profiti -- Eight Capital -- Analyst

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

Daniel Racine -- President and Chief Executive Officer

[Technical Issues] 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 cause, and we are going to be looking at alternatives for that. Electric trucks is one of them or semi trucks that could improve the productivity and safety on that. We have a table in the next stage. We do need to take samples in order to do that, so that would probably be for feasibility, not for the next stage of value seeking, but it is something we're looking at especially for improving the profile of the order. We are doing blending right now in order to improve the impurity going into the mill before it gets there.

Ralph Profiti -- Eight Capital -- Analyst

I see. Okay, great. Yes, that's it for me. Thanks very much.

Daniel Racine -- President and Chief Executive Officer

Thank you, Ralph.

Operator

Thank you. The next question is from Tanya Jakusconek of Scotia Bank. Please proceed.

Tanya Jakusconek -- Scotia Capital -- Analyst

Good morning, everybody. 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?

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

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

Tanya Jakusconek -- Scotia Capital -- Analyst

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

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

Nope.

Tanya Jakusconek -- Scotia Capital -- Analyst

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

Daniel Racine -- President and Chief Executive Officer

No. At El Penon, the big difference is the grade increase you are going to see in Q3 and in Q4. So we are 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 are pretty well advanced on what we have to do on development and then you are going to see that's the big difference in Q2 with El Penon. And then at Florida, it's the same thing. We are going to focus on exploration, basically on the new zones. And then also the production, you will see a big increase. So we are not worried to achieve the guidance on Florida.

Tanya Jakusconek -- Scotia Capital -- Analyst

Ok.

Daniel Racine -- President and Chief Executive Officer

We knew it would be lower Q, first half than the second half at Florida.

Tanya Jakusconek -- Scotia Capital -- Analyst

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?

Daniel Racine -- President and Chief Executive Officer

Yes. You will see Q3 and Q4, especially Q4 as you know the 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.

Tanya Jakusconek -- Scotia Capital -- Analyst

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 are doing for optimization on the asset base?

Daniel Racine -- President and Chief Executive Officer

Well, we took that as a challenge, Tanya. We know that there would be cost increase because of the Chapada's $30 per ounces. But our GMs, all of five of them, they know it's important for us. And then 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 are looking at opportunities. There's two ways, you know, to reduce cost or increase production. And then we're looking at both ways of, you know, achieving our guidance. I mentioned that earlier this year that we won't change our guidance despite of the sale of lower cost Chapada and that's what we want to do.

Tanya Jakusconek -- Scotia Capital -- Analyst

Okay.

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

Tanya, maybe just to round out that thought process as well. I think to also look at and I made reference to it in some of my remarks today that we have said before there was a 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 have 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.

Tanya Jakusconek -- Scotia Capital -- Analyst

Okay. All right. Thank you very much.

Daniel Racine -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Your next question is from Don MacLean of Paradigm Capital. Please proceed.

Don MacLean -- Paradigm Securities -- Analyst

Good morning, guys. 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?

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

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 -- it's a very formal priority waterfall that's setup. So in a couple of weeks' time, we will know that profile. I would say just broadly speaking our approach generally and in the past has been to retire a shorter-term debt first. We like the idea of having a lot of runway before we deal with the debt repayment. I think that will very much be the case with this result, and to the extent it doesn't personally optimize for that strategy on this, we would with free cash flows post that transaction carry on that process of improving that profile and reducing debt as well.

Don MacLean -- Paradigm Securities -- Analyst

Okay. So, you will be focusing primarily on that 2022, 2023 mark?

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

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

Don MacLean -- Paradigm Securities -- Analyst

Perfect. Okay. Thank you.

Operator

Thank you. This concludes today's question period. I would now like to return the meeting back over to Mr. Racine. Please proceed.

Daniel Racine -- President and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 31 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 -- Scotia Capital -- Analyst

Don MacLean -- Paradigm Securities -- Analyst

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