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Yamana Gold, Inc. (NYSE:AUY)

Q1 2013 Results Earnings Call

May 1, 2013 8:30 AM ET

Executives

Lisa Doddridge - Vice President, Corporate Communications and IR

Peter Marrone - Chairman and CEO

Ludovico Costa - President and COO

Darcy Marud - Senior Vice President, Exploration

Chuck Main - Chief Financial Officer

Analysts

Patrick Chidley - HSBC Securities

John Kratochwil - Canaccord Genuity

Alec Kodatsky - CIBC

Dan Rollins - RBC Capital Markets

David Haughton - BMO Capital Markets

Anita Soni - Credit Suisse

Paretosh Misra - Morgan Stanley

Steve Parsons - National Bank Financial

Operator

Please standby, your meeting is about to begin. Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Yamana Gold’s 2013 First Quarter Release Conference Call and Webcast. At this time, all participants are in a listen-only-mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time.

I would like to turn the meeting over to Ms. Lisa Doddridge, Vice President, Corporate Communications and Investor Relations. Please go ahead, Ms. Doddridge.

Lisa Doddridge

Thank you all for joining us this morning. Before I turn the call over to Peter Marrone, I need to advice 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 includes, but are not limited to, statements with respect to 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 risks, uncertainties and factors, which may lead to our actual financial results and performance being different from the estimates contained in our forward-looking statements, please refer to our press release issued yesterday announcing our first quarter 2013 results, as well as our management’s discussion and analysis for the same period, and other regulatory filings in Canada and United States.

Throughout the presentation, when speakers use the term ounces, they will referring to gold equivalent ounces unless otherwise stated. Gold equivalent ounces include silver production at a ratio of 50:1.

I would like to remind everyone that this conference call is being recorded and will be available for replay today at 2.00 p.m. Eastern. 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. Peter Marrone, Chairman and CEO.

Peter Marrone

Lisa, thank you. Good morning and thank you to all of us -- all of you for joining us. I have with me members of our senior management who will help provide highlights and insight into the various aspects of our first quarter results. So we have a lot to present and discuss, but we’ll try to be brief and encourage as many questions as possible.

Our goal is to be a prudent and disciplined in every aspect of running this business. We are focused on growth and sustainability. Operationally, we look at resources, reserves and production, although, again as I’ve done before, I want to emphasis importance of the financial measures and cash flow in particular, that is an important tenet of our strategy and our business plan.

Increasing and sustaining new levels of absolute and per share cash flow, and profitability are important, and in many respects are more important then resources and production growth.

We have a clear and strategic focus, which you heard me say before, we stick to what we know and we stick to it where we know it, jurisdictional relevance, the countries and regions of countries in which we operate is very important to us. This means that we are focused in jurisdictions that have an established mining pedigree where we have experience in which to operate.

We are also focused on more conventional geologies using mining and processing methods that we already have a competency and expertise, and we apply that to operations but also took the development projects.

The combination of doing what we know and where we know it, better positions us to achieve, what I describe is sustainable growth across both operational and as importantly financial measures. The sustainable and discipline growth across operational and financial measures is how we believe we can best deliver value to shareholders.

And as you heard me before, I do not want to leave you with the impression that we are always going to get it right and we are always going to get it right across all operations, sometimes things don't work out quarter-over-quarter or any particular quarter for an operation, things are unexpected, that's just the nature of the mine -- of mining enterprises.

Although, with a portfolio approach that we have in familiar jurisdictions and regions, focusing on that core competency and expertise in the company and with better planning we can execute better and deliver increased value over the longer term, better geological interpretation, reserve estimation and modeling along with more development work, improved health and safety approaches leads to better production. It's the planning and execution at every stage of the project that allows us to deliver value overtime and we apply that same approach to corporate development.

In total, in the first quarter, we had a 4% production increase when compared to the first quarter of last year, which continued an established trend of year-over-year production growth. We also have an established trend of quarter-over-quarter production growth with the second half of the year being noticeably stronger than the first half and we expect that to continue this year.

In 2013, we expect our second quarter production to exceed our Q2 of last year and of course, Q1 of this year, we had not quite exceed Q3 production levels. That is an expected that we have seen before over many years and we will see it again this year, more pronounced this year as a result of the development stage projects that begin production from now to the end of year.

And I’ve just mentioned, we use a portfolio approach to managing our assets and this means that we have more flexibility to achieve our corporate objectives, by relying on strong performance at a mine to compensate for potential shortcomings and another or to compensate for market or industry events.

An example of this, was our ability in 2012, interestingly to increase copper production at Chapada, to mitigate the lower copper prices and inflationary pressures on our consolidated cost structure, one directly offset the other.

So if we look at the production from our existing operations. We see a 6% growth for Q1 compared to Q1 of last year and this portfolio of existing operations forms a strong base, which positions us well to deliver on our full year production targets this year. The ramp-up at our new mines will contribute further increases in quarterly production throughout the year.

We expect this growth in production to continue. In 2012, we achieved record production of 1.2 million ounces. In 2013, we expect to continue our established trend of growth in production by producing over 1.4 million ounces with our guidance of over 1.44 million ounces.

Let me explain also that while our guidance is 1.44 million ounces to 1.6 million ounces, we said in our MD&A last night that we expect to exceed 1.44 million ounces, that is over our expectation. We would still expect to be within that guidance range for the year. We will evaluate that as Q2 completes and as we see the developments of the ramp-up of our new projects starting operations. Our long term sustainable production target remains 1.75 million ounces and we are on track for that.

Now if I turn to costs, in the first quarter we had our by-product cash costs of $383 per ounce, co-product cash costs of $587 per ounce and all-in sustaining cash costs of $856 per ounce. It is important to note that despite lower than expected copper prices in the first quarter, we were still able to deliver costs that are very close to what we have guided for the full year on costs. It’s equally important to note the trend in 2012 on costs which decreased quarter over quarter and we expect 2013 to follow that same established trend.

With decreasing quarter over quarter costs and our belief that copper prices will strengthen in the second half of the year and with our production from Chapada expected to exceed our guidance certainly as evidenced in the first quarter of this year, we are well positioned at this point to meet our full year by-product cost guidance although I do caution that we used $4 per pound of copper to determine that by-product cash cost guidance.

Margin is important to us and we will continue to focus on it. The recent sharp decline in the price of gold has, simply put, jeopardized that margin. May believe that this decline will alleviate cost pressure and over the medium term and because costs are sticky and do not react quickly to adjustment, I believe that most mining companies should realize related cost savings but over the course of time, it will not be immediate.

However and this is important, we have chosen not to wait for input costs to come down, instead and before this precipitous drop in metal prices, we began an aggressive pursuit of cost reductions. We have taken immediate steps to maintain profitability of the ounces we produce. To do this in an environment of lower metal prices will require emphasis on cost reduction and disciplined capital allocation.

We are evaluating the profitability of our production targets for future years to reflect this risk period where metal prices may remain low or may be lower than the current level although at present no change has been made. This will mean prioritizing margins and profitability over production.

Ladies and gentlemen, we are getting it right at some of our operations. If we look at Chapada, El Peñón and Mercedes we’ve produced above our guidance in the first quarter. We are also slightly ahead of guidance on Gualcamayo and Fazenda Brasileiro. We have to improve Jacobina. Similar to two or three years ago we are evaluating a reduced production plan so that we can improve development, improve dilution, get better grade reconciliation and then improve overall costs. We do not expect a low production and high cost of fuel in Q1 to endure. However we are expecting less ounces than we forecast for Jacobina although at better cost than we were forecasting a better cost in Q1.

Ernesto/Pau-a-Pique is going toward a longer end of ramp up because of our Pau-a-Pique underground mine completing the development there and getting it fully permitted although not beyond the six months that we originally forecast. (Inaudible) is permitted and actually mining and processing is progressing. We have power, water, sufficient stockpile to blend with mine ore to accelerate through commissioning we are permitted.

We are ramping up the mining rate and flow rate. We are reconciling grade to our mining model as expected. Pilar is advancing to start up its plant and Gualcamayo expansion is also advancing and we expect a windfall of new ounces come Q4 of this year. We are finalizing a program to proactively reclaim some of that potential lost margin through the reduction of costs by $150 or more per ounce by the end of this year.

Initially and by the middle of this year we expect a reduction in the range $100 per ounce. Now I need to provide another caution, this is not -- this is important, it’s just not because of pressure on costs, but because we believe it is prudent to do it now just as input costs begin to decline, start the process early. We expect cost savings will be realized through reduction in operating costs and capital expenditures, some exploration and general and administrative costs as well.

Our focus with this program is to preserve margins so that we can continue to generate strong cash flow. And you’ve heard me say before the importance of cash flow to this company. In the first quarter of this year we had cash flow of $214 million or $0.29 per share which is comparable to first quarter of 2012 despite lower metal prices this year. For all of 2012 we generated $1.40 per share with growth in cash flow quarter over quarter throughout the year. And I believe we can get to at least that level again this year despite the metal price levels and the drop in those metal price levels and despite the continuing cost pressures because of these efforts that we are undertaking to implement this cost cutting.

And with that as introduction, let me turn it to our Chief Operations Officer on our operations.

Ludovico Costa

Thank you, Peter. Production grew by 4% in the quarter. We produced 291,312 ounces. This includes 248,239 ounces of gold and 2.2 million ounces of silver. We also produced just over 27 million pounds of copper from Chapada. By product cash costs for the quarter were 383 per ounce. Co-product costs were 587 per ounce. Overall the quarter delivered this on expectations.

Production at Chapada was on plan, 23,358 ounces and 27.4 million pounds of copper for the quarter. Same as last year we expect production increasing in the second half of the year. Production is expected to increase further into 2014 as (inaudible) will begin production early in that year. Total production at El Peñón increased by 9% from last year. This included a 24% increase in gold only production offset by a similar production decline in silver. The increase in gold were driven by higher rates. El Peñón continues to be a strong performer in the first quarter.

At Gualcamayo, production was primarily sourced from the lower grade spot price reflects by the declining ounces from last year. This is temporary as we transition to phase 2 of the mine plant. Costs were also impacted by lower grades and the continuing inflationary pressures. The debt refinance of QDD Lower West is only scheduled to be complete in the third quarter of 2013. We are already continuing on the potential for (inaudible) of the resource.

Mercedes continues to exceed expectations. Production costs improved from last year as these grades have been recovered. This operation is quickly becoming a cornerstone of our first quarter. Jacobina performed in the quarter whereas below our expectation. Production costs were affected by insufficient development work, increased dilution lower grades. Our plan has been initiated to reduce costs and increase profitability rather than maximizing production.

We expect cost to return to the normal levels of between $650 to $750 per ounce. We are also taking active step to access higher grade areas of the mining complex more quickly. Florida performed well in the quarter. These results from an improved mining plant in the production contribution from the tailings retreatment plant, which achieved full capacity utilization early in the year.

At our order operations, Fazenda Brasileiro’s productions increased by 19%, which cost has improved by 11% because of improvement grades every quarter. Alumbrera did not produce as expected. The production was impacted by copper and gold grades. Metal sold in general declined the commodity price. We are hopeful that measure has been take [through this].

Ernesto/Pau-a-Pique continues to ramp-up in the quarter with production from the lower grade Ernesto open-pit deposit only. We are planning more gradual ramp-up of these operations as we find it more open pit ore ounces in the development of Pau-a-Pique is advancing.

During the quarter, work continue to advance at our development projects. At C1 Santa Luz, construction is now complete. The commission has begun in this respect to be completed in some time in mid year.

At Pilar, construction is on schedule and is now over 85% complete. Commission of production is expected to begin mid year 2013. We started development at (inaudible) continue the higher grade Caiamar satellite deposit. There is a low demand at Maria Lazarus has been accelerated based on continuous positive exploration results.

At Cerro Moro, pre-development is advanced with a start-up of the production rather decline. Work also began on feasibility study.

I will turn the call to Chuck to present our financial performance.

Chuck Main

Thank you, Ludovico. In general, the first quarter of 2013 was as we expected. Revenues were $535 million in the quarter, which is slightly lower than the first quarter of 2012 because of lower metal prices offset by higher sale.

The average realized price for all the commodities was lower than in the first quarter of 2012. We had adjusted earnings of $117 million or $0.16 per share lower than the first quarter of 2012, which is attributed to lower mine operating earnings and lower equity earnings from Alumbrera.

The lower Alumbrera earnings represents approximately $0.01 to $0.02 relative to prior periods and is due to lower grade copper and gold being mined in the lower metal prices. The lower grades are expected to continue into the third quarter returning to normal levels in the fourth quarter.

Operating cash flow before changes in non-cash working capital was $214 million or $0.29 per share. This is comparable to cash flow generated in the first quarter of last year.

At the end of the quarter, our balance sheet remains strong. Cash and available credit at the end of the quarter was approximately $1 billion. This includes cash and equivalents of approximately $343 million.

G&A for the quarter was $37 million and reflects the expanded administration of the company’s growing operation and consulting cost relating to various improvement initiatives. As mentioned by Peter, programs are underway to reduce G&A level. Net finance expense was $7 million for the quarter. The decrease compared to first quarter 2012 was due to higher unrealized foreign exchange gain.

Depletion, depreciation and amortization was $96 million due to higher sales volumes in the quarter but a full-quarter depreciation at Mercedes. Total exploration spending were $24 million, of which $7 million was expended.

Total capital in the quarter was $239 million. This was under budget for the quarter. The primary component were $98 million for sustaining capital, $104 million for construction activities, exploration of $17 million and $11 million for feasibility study work.

In conjunction with our initiatives for cost reduction for metal -- due to metal price reduction, we plan to reduce sustaining and expansionary capital that was included in our original 2013 plant.

And now on the costs. For 2013, we began disclosing all-in sustaining costs, which is a metric that we've been using internally for some time. In the first quarter, our all-in sustaining costs were $856 per ounce, including $25 in exploration expenses, $341 in sustaining CapEx and $107 in G&A and byproduct cash costs of $383. We expect that cost will continue to trend -- the trend of declining quarter-over-quarter.

As Peter mentioned earlier, we are taking measures to pull actively weakening margin in light of recent decline in metal prices. The cost savings will be realized through reductions in operating costs, capital expenditure, exploration and G&A costs.

These reductions are expected to be reflected it our all-in sustaining costs. We will also continue with the margin expansion initiative such as the automation of operations that have been ongoing over a longer period.

I’ll now turn the call over to Darcy to discuss our exploration program.

Darcy Marud

Thank you, Chuck. My 2013 exploration objectives remain similar to 2012. We had a continued focus on increasing mineral reserves and resources of all over operation. With that new development projects quickly into the development and ultimate construction base and increase the site potential of the new project that we currently have in our pipeline.

A quick look at our exploration focus through the year project by project. At Ernesto/Pau-a-Pique, we will continue to extend Ernesto deposits down plant in to five resources at the adjacent satellite deposit. We have an active exploration program around Ernesto where we currently got five drill actively drilling.

At Pilar, we’ll increase the inferred resource at Maria Lazarus. Last year at Maria Lazarus, we declared a preliminary (inaudible) maiden inferred mineral resource. We expect to increase that this year. We’ll locally upgrade inferred mineral resource to the indicated mineral resource category primarily at Maria Lazarus as well as Jordino.

At Chapada, the drilling will focus on the Corpo Sul, Norte mine and (inaudible) target that were defined last year.

At El Penon, extending to find a new mineral resources of Providencia and Dorado where wer declared additional resources last year and outlined new mineral resources in the Fortuna Este area which was discovered in 2011.

At Cerro Moro, we continue to evaluate the site and the great potential of newly discovered Margarita vein which is located north of the main mineralized vein to the (inaudible) vein system.

At Gualcamayo, we extend the non-mineralization of Rodado. We’ll extend the depositi further to the southwest as well as down pit and increase the side scale and breadth of the QDD Lower West deposit general.

At Mercedes, we continue to drill Rey de Oro with the goal of converting mineral resource to minable reserve by the end of 2013.

That’s a brief summary of where we are in the first quarter of exploration in 2013. With that, I’ll turn it back to Peter.

Peter Marrone

Darcy, thank you. Thank you for that. Perhaps, if can give some concluding thoughts before opening the call up to questions. As I described, Q1 was a steady state, a very reasonable quarter in line with our expectations. And we’re well positioned now for the whole year.

Couple of other observations that are relevant and we think important to clarify. We indicated in our financial results last night that we are evaluating our projects for the purposes of determining profitability in the context of the new metal prices. We highlighted in particular Corpo Sul, Suruca and Cerro Moro. I want to clarify this was already ongoing. Corpo Sul we believe will provide excellent contribution to copper and gold production at Chapada. Suruca will be a satellite adjacent, keep this operation that will provide between 40,000 and 50,000 new ounces at the Chapada operation overall. And you are aware of Cerro Moro as the very high-grade of the thermal vein structure. It was an acquisition last year, we already have just under 2 million ounces and with the Margarito discovery we think that we can make some very significant further improvements to the total resources and reserves at this very high grade deposit.

We believe that we will deliver a positive feasibility study at Cerro Moro. However what we’ve also said is that we need to be prudent and disciplined. We need to make sure that we take our dime. As cost inputs begin to come down as we foresee that, that will happen over the course of time, I mention that costs sometimes are sticky and so it takes a few quarters to do that. We’d like to evaluate these projects in the context of the new metal prices but also in the context of the expected improvements of costs. The result of all of that continues to be that we believe they will be positive.

I want to further highlight that in the case of Corpo Sul and Suruca we have already assumed that the production would occur beginning in the case of Suruca sometime in 2014 and our guidance for 2014, and then in the case of Cerro Moro we have not included Cerro Moro in our long-term guidance of 1.75 million ounces. We are committed to that 1.75 million ounces plus and we believe that Cerro Moro will positively contribute to that production goal. We will always keep an eye however on cash flow and improvements to cash flow per share, not only on the production growth above the 1.75 million ounces.

On our cost guidance and the impact of metal prices, in this first quarter we had 7% more copper than in our guidance assumption. We also had between 10% and 20% lower copper price than in our guidance assumption. With the current price and an expectation of 5% to 10% more copper than in our guidance assumption, we anticipate that our cost structure would be in the range of $400 to $450 per ounce with by-product credit. That would mean an all-in cost structure of $850 to $900 per ounce. We believe we can reduce that all-in cost structure by initially just over $100 per ounce, so we consider a reasonable number to be between $700 and $800 per ounce on an all-in basis. We think that, that is achievable.

That will be achieved through reductions in sustaining capital and through operating cost reductions. It will include better maintenance, it will include improvements to the cost structure with contractors as there is more capacity that comes into the system. It will include better management of inventory, it will include looking at higher grade areas for development and for mining. The result of all of that is we anticipate over $100 per ounce of improvement to cost and we are targeting by the end of the year a higher level as I mentioned $150 per ounce. And so we’re very comfortable and confident that over the course of the year that all-in cost that was $800 per ounce will come in line with what we have guided and perhaps below that.

So with that, may I open it to questions, please?

Question-and-Answer Session

Operator

(Operator Instructions) And the first question is from Patrick Chidley from HSBC Securities.

Patrick Chidley - HSBC Securities

First question just quickly on Jacobina, just maybe you could explain a little bit more about dilution problems there, what’s happened quarter on quarter in terms of where those came from, was it single event or is there something that we should expect it to continue with?

Ludovico Costa

Here is Ludovico, what is happening as we were a little bit fall behind it, about the demand. We had -- we had to reduce João Belo mine and mine is more horizontal that were already available with lower grades. That’s in overall terms but we are still evaluating what -- how can we access the higher grade areas and how can we do easing further the dilution in João Belo.

Patrick Chidley - HSBC Securities

Okay, so the dilution was at João Belo?

Ludovico Costa

Actually it was a little bit in lower depth in João Belo, then we have to access the lower grade to more events. But we are working on improving dilutions at João Belo zone.

Patrick Chidley - HSBC Securities

And can I hear -- are you developing and where you are mining in there later in the year?

Ludovico Costa

We are already mining in Canavie but we intend to increase the production at Canavie throughout the year.

Patrick Chidley - HSBC Securities

Would it be fair to say that mining cost it on a per ton basis that Canavie would be higher?

Ludovico Costa

That’s right. It’s around 20% higher than João Belo because of the distance and kind of gold that we have there.

Patrick Chidley - HSBC Securities

And what would it be around total all-in sustaining costs before Jacobina this quarter?

Ludovico Costa

The quarter, we expect in the range of 12 to 13 ounces all-in.

Patrick Chidley - HSBC Securities

So slightly better than this quarter?

Ludovico Costa

Better than this quarter.

Peter Marrone

Patrick, we are expecting from Q2 onward they may have an impact on production. We have seen it with Jacobina before. But we are expecting that we will reduce the production level to maximize the efficiency of the operation but we would also anticipate that our cost structure would be in the $800 range, so in the 800, 850. And we also anticipate that the all-in costs would be about $1200 per ounce. So it’s a better than slightly better because our cash costs were $1200 in the first quarter. We are anticipating that our all-in costs would be in the range of $1200 from the second quarter onward.

Operator

Thank you. Our next question is from John Kratochwil from Canaccord Genuity.

John Kratochwil - Canaccord Genuity

I had a question on El Peñón, the grade was actually quite a bit higher than in the previous quarter and the press release seems to indicate that the grade should continue going forward. Should we be looking at the low 8 for gold grades for the rest of the year or should we be looking high 7s or could you give an idea of where the range should be for the grades?

Ludovico Costa

It’s Ludovico here. For El Peñón we expect the grades to continue more or less in the same range as this quarter. The other is grades for the year we expect to be in the range of 7.5 (inaudible).

John Kratochwil - Canaccord Genuity

And that would almost -- if I just imply it out that almost indicates a beat to your guidance range for El Peñón and for the year? Is that correct?

Ludovico Costa

Yes, it does.

John Kratochwil - Canaccord Genuity

And then Ernesto/Pau-a-Pique you indicated some potential permitting for the Pau-a-Pique. Could you get to a commercial production just on Ernesto?

Ludovico Costa

It would be difficult to get to commercial production with Ernesto alone.

John Kratochwil - Canaccord Genuity

Okay.

Peter Marrone

Pau-a-Pique provides less tonnes but more grade, and that’s fulfills the plant with more tonnes but of course plus grade.

John Kratochwil - Canaccord Genuity

Okay.

Peter Marrone

So it will be difficult to get to commercial production with Ernesto alone. We would need Pau-a-Pique. On the permitting, John, this is an important point. We are not seeing a delay in permitting. What we did was we tried to make the mine plan -- the underground mine plan more efficient. How many ounces can we mine at improved costs? The result of all of that is that we are going to a permitting process for Pau-a-Pique.

We anticipate that those provisional permits that are being issued in Brazil will apply to Pau-a-Pique as well. But what we've tried to do it is say, let’s concentrate on making sure that we get it right even if it takes us a few more quarters. Sorry, a few more months and other quarter rather than fast tracking and getting to production quickly and running the risk that the underground operations is then challenged over the course of a longer term.

John Kratochwil - Canaccord Genuity

Okay. And, so do you still see yourself going to potentially commercial within Q3, or should we be looking at Q4 then?

Peter Marrone

No. We are anticipating that it will be in the range of another three months before we get there. The production this year, as a result of all of that of the Ernesto/Pau-a-Pique, will be below where we had anticipated at the beginning of the year, late last year. But in terms of its longer-term production, we are evaluating that from 2014 onwards. But we do anticipate that we should get more production next year than this year. We are evaluating what the total production level is.

Our view presently based on Ernesto and Pau-a-Pique and that the reduction of the size of stokes the Pau-a-Pique. They give us more confidence on the mine ability also more confidence in health and safety aspects is that we would be in the range of 70,000 ounces. But we have an active exploration campaign because we are finding more ounces. These are open pittable ounces. So we would be in a better position to gauge longer-term production impacts of Ernesto/Pau-a-Pique by the end of the year.

John Kratochwil - Canaccord Genuity

Okay. Fair enough. And just finally, the cost reduction program, are you looking at the 150 or 100 by mid year, is that more on the operating cost side or are you looking for more savings along the G&A, the exploration of sites sustaining capital, things like that?

Peter Marrone

It’s a balanced mix between mine site G&A sustaining and operating costs.

John Kratochwil - Canaccord Genuity

Okay.

Peter Marrone

And it would give us an expectation that it would be initially over $100 per ounce. But as with all things, John, there is always a little bit of push and pull. So we are anticipating that 100 is a reasonable and achievable target by the middle of the year.

John Kratochwil - Canaccord Genuity

Okay. And then this is not factoring in potential declines in input costs and things like that. So it is potential for that to even get better than that, correct?

Peter Marrone

We think so and clearly the most, as I said and you heard me say this in 2009, when we saw that precipitous drop in metal prices. I made it very clear, costs are sticky. They last for a while and all those who said at that time that we are going to see immediate cost improvements got it wrong. We said that it’s going to take a number of quarters before we get to that result. But we’ve already started that program before this drop in metal prices.

And so we think that we can advance that and fast track it comparatively quickly, but some costs will be sticky. But we think that we are going to get there over the course of the year and we will get to that lower cost structure initially by the middle of year. And then by the end of the year, we should we see some improvements. What are the improvements that we should see? Some of that is what you just mentioned, the input costs.

One of the things that we've not seen is the change to the foreign exchange levels. I find that interesting incidentally. And then as in a site, because if we’ve seen this significant drop in copper price and significant drop in gold and silver price, what we find it very interesting that it has not reflected itself in the foreign exchange of the countries in which we operate that depend on many of these mining endeavors.

So our impression is that one of those is wrong. So if the metal prices are sustainable at these levels than the currency should devalue and we should get the improvement of that to our cost structure. And if the currencies are reflecting a proper evaluation of where the markets will go, then we are taking this as an opportunity to take little of the costs as we did in 2009, push costs down and then we will get the benefit of metal prices going backup.

John Kratochwil - Canaccord Genuity

Okay. Fair enough. I appreciate the explantation.

Peter Marrone

Thanks, John.

John Kratochwil - Canaccord Genuity

That concludes my question. So, I will let somebody else ask some more.

Operator

Thank you. The next question is from Alec Kodatsky from CIBC. Please go ahead.

Alec Kodatsky - CIBC

Thanks. Good morning, everyone. I just want to clarify a couple points. In the release, again focusing on both Jacobina and Ernesto/Pau-a-Pique from maximizing -- sorry improving costs but not at the expense of production, is this I guess the programs that you’ve outlined for both? Is that sort of the extent of what you're looking at, or are there other opportunities in there such that you would be looking at different numbers on a longer-term basis, or perhaps taking resources out of the mix? So, I’m curious sort of what the spectrum is that you are looking at?

Peter Marrone

We see more limited possibilities for variations in the Ernesto/Pau-a-Pique, because as you know it’s a very, very small operation and a very short mine life in the range of -- subject to what exploration can find in the range of seven to eight years of mine life as was the original plan.

In the case of Jacobina, it is different. And one of the things that needs to be highlighted is that Jacobina is a complex of multiple mines with a common plant. And in that regard, you probably noticed over the last few years that our grade has gone up significantly at Jacobina. But that’s the result of new discoveries in the Canavieiras mine in Morro do Vento in areas that we are not presently mining.

So, we see Jacobina as the push and pull between cost pressure and production is a temporary provisional event, because ultimately we will complete the development work into that high grade area. And while as was asked in the question we should see a higher cost per tonne from Canavieiras. We will also higher grade. And that should balance out in favor of grade and then we should be able to get higher production.

Alec Kodatsky - CIBC

Okay. And just in terms of that I guess the timeline for that is that the similars to what you are seeing at Ernesto, we would see something towards the end of the year?

Peter Marrone

We should see an improvement to Jacobina from Q2 onwards. Now, that is an improvement to cost and overall profitability contribution to cash flow. That may mean that we will reduce the production expectations as we did in 2009 and to part of 2010 to improve ‘11 and ’12. In the ’11 and ’12, we did not have the benefit of the higher grade Canavieiras and Morro do Vento.

In the case of Ernesto/Pau-a-Pique, that will take us into the quarter but we will see a steady state -- we should see a steady state for the balance of the year. But then we wouldn’t see that changing significantly in ’14, ’15 and the years to follow, whereas in the case of Jacobina, we should see some improvement to production and it would be a significant improvement over where we expect to be for the end of year because of Canavieiras and Morro do Vento and the development work that would be done over the course of time.

Now the time is important and so what we said late last year, we continued to say now. Our expectation is to complete the development work and to get ahead of ourselves on development work would be in the range of about year and a half to two years. And that’s what we are looking at as a time horizon to get that higher production coming from that higher grade.

Alec Kodatsky - CIBC

Okay. Thank you very much.

Operator

Thank you. The next question is from Dan Rollins from RBC Capital Markets. Please go ahead.

Dan Rollins - RBC Capital Markets

Thanks very much. Peter, I just want to confirm a couple of things. I got two questions. You were talking about Ernesto/Pau-a-Pique. You mentioned 70,000 ounces of production, is that for this year or is that what you looking at as a new sustained steady state rate for those two mines?

Peter Marrone

Good question, and let me clarify that. As a result of our improvements in the health and safety protocols at Pau-a-Pique and as a result of the modification to our mine plan, we are anticipating that that's roughly 70,000 would be a baseline for 2014 onward. But we think we can improve on that but that’s the current baseline that we are anticipating. It will be less this year because of the ramp up of operations through the end of the year.

Dan Rollins - RBC Capital Markets

Okay. And that mine was originally for about 100,000 ounces a year life of mine?

Peter Marrone

Yes, I think we are forecasting next year though 80 -- closer to 90,000 ounces in 2014. So there would be a small reduction to that, of roughly 20,000 ounces. But now we are looking at what happens from 2014 onward whether or not we can get more production coming from it is the Pau-a-Pique. Pau-a-Pique will produce slightly less but we should also be able to get the benefit of slightly better grades. Ernesto will contribute to the production but what we're looking to find is additional satellite open pittable ore bodies that will contribute to the production.

Dan Rollins - RBC Capital Markets

I guess back of the envelope, what are you guys seeing for your life of mine costs now at 70,000 that would put that mine probably in the range of one year Jacobina and $700 an ounce range.

Peter Marrone

We think a little bit higher than that but we think that the realistic number is in the $800 range.

Dan Rollins - RBC Capital Markets

I guess in this type of market, is this a project that as you have done in the past look to put out of the portfolio and put into a sort of a smaller company, that can maybe do it a little bit more with it than you guys will be doing at 70,000 ounces because that’s a pretty small now for you guys?

Peter Marrone

Dan, it’s an interesting question and a very important point. I am sure that there are many investment bankers on this call and they are probably frothing at the mouth at the idea that there might be business opportunity. But I would encourage everyone to look at it from this point of view. We are committed to 1.75 million ounces. We believe that Cerro Moro will be bringing it well in excess of 1.75 million ounces. That does not include any contribution coming from Agua Rica’s development and integration into Alumbrera once that decision is made. It does not include (inaudible) or other projects that are in the company. It does not include any exploration successes.

A part of what we are evaluating is can we get more cash flow per share by not necessarily increasing production. A part of that evaluation is just to look at what is core and what is not core and to look to the alternatives that are available for non-core operations. I don’t want to leave you with the impression that Ernesto/Pau-a-Pique is not core but it is small. Fazenda Brasileiro was small and years ago I was asked that same question. And what I said and remains true is it’s not because of the size but it’s because of its contribution to the bottom line, because of what we can learn from that operation will allow us to be able to do other things.

So for present purposes we think there's an exceptional exploration opportunity at the area of Ernesto/Pau-a-Pique. We will evaluate that, we will continue with that. And then we will evaluate what fits into core, what fits into non-core.

Dan Rollins - RBC Capital Markets

And then maybe just on C1 Santa Luz, you see you have enough commodity to get through the commissioning and then into the transition, do you require more water to get this to steady-state?

Peter Marrone

Into a longer period than six months, the answer is yes. But we are confident that, that water is there for the following reason. It’s not just relying on rain water, it is also relying on water wells and the permitting of new water wells and the discovery of these new water wells. We also have water at Fazenda Brasileiro. So a part of what we are evaluating now is can we take some of that water at Brasileiro and with the pipeline that would take in the range of three to four months to complete, clearly we have to go through a permitting process, can we take water from Fazenda Brasileiro where there is more abundance and bring it to C1 Santa Luz. T

Dan Rollins - RBC Capital Markets

And then maybe just on Jacobina, what caused you to get still behind on development there? Was there rock mechanic issues in the underground or was there a labor issue? What happened there?

Ludovico Costa

Really then we have to increase our spending, for that we have to do more ground support in terms of geo-mechanical, mainly at (inaudible). And it’s a different -- we still have to improve the ore support that is in there. That was basically the main reason. We don’t have -- we did not have issues with the people there. We still have the correct amount and the contractors that we are using there is also contractor.

Dan Rollins - RBC Capital Markets

Peter, one last question, just maybe more broad base, we have seen a lot of precious metal company, mining companies talking about cost savings. You have been -- you guys have been focused on maintaining and cost control pretty I’d say better than most of your peers. But you are going to be reducing all-in costs by $150 an ounce, what’s take so long to sort of trim some of the fat and is it just the fact that the gold prices have fallen or do you actually see areas where you are seeing some low hanging fruit that you guys hadn’t seen in the past because $150 an ounce is quite a lot.

Peter Marrone

Well, again we think that the achievable level is $100 per ounce, 150 is the target by the end of the year, Dan. And that is assuming that there will be, if the metal prices stay at these levels and it’s sustainable at these levels or even if they drop below these levels, we think that the input costs will come down and clearly one of the very significant ones would be FX. But what is sticky mostly is labor. Many of the countries in which we operate are 100% capacity. The country like Brazil for example, has 5.5% unemployment rate, that is pretty much 100% capacity and a lot of that has been focused on the staples of its country, agriculture, mining. We think as economic conditions can -- if they stay at these levels, we think that, that will begin zeroed, we will get the benefit of contractors, being able to negotiate better prices. When I say labor incident, they include contractor costs into that.

We will be able to -- and that’s one that I think can be very significant, as significant will be that we can get better attention of the contractors. And that means that we can optimize operations, we can get to more efficiencies in operations. So we think that, that can provide some improvements to costs. Maintenance, how we manage our inventory, how we manage our trucking fleet can provide some further improvements. That’s the lower hanging fruit. In terms of some of the stickier costs, it would be labor and I include contractors into that. Let me give you an interesting anecdotal in a different -- from a different perspective.

In 2009 when we saw a precipitous drop in metal prices, so we've seen this movie before that we have seen today. But when we saw that precipitous drop in metal prices, there was an assumption that there would be an immediate improvement to costs and one that was often given is cyanide costs. What we saw was five suppliers doing both the two suppliers, and when you have two suppliers rather than five suppliers, your competitive advantage has been eroded. And it’s going to take time for the new psychology to enter into the mindsets that you are in the New World and that means that the costs have to come down. You have to work through inventory, and so the result of all of that is it takes a little bit of time before you start to get some improvements to costs.

Dan Rollins - RBC Capital Markets

Let me just clarify one thing. You brought up the FX a couple times. Is that $100 mid-year savings, does that include potential gains on FX?

Peter Marrone

No it does not.

Operator

The next question is from David Haughton from BMO.

David Haughton - BMO Capital Markets

Just turning our attention to Chapada, I am just wondering what the outlook might be if they settled the projects of Suruco and Corpus Sul, could be put on ice, if the metal price is not favourable for their development. What’s the outlook for that operation?

Peter Marrone

David, we are not seeing that it would be put on ice indefinitely. What we were trying to refer to is that we can get the benefit of some improvements to cost as a result of the cost inputs coming down and most of them capital costs rather than operating costs. But if I were to give you an indication of what happened to Chapada in 2014, with the deferral so that we are not in production at Suruco initially, we are delayed by a late. We deferred it for a year. That means that the production in 2014 would decline by approximately 30,000 ounces from what was publicly stated. We publicly indicated that we expect to produce over 1.6 million ounces. We had already assumed that Suruca would be in production in 2014. So it’s just a question of when in 2014.

So it would compel me to conclude that it would not be changing our guidance expectations for 2014 in total, but it would reduce the production expectations at Chapada in the range of about 30,000 ounces.

David Haughton - BMO Capital Markets

All right. And it’s just where we’re standing at the moment on Suruca, what would be your expectation with how you’re tracking right now for it to come online, would you see that online in '13 or would it likely be in the beginning of '14?

Peter Marrone

Sometime between the beginning and middle of 2014 is a more realistic expectation for Suruca.

David Haughton - BMO Capital Markets

Okay. And then thinking about copper, so given the context a bit thinking about here, I guess the standalone concept of it might be less appealing than as a satellite? Is that a right way that we should be thinking about it?

Peter Marrone

We’re seeing it still as a contribution to ore field at Chapada rather than standalone, yes.

David Haughton - BMO Capital Markets

Okay. And given how things are tracking at the moment, when would you think it could come on stream and beat that contribution to Chapada?

Ludovico Costa

David, it’s Ludovico here. We see some of the ore come to Chapada by the end next year.

David Haughton - BMO Capital Markets

Okay.

Ludovico Costa

But as you see, we are evaluating that if we have a better order, we may bring it online.

David Haughton - BMO Capital Markets

Okay. And the kind of guidance it had previously would be if you were to blend it with Chapada, you could enhance the copper grade by about 20% is that still you are thinking?

Ludovico Costa

Yeah. That’s right. That’s correct.

David Haughton - BMO Capital Markets

Okay. All right. Thank you very much.

Peter Marrone

David if I can…

David Haughton - BMO Capital Markets

All right. Go ahead. Yes.

Peter Marrone

Yeah. If I can conclude the thinking on this, part of the evaluation of Chapada is look Yamana is a precious metal company but we have this component of copper production as well.

Chapada is a copper-gold mine with emphasis on copper, we can get good production on gold. But part of what we need to evaluate, and this is where the metal prices becomes relevant. What we need to evaluate is we can increase the copper production at Chapada, partly at expensive gold and Corpo Sul would interestingly contribute to that.

At Chapada what we are evaluating is do we have enough gold production in the rest of our operations and is it sustainable that what we should be doing is emphasizing and maximizing copper production at Chapada with modest mitigation to gold production coming from Chapada, and we think we can do that. But part of what we need to evaluate and that’s what we meant about Corpo Sul is where do we see copper price going.

David Haughton - BMO Capital Markets

Okay.

Peter Marrone

If we anticipate the copper prices are sustainable at this level, all will go back up then we should be taking advantage of that opportunity at Chapada.

David Haughton - BMO Capital Markets

All right. Thank you very much.

Peter Marrone

Thank you, David.

Operator

Thank you. The next question is from Michael Jalonen from Bank of America Merrill Lynch. Please go ahead. Jalone, your line is open. We will proceed to the next question. The next question is from Anita Soni from Credit Suisse. Please go ahead.

Anita Soni - Credit Suisse

Hi. Good morning, guys. So my question is just with regards to Jacobina. How should we really think about the production profile that plays out over the course of the year? I’m trying to get a grasp on the balance between cost reduction and focus on higher grades as we go into Q2, Q3, Q4?

Peter Marrone

Anita it’s always a challenge to look at where we stand with guidance on a particular operation as it is going through evaluation and the evaluation process is evolving. But I would say a good guide would be somewhere between 80,000 ounces and 100,000 ounces more realistically 80 to 90,000 ounces at a cost structure that is between $800 and $850 per ounce.

Anita Soni - Credit Suisse

Sorry, $800 on the total cash cost.

Peter Marrone

$800 on the cash cost, yeah.

Anita Soni - Credit Suisse

Yeah. Okay.

Peter Marrone

As we said, about $1,200, a little over $1,200 on it’s all in costs, we can get Jacobina to go above 100,000 ounces per year and indeed in one of the simulations that we run, one of the models that we have, we’re closer to 110,000 ounces, but we’re evaluating what’s the impact to cost this on that.

So what I favor and where I air, is on the side of grade on the side of production to cost at the expense of production because we’ve got plenty of production coming from our other operations.

One of the questions that was asked by John, was about El Penon and with the grade at El Penon we do see that over performing this year. So we can pick up the slot in terms of other operations.

Anita Soni - Credit Suisse

Okay.

Peter Marrone

And that gives us more flexibility longer term on an asset like Jacobina. So we are going to add evaluation process but I would say it’s a good guide, somewhere in the range of 80 to 90,000 ounces with a cash cost of mid $800s and then all in cost of $1,200, slightly above $1,200 there about.

Anita Soni - Credit Suisse

Okay. And then just a little bit more focus I think I am not quite sure I’ve heard any questions here on Gualcamayo, there is an area where you are expecting some growth this year. How is the ramp up going on this?

Peter Marrone

Sorry, I can’t hear the question.

Anita Soni - Credit Suisse

Sorry. At Gualcamayo, what’s the in second half I think there was a higher expected production, I believe it was through accessing other ore areas, is that going, can you comment on the ramp at Gualcamayo?

Peter Marrone

Yeah. We are seeing the start up of, that that’s the expansion in QDD Lower West. We’re seeing that completing by the third quarter. And as I said, in the former part of the presentation, we’re anticipating a big windfall of new ounces for Gualcamayo coming in the fourth quarter as a result of that ramp up at Lower West.

Anita Soni - Credit Suisse

That’s it from me. Thanks.

Peter Marrone

We should more than double the production in Q4 over what we see in Q1 at Gualcamayo as a result of that ramp up from Q3 through Q4.

Anita Soni - Credit Suisse

Right. Thank you.

Operator

Thank you. (Operator Instructions) And the next question is from Paretosh Misra from Morgan Stanley. Please go ahead.

Paretosh Misra - Morgan Stanley

Hi guys. Good morning. I’d a question on your CapEx for this year. How much of the total in $900 million plus CapEx is allocated for Cerro Moro, Suruca and Corpo Sul?

Peter Marrone

Chuck, do you have the numbers. Let me begin. Cerro Moro is modest amount, mostly for feasibility study and that decline which we referred. The number is in the range of $40 million this year. We’re evaluating where we might be able to improve some of that. You asked about what are the other ones that you asked?

Paretosh Misra - Morgan Stanley

The all three that you are evaluating, Suruca and Corpo Sul.

Peter Marrone

Okay. What’s the number that we have for Suruca?

Chuck Main

$90.

Operator

Thank you.

Peter Marrone

Suruca, what is expected to be somewhere in the range of $70 million to $90 million and that’s part of the evaluation of what David asked which is, can we defer some of that into 2014 and that’s part of what we’re evaluating, the movement of some of that into 2014.

Presently, we spent in the range of $30 million, $35 million and we think some of that can be moved into 2014 to better improve the free cash for this year but also we think it’s going to give us a better result because of the improvement to cost by the end of the year.

Paretosh Misra - Morgan Stanley

I understood. And I think about half of your total CapEx for this year is growth and the remaining sustaining. So if metal prices were to fall, could we potentially see as much as 50% cut in your CapEx next year or 2014?

Peter Marrone

Well, 2014’s CapEx is a very modest. What we have in 2014 with Cerro Moro -- decision on Cerro Moro clearly would be a 2014 event. But if we look at non-Cerro Moro, the CapEx, the expansionary CapEx in 2014 is a very, very modest number by comparison to 2013 and a lot of it is what I would describe as improvements, modification upgrade to trucking fleets, tailings, new tailings in pounds.

So part of what we would evaluate is can we further cut that back because we can stretch out the trucking fleet and we can stretch out the tailings in pound for another year or couple of years.

So from that perspective, my impression presently, we are just going to that evaluation for 14 now, we completed 13 we are going into 14. My impression is if there is a further drop in metal prices and it’s a significant drop then we can further cut back significantly on the expansionary capital in 2014. We think that will apply to sustaining capital as well, mostly on contractor rates and that result in in lower development costs.

But then we have to deal with Cerro Moro. And as you know we have an approximation per capital at Cerro Moro based on the numbers that we published earlier in this year were above $400 million. But what is interesting about Cerro Moro is that, there is at least the possibility that that will be lower and partly due to the fact that by the end of the year into next year if we have a drop in metal prices in particular, there should be some change to the FX in Argentina and that should lead to some improvements to the inflationary events in Argentinas as well.

Paretosh Misra - Morgan Stanley

Great color. Thanks. I have one final question, just going back to Cyanide costs that you talked about earlier. What did you see in the first quarter, were they still rising or getting maybe flat?

Ludovico Costa

Ludovico here. No. We are seeing a flat price right now.

Paretosh Misra - Morgan Stanley

Great. Thanks guys.

Peter Marrone

Okay. I’m encouraged by this gentlemen and ladies, because flat is good. If you start to see a flat -- a flattening of costs that means that there is a realization or recognition what I described is the sort of the psychology changing among suppliers and third parties that we are into a different environment and that means in overtime we should be able to get better costs.

Operator

Thank you. The next question is from Steve Parsons from National Bank Financial. Please go ahead.

Steve Parsons - National Bank Financial

Yeah. Thank you. Peter, what detail color can you provide on the repatriation charges that you were experiencing in Argentina? Do you need to see a resolution on this before making any investment decisions on Cerro Moro?

Peter Marrone

No. The investment decision process on Cerro Moro and that decision timeline and the go no go on Cerro Moro is not dependent on that issue. We are beginning to see liberalization in Argentina of the constraints on a movement of moneys out of country.

As you know, last year we didn’t experience issues relating to movement of capital out of country. We did experience some impact on the movement of profit out of country but from our Alumbrera interest.

We are starting to see some liberalization of that this year. It does look as if the trend is very favorable, it would not have an impact on whether or not we make a decision to construct Cerro Moro, because we think that that favorable trend will continue through 2013 and that construction decision wouldn’t be made until 2014, which means we then have year and half to two years in addition to that for the development of Cerro Moro.

Steve Parsons - National Bank Financial

Okay. That’s it for me. Thank you.

Operator

Thank you. Ladies and gentlemen, this will conclude the question-and-answer session, I would like to turn the meeting back over to Mr. Marrone.

Peter Marrone

Well, thank you, Operator, and thank you to everyone for listening in on the call. I would like to leave with one or couple of final thoughts. We will continue to stay focus on production and what I describe is the volume growth, resources and reserves and production in this company. That is important. It needs to be important. That’s the sustainability of a mining company.

But we are also focused on increasing free cash flow, cash flow and free cash flow, and the growth and profitability of this company rather than growth of production of ounces only. We will remain focused on maintaining a disciplined over capital spend and if you hear excitement in my voice, it is because I do believe that metal prices will go back up overtime.

But I also believe that this is an excellent opportunity for us to do what we've done before, which is to take that lead on cost and to push it down, and that’s the action that we will be taking. We believe this is a prudent approach. It focuses on quality and allows us to continue to build on superior value.

The final thought is that we have our Shareholder Meeting at 11 o’clock this morning. That is at the Design Exchange on Bay Street. We look forward to seeing our shareholders and others who are on the call at that Shareholder Meeting. And we thank you for your participation in this call.

Operator

Thank you, Mr. Marrone. The conference has now ended, please disconnect your lines at this time and thank you for your participation.

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