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Yamana Gold Inc. (NYSE:AUY)

Q2 2013 Earnings Conference Call

August 1, 2013 8:30 AM ET

Executives

Lisa Doddridge – Vice President, Investor Relations and Corporate Communications

Peter Marrone – Chairman and Chief Executive Officer

Charles B. Main – Executive Vice President, Finance and Chief Financial Officer

Ludovico Costa – President and Chief Operating Officer

Darcy Marud – Senior Vice President, Exploration

William Wulftange – Vice President of Resources and Reserves

Analysts

Don MacLean – Paradigm Securities

Dan Rollins – RBC Capital Markets

Alec Kodatsky – CIBC World Markets

Anita Soni – Credit Suisse

Neils Christensen – Kitco News

Doug Dyer – Heartland Advisors Research

Steve Parsons – National Bank Financial

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Yamana Gold's 2013 Second Quarter Release Conference Call and Webcast. At this time, all participants are in a listen-only mode. And following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time.

I’ll like to turn the meeting over to Ms. Lisa Doddridge, Vice President, Corporate Communications and Investor Relations.

Lisa Doddridge

Thank you all for joining us this morning. Before I turn the call over, I need to advise that certain statements made during this call today may contain forward-looking information and actual results could differ from the conclusions or projections in that forward-looking information, which include, but are not limited to, statements with respect to the estimation of mineral reserves and resources, the timing and amount of estimated future production, cost of production, capital expenditures, future metal prices and the cost and timing of the development of new projects.

For a complete discussion of the 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 second quarter 2013 results, as well as our management’s discussion and analysis for the same period and other regulatory filings in the Canada and United States.

Throughout the presentation, when speakers use the term ounces, they will be 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 pm Eastern Time. Replay information and the presentation slides accompanying this conference call and webcast are available on our website at yamana.com.

I will now turn the call over to Mr. Peter Marrone, Chairman and CEO.

Peter Marrone

Lisa, thank you very much and good morning and thank you to all of you for joining us. With me this morning are the other members of senior management, and after some introductory comments, I’ll turn the call to those members of management.

I would like to begin by addressing how we’re adapting to the new metal prices environment that we find ourselves in. Over the second quarter, we saw significant precious metal volatility. There have also been signs of lower costs. As you’ll hear me say throughout this presentation, I believe that we are in a transition period with this metal price environment to lower costs.

But in response to this, and is introduced on our first quarter conference call several months ago, we initiated a series of cost-containment initiatives, through which we committed to reducing our all-in sustaining co-product cash costs. We have begun to achieve a measure of that with $150 million of savings already. And that's only in the last several months we also took the opportunity to increase the urgency in timetable on some existing efficiency programs that were already underway. The cost reduction involves reductions in operating costs our G&A exploration costs and a reduction in deferrals of certain capital expenditure amounts.

On deferrals, it allows us to critically evaluate opportunities after look-see at what will happen to costs. I'm not going to go into all of the detail, but I do want to make the point that development capital deferrals and the reductions are not captured in all-in sustaining costs measure, they are in addition to these savings and will improve our ability to generate over time free cash flow.

I will let Chuck provide more insight into the specifics of the program and the measured successes to-date. I do want to make it well-known that this is not the first time that we found ourselves in this position. And taken this as opportunity to create efficiencies in 2009, we then took a similar program in response to the financial crisis of the time and we got good results, except the company up for better margin growth and profitability as the metal prices then continued to increase in the years to follow. We got the benefit of all of that, for the last several years following 2009, that is what we are endeavoring to do again.

We are not waiting for costs to come down, which we believe is a natural long-term effect of the precipitous drop in metals prices, in a lower metal price environment input costs generally do go down overtime, but prices are sticky and they will come down but it will be on their own timetable. And as I said, we are not going to wait for all of that to happen, we’ll take advantage of opportunity as they present themselves, aggressively pushing down the lid on costs will position this company to provide better margins and when coupled with the expected volume growth through production increases, even at a constant gold price it will produce increasing aggregate margin growth.

Impart this program is already showing results as you can see with that reduction in all-in sustaining co-product cash cost in the second quarter over the first. Our plan delivers a savings of an initial $100 per ounce and we calculated that based on our mines in full production, so not yet applying that to our newest mines. For the balance of this year, we will be evaluating how we improve our costs at these mines as well.

From the inception of this company we had been and will continue to be focused on cash flow generation. In the second quarter we generated over $150 million in cash flow, before changes in non-cash working capital this represents $0.20 per share. If you look at year-to-date we’ve generated just under $0.50 per share in cash flow.

Now this is below the cash flow level of the previous year, but we were in a different environment. Metal prices have decline and the reality of the new cost structure has not yet caught up. In the second half of this year we are expecting increased production levels and all-in costs that will reflect the cost containment initiatives. With lower costs and volume growth I think it is reasonable to say that we should be generating more cash flow in the second half of this year than in the first at these metal prices.

In the year’s to follow, is our operations are fully ramped up and are new low cost structure becomes better and trenched, coupled with the decline that we expect in development capital, given that our projects are now built as of the end of this year, we will be generating higher levels of free cash flow also.

I would like to dwell a little deeper into our ability to generate cash flow, free cash flow. We have established a portfolio of mines, before production from our three newest mines that can produce in excess of 1 million, 2 million ounces per year which is evidenced by our production last year and mostly evidenced by our production in the first half of this year. The portfolio like any other has room for greater efficiencies and to do better, and some mines do better than others.

Over the second half of the year, we now have three new mines, three new operations that are ramping up to full production levels. Now that all of these operations are in production, a large component of production growth risk has been eliminated as they get closer to full capacity, that risk will be even further reduced. We expect to get to that point by the end of the year, as commercial production is expected to be achieved at our Ernesto/Pau-a-Pique, C1 and Pilar by then.

Based on the midpoint of our new guidance for this year, production in the second half of this year is expected to be 30% higher than the first half and full-year production will be almost 13% higher than last year. That volume growth will generate additional cash flow, but the implications are even greater in future years.

As we also disclosed last night, we have revised our production expectations in 2013 and the years to follow to better align with new metal price environment, more importantly, with the objective of reducing costs before maximizing production growth, and just general prudence in the midst of price and cost uncertainty as a transition occurs to what I believe will be a lower, better and more sustainable cost environment.

Now I hope this revision in our guidance has not been interpreted as an inability to provide the growth to the levels previously stated, because that is simply not what we’re planning to do. Let me be clear, we still plan to deliver production growth to the previously indicated levels, but on a different timeframe which will allow for more efficient growth and likely at much better costs, so creating better returns. That additional growth is being evaluated. In 2013, we expect to deliver in excess of 1.32 million ounces. This reflects the timing of start up of our development projects and expected timing of ramp up to full production of those three new mines.

In 2014 with all of our operating mines in full production under the new cost regime, our production in 2014 even at a lower level of guidance that we represented last night will be almost 17% higher over last year and by 2015 that growth over 2012 as a reference year will be in excess of 30%.

Now I’d like to go back to something that I said just a minute ago about risk, the risk associated with the delivery of that production growth has been reduced in relation given that all of our operations will be fully permitted. They’re operating and they will be ramped up by the end of this year that provides more certainty on ability to deliver over 1.4 million ounces in 2014 and 1.55 million ounces in 2015.

And we expect the balance of 2013 production to be at a cost structure that is below the second quarter levels and for 2014 and 2015 the average all-in sustaining co-product cash costs with the cost reduction initiatives that we’ve already put into place before further improvements is expected to be below $925 per ounce or on a by-product basis after copper as a credit below $850 per ounce.

We have not assumed the same discipline yet on our newest mines, as we are just starting production. So this cost assumes an initial estimate of costs at these new mines. Throughout the year, we will evaluate cost improvements the result of which should be a further improvement to our overall cost structure. I would like to add that we have lots of opportunity from improvement to costs and just as importantly in that cost regimen to production, the high grade core Corpo Sulas you saw from our exploration results last night. Offers the potential to increase sustainable production levels at Chapada.

The focus at Jacobina over the next several years will be on development work related to the underground in new areas that are higher grade which is expected to be followed by increasing production levels. The continued exploration success at Ernesto which allows the company to evaluate production back to initial design levels.

Concurrent mining of an underground zone at C1 Santa Luz that is opened in most directions and getting increasingly larger, through the efforts of our exploration instead in other words of an initially planned successive production of underground following the open pit once the open pit ore is depleted, we are now looking at this as a concurrent operation of underground to supplement what we are getting with the open pit.

Maria Lazarus deposit at Pilar, which is being evaluated as additional ore sources for the Pilar plant which provides potentially a positive impact to production levels. We expect to have more clarity on the reality of some of the potential enhancements by year end. Exploration I humbly say had delivered the resource opportunity and now we are evaluating brining this opportunity to sustainably higher production levels.

When we bring that back to margins as you can see an increase in production volume at an established lowest curtail cost structure, margins will increase even if the gold price is not. I want to leave you with an important philosophical point, I do not subscribe to the philosophy that a company should generate only immediate free cash flow, at the expense of volume growth, if that volume growth delivers sustainable higher cash flow. Growth is growth and we are still focused on growth. But the efficiency of that growth is important. So we have stepped back, created a plan to push the lid down on costs and determined how to continue to grow in a way that will better create value, a plan that will be executed over the next few years. And as I said, I think that there may be room for further improvement.

Our objective is to increase production to a new sustainable level from 2015 onward of over 1.55 million ounces. That will be with the mines that are now in operations and at the cost structure that we are guiding. Our follow-on objective is to evaluate the exceptional opportunity at our mines that comes from exploration to further increase the production level, leaving off of those exploration successes as I mentioned.

We’re evaluating that opportunity based on our cost regimen. We have not taken our eye off of the ball on that objective of over 1.7 million ounces, although given the volatility in metal prices and the transition to reducing costs. We think we can deliver better value, by waiting out the volatility and getting better costs.

Where have we down scale production is Jacobina, Ernesto/Pau-a-Pique and for 2014, with the later start up of Suruca and Chapada mostly. Where we opportunities for upscale is Jacobina after development in the next couple of years Chapada, mostly from Corpo Sul and that very high grade core that we published last night and C1 Santa Luz is underground. Our further objective then remains to evaluate Cerro Moro as our next perspective project and mine, which we plan to continue into next year.

And now I will turn the call over to Ludovico, to share the highlights of our operational performance.

Ludovico Costa

Thank you, Peter. Production in the second quarter was comparable to that of the first quarter at 295.504 ounces, this was within our expectations. El Penon (inaudible) performance better than expect, while the Jacobina had a challenging quarter. In addition 257,608 ounces of gold and the 1.9 million ounces (inaudible) produced in the quarter. We also had a production of 30.1 million pounds of copper from Chapada.

Bi-product cash costs for the quarter were 476 pounds. Ore product costs were 577 pounds. At Chapada we expect lower grades and (inaudible) continue which it was according to the mining plan. Production was also impacted by our linear changes (inaudible) in the quarter. We do expect production to be strong in the second half of the year, which is vital improvement of mining rates and to good grades and recovery. (inaudible) Suruca was respect. We expect Suruca to contribute to some production at Chapada in 2014.

Work also continued at the Corpo Sul which is expected to provide greater flexibility to Chapada with the potential to increase production levels. Production at El Penon increased by 16% from last year this include 35% increasing gold production quarterly offset by the 18% decline in silver.

For the first half of 2013 El Penon has significantly out performed our expectations. This has been helpful to offset the underperformance of other operation. El Penon is very well positioned to the legal as expected this year. Gold degrees are expected to be (inaudible) silver grades improve over the second half. El Penon continues to be a stronger performing portfolio.

Production at the Gualcamayo was again primary source from the lower grades spot priced in the period as transition from Phase II to Phase III continued. Productions were impacted by lower grades and continued inflationary pressures. The development of QDD Lower West is expected to be complete in the third quarter of 2013. exploration success at QDD Lower West continues to result in growth and mineral resources in 2013, which has lead to the initiation of a (inaudible) starting processing options to better optimize recoveries.

Mercedes continues to exceed expectations, production increased by 36% and costs improved by 27% from last year, partially driven by improvements in grading recoveries, these operations quickly becoming a cornerstone of our portfolio. Jacobina’s performance in the quarter was similar to Q1, and continued to be below expectations.

As we disclosed in the first quarter results, a plan has been put in place to reduce costs in

(inaudible) underground developmental operation. We expect improvement in the second half in grades and recoveries as a part of that plant. (inaudible) performed well in the quarter, they plan to increasing production result from the stages of the process extension. They are improving in performance was a right offset by the decline in zinc accredits because of lower prices. Second half performance will be similar to the first half, but at the lower cost.

At our other operations Fazenda Brasileiro’s production increased by 13% and cost improved by 5%, largely because of (inaudible) increasing processing rates. Alumbrera’s production declined relatively to the prior year in fact by volumes and recoveries. Ernesto/Pau-a-Pique continued to ramp up in the quarter with the pace of ramp up accelerating, the production is expected to improve over the second half.

C1 Santa Luz is ramping up to full production levels and is progressing as expected. At Pilar first (inaudible) in early July and the ramp up is going as expected. At Cerro Moro pre-development working feasibility test continued to advance. In general operation performance for the second quarter was on track.

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

Charles B. Main

Thank you, Ludovico. In general the second quarter of 2013 was in line with our plan. Revenues were $430 million in the quarter, which is lower than the second quarter of 2012 with higher sales offset by lower metal prices. The average realized price for our all metals were considerably lower than in the second quarter of 2012. Gold was down 13.7%, silver was down 16.3% and copper down 15.3%.

We had adjusted earnings of $50 million or $0.07 per share. The decline in metal price accounts for an estimated decline in earnings on adjusted earnings of approximately $0.12 per share. Operating cash flow before changes in non-cash working capital was $150 million or $0.20 per share.

In the quarter, our financial position was maintained, cash and available credit at the end of the quarter were approximately $1.1 billion. This includes cash and equivalents of approximately $380 million. G&A for the quarter was $38 million which is comparable in the second quarter of 2012 and is expected to decrease in the third quarter due to cost-containment initiatives.

Depreciation and amortization was $94 million, exploration expense for the quarter was $8 million compared to $14 million in the second quarter of 2012. Total capital spent in the quarter was $300 million. During the quarter to maintain our financial flexibility and take advantage of extremely low borrowing costs we issued $300 million in senior debt notes with an average duration of 9.4 years and an average all-in yield of 4.65%. We also repaid the $100 million on our credit line, which we drill down in the first quarter.

I’d like to spend a few minutes on cash costs, because understanding the impact of copper credit in our cost structure is important when looking at longer term trends. As you are aware, in 2013 we are going to produce in excess of 120 pounds of copper hedge pattern this secondary metal helps to mitigate the impact of inflation and movements in currency that put pressure on our cost structure, particularly in Chile.

We net the corporate credit against our costs to determine our by-product cash costs although we always record a coal costs as well for better transparency. If you looked at our by-product costs from the second quarter of 2012 compared to the second quarter of 2013 the increase is obvious, costs did increase but a significant drop in the copper credits applied skews the picture a bit from the perspective of by-product credit.

In the second quarter of 2012 the cash copper margin from copper was approximately $84 million in aggregate which equates to $292 per ounce this credit reflects the average realized price of $3.60. Now in the same period this year, our average realized price declined by more than 15% to $3.05 generating cash margin, copper margins of approximately $29 million in aggregate or $101 per ounce. This is important to understand as you know we have low control over the copper price. And as evident this quarter there can be lot of volatility.

Now relating that to our revised cash cost guidance the change should not be looked at as an increase to cost as the changes mostly driven by our copper price assumption decreased at $3.10 per pound. That brings me to our new disclosure of all-in sustaining costs and our cost containment initiatives that Peter previously mentioned.

When we announced our initiative, we’ve committed to a drop of $100 per ounce in this measure, because of the impact of copper credit and the inability of anyone’s record we forecast movements on copper prices, we have no way to forecast actively the credit each quarter, so the best way to clearly demonstrate our cost savings, we encourage everyone to look at our all-in sustaining co-product cash cost metric.

In the first quartet 2013 our all-in sustaining co-product cash cost was $1014 per ounce, in the second quarter that number dropped by $64 to $950 per ounce. This drop represents a decline in our co-product cost of approximately $10 and the remainder a decline in sustaining capital.

We have taken steps to reduce operating cost by $30 million sustaining capital by $50, million, exploration by $10 million, G&A reduction of $24 million, for G&A this will establish a new run rate going forward. All of this equates to over $100 per ounces for our mines in commercial production, which will be fully realized though the remainder of the year.

We have a target of an additional $50 in [ounce] reduction that we expect to come in part through the decline is some currencies and the nature course of input price reduction. We will continue to update on our progress of achieving this target. In general our financial performance for this quarter was inline.

I will now turn the call over to Darcy, for an update on exploration.

Darcy Marud

Thank you, Chuck. Exploration spending for 2013 has been reduced by approximately $10 million to $105 million. This is inline with our corporative objective to reducing spending more possible as previously discussed by Chuck. The reduction in the exploration investment will not affect our ability to enhance values at our mines development project, as we intend to increase resources and reserves year-over-year. We continue to do exploration as the cornerstone to building our pipeline to reach our annual goal – excuse me our annual goal of future production of 1.7 million ounces.

At this time, it is my pleasure to pass the call over to Mr. William Wulftange, our newly appointed Vice President of Resources and Reserves to discuss some specifics of exploration during quarter two, which we think will have important impact for our resources and reserves going forward at 2013 and beyond.

William Wulftange

Thank you, Darcy. Yesterday, we released the second quarter exploration results that cover most of the Yamana mines with a notable exception of El Penon. The exploration program at El Penon kicked off late at the end of March this year and we’re now beginning to see positive results with the – inflow report on Q3, at the end of Q3.

I’ll request that you for further detail review and use this second quarter exploration results press release for a detailed follow-up to discuss.

I have chosen to discuss the second quarter exploration highlights for mines and projects listed on the slide, as we saw significant and new positive information that will add to the resource phase and widely improved and extend like mine profile.

At Chapada the second quarter in-field drill program at Corpo Sul has identified broad intercepts of gold and copper grade at higher grade than currently being mined and higher than the mine’s initial average grades. This is exemplified by CS 213 that cut nearly 168 meters of 0.69 grams of gold and 0.5% copper from hole depth of 22.3 meters. Based on this and other holes our geologist have identified the high grade core that the Corpo Sul ore bodies that they are not testing for extensions outside of the current pit outline.

At Gualcamayo underground exploration drilling of the QDD Lower West and Rodado targets have developed important extensions to these targets that are opened to depth in a long strike. Our geologists believe that this new mineral body beneath QDD Lower West could grow to the size and rival what we currently as the QDD Lower West. Ore bodies it will help provide additional ounces to make the proposed (inaudible) ore processing samples to success.

Key intercepts for this work include a 133 meters of 1.5 grams per gold and drill hole 762 and a 115 meters of 2.26 grams per ton gold at the South West Rodado deposits. Along with two interception hole, 764 that contain 26 meters of 7.98 grams per ton gold and 24 meters of 6.76 grams per ton gold.

At Minera Florida, our exploration geologists have developed a better understanding of a structural model of Minera Florida and specifically (inaudible) deposit and continue and has modeled our potential new mineral body a 100 meter South West of the Millenium deposit.

Key results here includes 37.8 meters of 3.99 gold equivalent in hole 13-11, 16.97 meters of 4.16 gold equivalent in hold 12-84 and 2.89 meters of 10.58 per ton gold equivalent and hold 13-18. At C1 Santa Luz, the down depth extension of the deep mineral body previously reported continues to remain open. Key intercepts here include 5.1 meters of 12.55 gram per ton gold in 4168, 5.56 meters of 5.35 grams per ton god in 174. These intercepts are 300 meters, to 500 meters beneath the surface. There are continuous previously identified mineralizations and should present a minable scenario using normal underground techniques.

At Ernesto/Pau-a-Pique the geologists have identified five mineral traps that holds moderate to high grade gold value such as 9.5 meters of 6.5 grams per ton gold in SM22 and one meter of 31 grams per ton in ER151. These multiple traps are all mineralized, they are all parallel to each other and should provide opportunities for multiple open pits in underground mining scenario that would provide can provide optionality to the miners currently exploring Ernesto.

At Pilar, Maria Lazarus continues to provide moderate to high grade results in a moderate configure – minable configuration that will again provide optionality for the miners. We have identified Maria Lazarus for over three kilometers along the strike and 900 meters down to dip and it present itself at the ore body at a 40 degree to 45 degree dip which is favorable mining configuration. The trends of Maria Lazarus continues for 20 kilometers towards the Cerro Moro deposits between the two deposits we have had limited testing to date and expect to find more opportunities further with mineralization and central ore body.

At Cerro Moro, the Margarita vein was found with a second drill hole of the year, which is remarkable in itself and it arbitrates for over 600 meters along strike, 200 meters down to dip. The initial hole cut diagonally across the vein and exaggerated a two (inaudible) off the hole but follow-up drilling has determined that return we still remain in a minable situation, typical intercepts with MMD 18-36 where we cut 4.8 meters nearly through it of approximately 17.2 gold equivalent grams ton or in 18-74 where we cut 2.7 meters of 5.5 grams per ton gold equivalent.

We feel the structure that we’ve identified which is 10 kilometers North of the [Zoe] deposits remains open along strike it presents itself very similar to what Escondida structure did in the initial phases and we expect to find more mineralization along that trend.

I would now turn it over to Peter.

Peter Marrone

Rich, thank you very much. And so before we open this call up for questions, let me make a few other clean up and broad comments. The first is Pilar, this is the last of our current development projects, it poured first goals in July. That means at all three of our development projects are now in ramp up.

At this point, I can say that the ramp ups are following ordinary course. These projects that are in commissioning are fully permitted, we have available water, power, equipment, parts and supplies. With the ramp ups in progress, construction development risk has significantly declined.

And there is one final comment I’d like to make, and that is about jurisdiction. And we’ve referred to these mining friendly jurisdictions in which we operate. I don’t want to lead you with the false impression that these jurisdiction are immune to any changes with respect to mining royalties’ and taxes.

Brazil has introduced a new mining law. Mexico has attempted to introduce the change to royalties. Both of these governments recognize the importance of mining in their jurisdictions. And so we don’t foresee that there will be anything will be up horned in these new developments.

Indeed it was foreseen in plant for many years in Brazil that a new mining law would be introduced with an increase in royalties and we still believe that that royalty structure that it introduced for gold production will be consistent with. Our expectations consistent with, what’s been telegraphed and at the low end of what one expects for royalties worldwide.

Argentina has been stable on the fiscal approach to mining enterprises and has recently made efforts to improve its currency exchanges issues and ultimately we believe to tame its inflation. There is strong support for mining what we operate ladies and gentlemen, and we continue to be confident that any changes would be as expected as telegraphed, as planned in the case of the some jurisdiction such as Brazil for several years and be consistent with what we’ve been saying and within our tolerance.

And so with that I will now open it up to question.

Question-and-Answer Session

Operator

Thank you, Mr. Marrone. Question will now be taken from the telephone lines. (Operator Instructions). There will be a brief pause while our participants register. Thank you for your patience.

The first question is from Don MacLean with Paradigm. Your line is now open. Please go ahead.

Don MacLean – Paradigm Securities

Good morning guys. A couple of questions, Peter you did a bit of a run down on where the difference to guidance is liable to take place. Could you please review that again and may be if you could quantify it a little bit.

Peter Marrone

Happy to do that at least some broad brush Don, but I think the one that is obvious is Jacobina, we are confident with the exploration success at Cerro Moro and (inaudible) Maria Lazarus. Sorry Canavieiras and Morro do Vento, we are confident that with those grades in those areas we are confident with a higher production level.

We have contemplated that Jacobina should be at a sustainable production level of 130,000 to 140,000 ounces per year. We’re indicating that this year we’re expecting to get 80,000 ounces. That accounts for the lion share of the production changes to what was planned in 2014 and 2015. We will remain confident that we’ll get there, but as I said several months ago on our first-quarter conference call, it will take us a bit of time to do the development work and so the shift has been to focus on development at the expense of mining.

Now we didn’t see the benefit of our cost improvement in Q2, but we didn’t anticipate that we would. As you can appreciate it would be difficult to get that within a month, to several months. But we do anticipate that we will be able to get some cost improvements at Jacobina, into the second half of the year and as importantly in 2014 and 2015 as we focus on development.

Jacobina then accounts for something in the range of 50,000 ounces to 60,000 ounces there is the shortfall between what we had anticipated in 2014 and 2015 to what we are currently participating, but it will we believed ultimately get there. The other one would be Ernesto/Pau-a-Pique, we had planned Ernesto/Pau-a-Pique to be at a production level of 100,000 ounces in the first two years perhaps 110,000 ounces.

We’re not getting the benefit of that as Ernesto/Pau-a-Pique is an open pit and underground, Pau-a-Pique, is the underground, we’re getting very positive grade reconciliation on the underground and not yet on the open pit. And so we have down skilled the expectations for production to roughly 70,000 ounces, for a full-year, we anticipate about 40,000 ounces this year and 70,000 ounces for a full-year. As we further evaluate what we can do with those exceptional exploration successes to which [Butch] and Darcy alluded to get it to that higher production levels.

So if you look at Ernesto/Pau-a-Pique and Jacobina they account for the lion’s share of that difference. That is a difference at Chapada as well, but that the difference at Chapada is temporal. Remember we took the position that for Suruca we would in Q1 we said we’re going to over haul our thought process on how quickly we have to – how fast track the program is for the development of certain things. The objective was to improve costs. Interestingly we saved roughly $20 million of capital by taking that action. And so now about a month a half ago, we took the position and most of that was through land acquisition. We were better able negotiate, because we took a longer timeframe.

In the context of that saving, we reinvigorated the view on Suruca and now we’ll start production at the end of 2014 rather than earlier in 2014. And that accounts for a difference in production at Chapada, in 2014 of about 25,000 ounces. We believe, however, that in two, three years, Corpo Sul and that very significant high grade, which Darcy alluded and Butch referred will bring this Chapada production level certainly to 150,000 ounces per year, which is our stated objective and we believe it will be at a higher level than that.

So it would be – so Ernesto/Pau-a-Pique a very modest changes just as we ramp up Pilar and C1 Santa Luz on those two operations, Jacobina and Chapada that account further differential between 2014 and 2015. For 2013 most of the difference is the result of the timing for the start up of operations for these three mines and a ramp up of those operations.

Don MacLean – Paradigm Securities

And you touched on maybe I didn’t catch this right. But in Ernesto, the underground, you’re getting a great grade positive reconciliation, but not so on the open pit. Can you just touch on those a little bit more?

Peter Marrone

I’ll turn it to Ludovico on that, but what I will say is as a general comment is remember that the underground is higher grade, but much less ore feed.

Don MacLean – Paradigm Securities

Okay.

Peter Marrone

So most of the ounces Ernesto/Pau-a-Pique will come from Ernesto, will come from the open pit.

Don MacLean – Paradigm Securities

Right.

Peter Marrone

So with that lower grade reconciliation, the tonnage being reduced. We have had less success than wanted to have in that open pit to percentage. We have decided that the better course would be to expect a production of about 70,000 ounces. Ludovico perhaps if you can supplement some of that.

Ludovico Costa

Yes. Don, (inaudible) at the Pau-a-Pique, we have experienced very good reconciliation degrees there, just ramping up that’s been very good. At the open pits what experienced there because some variation on the where really the ore body is located, we have experienced a lower mining coal factor there and not so good reconciliation there. As we have diverse open pit, we expected to have a better reconciliation. We are improving that, the drilling space in order to get a better view beforehand. In the order of terms that.

Don MacLean – Paradigm Securities

Yes it just that it's more complicated the ore is more complicated to mine than the pit?

Ludovico Costa

Yeah. I would say yes, but we have to experience, as it is a new mine, we have to go through the experience to really identify the best way to mine that, and I think throughout the months we're going to see a better reconciliation and we introduced new (inaudible) drilling, we expect that to improve.

Don MacLean – Paradigm Securities

Right. Okay and can I just go back to Jacobina and maybe Chuck can sort of fill in what the book value for Jacobina is at this point, because it still got a long way to go to get back to the kind of costs that you want and what would you be looking for a target operating costs for that mine and maybe now that we're getting into things like the all-in costs maybe you could touch on what that would be?

Peter Marrone

Yeah. Let me address the second point, because we said I believe on our second quarter call last – few months ago, we expect the Jacobina cost structure to be in the range of $850 per ounces. That is the operating costs sustaining capital and the other items that going to all-in costs would be higher than that, but that is our expectation for – by the end of this year and into 2014, we should be getting a better cost structure as we complete this development working get into these higher grade areas and are producing 130,000 ounces to 140,000 ounces, which is our objective with these higher grade areas rather than the 80,000 ounces that were currently contemplating. On the book value perhaps if its okay with you Don may be Chuck can get back to you on that.

Don MacLean – Paradigm Securities

Okay, because I guess that mine has been problematic for the company in terms of the often coming in a very high cost as compared to expectation, so in the review of cost or the book of costs, I was actually a bit surprise that it didn’t end up having to take a haircut.

Peter Marrone

Well there is a lot of exploration success in a lot of ounces, with more than 2 million ounces in a grade of having gone from – grade having gone from 2 grams per ton to over 3 gram per ton, which means it we have areas that are well in excess of 3 grams per ton 3.75 grams per tone to 4 grams per ton. I think that it would be fair to say that there is a tremendous amount of optionality.

What is the problem with Jacobina, the problem with Jacobina is that while there is a legacy issue because its been around well before we owned it and for many, many, many decades and so part of it is just a systemic issue with the mine in the operation, but what we’ve been doing for the past several years is focusing on exploration in an higher grade, what we are doing for the next several years is focusing on development of higher grade areas to get to a higher production level. So we should be able to with that higher production level get the value of –support the value of that asset as it currently stands.

Don MacLean – Paradigm Securities

Right. Okay, thanks, I appreciate the feedback.

Peter Marrone

Thanks Don.

Operator

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

Dan Rollins – RBC Capital Markets

Yeah thanks very much. Peter, previous quarters you’ve mention that you’re sort of sustaining camp on an annual basis would be about 400 million. Could you give us an update on where do you expect that to be going forward after your cost studies?

Peter Marrone

Yeah I think we indicated 420 million. In our current contemplation, we’re still assuming of 400 million to 420 million. But what we’re looking at is opportunities to further reduce that. Most of that reduction would come from contractor rates, efficiencies of contractors, so many meters for a period of time and the cost per meter, which we anticipate being able to improve over the course of the next year to several years.

Dan Rollins – RBC Capital Markets

Okay. And then just on the all-in sustaining costs you using the current definition provided by the World Gold Council?

Peter Marrone

Well we’re including in all-in sustaining costs and perhaps we do highlight in our disclosure. But may be I can answer the question this way. We including operating costs, we include sustaining capital, we include expensed exploration, we include G&A and that includes corporate G&A into that number. I don’t recollect that the World Gold Council includes all of those things, but those are the things that we include in our view of all-in sustaining cash costs.

But we then do Dan is that we say, well we’ll show that on a co-product basis, and then we believe as you probably say for a long time that I think it is fare to look at as Chuck said, copper as a by-product credit, as an offset to some of the risk to inflation, to cost structure within a buyback credit to that all-in sustaining costs on a co-product basis to determine the all-in sustaining cash cost on a by-product basis.

Dan Rollins – RBC Capital Markets

Okay perfect. May be on some of the development stage projects, I think I'm on the road so I don’t have full access to your MD&A, but I see that you produced I think about 7,500 of ounces being on the commissioning stage. You’re seeing certainly low for both C1 and Ernesto/Pau-a-Pique area obviously you’re now expecting commercial brush in late Q4 on those assets?

Peter Marrone

Well, it’s low, but it’s consistent with what we had anticipated. Remember, Pilar (inaudible) is only in July. Most of that production is from Ernesto/Pau-a-Pique. So we’re still confident in being able to deliver commercial production at C1 in the third quarter. Likely the end of the third quarter, if we miss it, we’ll miss it by a little bit, maybe the early fourth quarter, but in that band, the narrowband and in the case of Pilar by the fourth quarter within the end of the year.

We had indicated in the past that we expected commerciality within a period of about four months. And that’s still realistic for C1 Santa Luz and for Pilar; as Ernesto/Pau-a-Pique is taking us a little bit longer than that to get the commerciality.

Dan Rollins – RBC Capital Markets

Okay. And then maybe just moving within our exploration, Gualcamayo you seem to have quite a bit of success there. I guess the two newer deposits you sort of discovered. How that change your view with respect that operation going forward? Would you be looking at potentially just mine extension with those assets or there is any recourses or would you be looking at potentially increasing capacity of the heap leach facility or even are you still concentrating a milling option there?

Peter Marrone

We’re contemplating a different treatment for those. That’s mostly sulphide material. So we’re contemplating a different treatment of that. We’d indicated previously that we expect it to have a study on that sometime this year and we’re still expecting within the third quarter we will deliver the initial view on that study. So as you recollect QDD Lower West, which was the initial ore body that was discovered in that shallow underground, the near to surface underground. The intention was to treat that ore through the heap leaching facilities that we already have. As it continue to get bigger and then the discovery of Rodado and then the sub-paralleled structures our view is that we are getting – increasingly Gualcamayo is becoming an underground opportunity. And so what we are now doing is we are going through that evaluation process of alternative methods for the recovery of what will be mostly sulphide ore.

Dan Rollins – RBC Capital Markets

Okay, great. Thanks very much.

Peter Marrone

Thank you. Gentlemen and ladies expect to get that study, we are expecting to get at least an initial view on that sometime in the third quarter. So we will likely be indicating that just as we doc the eyes in core expertise perhaps in our third quarter results, but certainly by the end of the year.

Operator

Thank you. The next question is from Alec Kodatsky, with CIBC. Your line is now open sir. Please go ahead.

Alec Kodatsky – CIBC World Markets

Thanks, and good morning. I just wanted to focus a bit on the cost side with respect to your original target, you are trying to get all-in sustaining costs down by $100 per GEO and that appeared to be tracking reasonably well and then the incremental target of $50 per ounce, are you still viewing that number as being achievable and where you are actually seeing the opportunities to continue to cut costs?

Peter Marrone

Well, we have – I’ll turn it to Chuck in a moment, but we have a $115 million of cost improvement that is already in the briefcase here, that's important, so if you looked at it from the point of view of when we undertook this task in the second – at the end of our first quarter on our first quarter conference call, we had indicated that what $100 costs per ounce and the incremental $50 initially would be applied to the mines that were then in production.

So if you look at the production for the second half of the year and divide that into the $115 million of improvements that we are already have in costs, it will be well in excess of $100 per ounce. Now what we’re doing is, we’re saying well in 2014 and 2015 we’re still going to get that $115 million, but it’s over a larger base of production with the new mines coming into production. Now how can we improve those, as we get these into production what efficiencies, what cost improvements can we make, that allow us to create a sustainability to that plus $100 per ounce across all our ounces. That’s what we’re in progress on right now.

So we refer to it Alec as $100 per ounce and then $50 per ounce, but may be the better way to look at it is, what’s the aggregate, And then we’ll leave it to us and to individuals to determine how you determine that on a per ounce basis. But the aggregate is $115 million and those savings have occurred literally within the course of a few months. And so while I’m a big believer that we’re into a transition on costs, you heard me say that. So I think we’re going to get substantially better, more improvements to cost structure as time passes. But $150 million and roughly $24 million in G&A alone should demonstrate to everyone that we have been very aggressive at making sure that we’ve gone leaner than we were.

Alec Kodatsky – CIBC World Markets

Great, and I guess just the components of that, I mean, the – I guess the underlining question is how much can you actually start to squeeze from the operations themselves. I mean the numbers on the corporate side and the sustaining side, are those sort of the incremental steps and now it’s getting back to mine plans and the renegotiations with suppliers and you would expect to see that filter through in the back half of the year. Is that’s I guess that timeframe where you could expect that to come through or is it a longer sort of a time frame where we may be into next year before some of these cost benefits come in? I’m just sort of curious how you’re seeing the response with regard to your whether it’s labor or your discussions with the suppliers?

Peter Marrone

I don’t know operational level, Alec we cut roughly 10% of our workforce within the past few months and that represents a significant savings on that up costs. If we looked that our cost structure, if we look at consumables, fuel, power, labor and then added labor would be contractor rates.

And if you looked at labor and contractor rates, that’s approximately 46%. In some operations, this is high as 50% of our cost structure. So my experience is the best way to improve cost is to go to these at the bulk, to go you have got the greatest item to cut. So cutting some of the other items, I think is going to be incremental. But I think the best improvement comes to those two items. And I think the one in that is roughly 40% to 50% of that is contractor rate.

And so I think the level of efficiency with contractors and the costs for contractor should be expected to come down as this reality in such as gold price. It’s across the Board in every commodity, it’s what’s happening with capital programs. As that all seat itself into the marketplace, as we go through this transition, I believe that that’s what we’re going to get our next best cost saving. We have a plan in place now. We’re not disclosing it yet, but we have a plan in place to further cut our operating costs and our sustaining capital. We expect that that will take us into the end of this year and likely into early next year. But we’ll get the benefit of it starting in 2014.

Alec Kodatsky – CIBC World Markets

Okay, great. Thank you very much

Peter Marrone

Thank you.

Operator

Thank you. The next question is from Anita Soni with Credit Suisse. Please go ahead.

Anita Soni – Credit Suisse

Good morning, Peter. I just have sort of a strategic question. As you look at the mines that are having all-in sustaining cash costs higher than average and I look at the one into Jacobina, Gualcamayo, and Minera Florida. How do you look at I guess optimizing operations and sustaining capital at some of those assets versus maintain a portfolio approach like you don’t want a cut rate to the sort of may be take a hit on Minera Florida, but if it’s got a longer term potential but how are you thinking about these things as you go forward in to your end.

Peter Marrone

Yeah I think some of the – its interesting that you mentioned those three in particular, because I think that in those three in my view our corporate view is that the improvement to cost structure that will bring it the closer to our average cost structure that we indicated in our public disclosure last night and on this call will be through efficiencies in operations and through increase in production.

Jacobina should be not be producing 80,000 ounces per year should not be producing 100,000 ounces per year, it should be producing 130,000 ounces per year plus, equally Gualcamayo the challenge of Gualcamayo is as we transition we are going to transition into the underground at the expense of the open.

Gualcamayo cost structure should improved as we increase the volume of ore coming from that under ground. We have to look at Gualcamayo from another perspective which is the inflation rate in Argentina has been higher then in other countries. As that inflation rate is changed then I think that that customers should will come down as well.

They will create further opportunities whereas there may have been a few contractors that we would higher for development work, we know have the option of bring other contractors in, I think as you appreciate Anita, in a jurisdiction that is has had certain fiscal issue that is strength that had challenged and its trying to deal with, with high inflation many foreign contractors may not be as interested, foreign workers may not be as interested and coming in.

That pressure will elevated itself as that fiscal huss comes in order and as that’s inflation rate comes down. So we are seeing improvement in efficiencies and in production at those operations in the case of Gualcamayo also the inflation rate.

Anita Soni – Credit Suisse

On Minera Florida I’m just wondering what would the sustain – what was the all-in cost or the cost fee if you were not using – didn’t continue with the tailing side of the equation?

Charles B. Main

We’re estimating approximately a $1100, $1150 per ounce all-in.

Anita Soni – Credit Suisse

Sorry with the tailings or without the tailings?

Charles B. Main

Without the tailings it would be that number. The tailings presently is not giving us a huge benefit on cost, we’re experiencing the mining project and this is probably you’re getting that.

Anita Soni – Credit Suisse

Yeah.

Charles B. Main

We’re not experiencing a mining cost with it but we’re getting less ounces than what was anticipated and so the result of all of that is that that plant is not running as efficient where it should. So what we’ve done over the course of the last several quarters to a year is mentioned is we have been focusing on exploration successes.

The idea being finding new ounces in new deposits, increasing the number of mine faces that allows us to feed that supplemental plants with new ore.

Anita Soni – Credit Suisse

And then a last technical question on Gualcamayo, should we be thinking still about an expansion of production there into 2014 originally with QDD Lower West as opposed to be started – starting up I think year end this year and then ramping up throughout 2014 is that still on the cards or…

Charles B. Main

Yeah QDD Lower West is we’re progressing with the completion of Lower West and we’re expecting to be in production third quarter to fourth quarter this year. Most of that production will come in fourth quarter for this year and then what we’re doing is we are evaluating what the production expectation is, given that to be fair we are a few months behind where we wanted to be on the start up of that operation, what that it has is an impact for 2014.

So when we given this guidance expectation for 2014, we’ve also taken a little bit of liberty on Gualcamayo’s ultimate potential by bringing down its production expectations in 2014, because of its later ramp up in 2013.

Anita Soni – Credit Suisse

Okay and then lastly the cash cost increase that you saw at Gualcamayo is that due to the – the ramp up into Lower West I mean that is commercial – you have got to basically take that start up cost on that side of the equation into the bottom line is that what comes in?

Charles B. Main

No we were not getting any ounces from Lower West at the end of Q2, most of it was coming through lower grade material, I mentioned the transition some open-pit to under ground. So you’re slowing down the open-pit at the expense of increasing the development level at the under ground and portion of that was also result of the inflationary pressures in the country. Ludovico, I don’t know if you wanted to supplement that with anything else.

Ludovico Costa

No that was exactly the specific growth. We are now in the transition there and we are seeing the lower grade material that was spot price, we state the underground (inaudible) ramp on from now onwards.

Anita Soni – Credit Suisse

Okay. All right, thank you very much.

Operator

Thank you. The next question is from Neils Christensen with Kitco News. Please go ahead.

Neils Christensen – Kitco News

Yes, I am sorry I just wanted to from at the beginning you’re talking about adapting to a new price environment. And talking about lower prices steepening in and creating lower cost for yourself and you are not waiting for those prices to those cost sort of – that is why you are aggressively cutting cost where you can. So going forward, I guess do you see gold prices at these levels are lower.

Charles B. Main

Neils I will give you, I can only give you what is my personal view.

Neils Christensen – Kitco News

Okay.

Charles B. Main

I think that we are – we would be foolish to believe the gold prices are at these levels and will not go higher than these levels. I don’t believe that the thesis for gold price going to higher levels has changed. I think you are aware that the World Gold Council published a report, which I think is a fair analysis and that’s the belief that when real interest rates in the United States go up and gold price comes down is just not true.

And so I think in that context we have to look at it and say well let’s be prudent, we’ve got an opportunity right now to compress costs, we did that in 2009 when gold price appear to fallen off of a cliff and so we’re taking the same approach, but ultimately my view is that gold price will go to substantially higher levels, and so we have to look at it and say well imagine what the consequence will be when you compress your costs, you can get the benefit of that for several years, when you’re back into a rising gold price environment. So be able to deliver good margins that is very good margins in the current gold price environment, which will only improve when gold price goes up.

Neils Christensen – Kitco News

Okay. So I guess you are just preparing now for cutting cost now to reflect today’s prices and then prepare – and then be situated for when prices do go up, you will be able to take off running I guess is the expression that I'm sort of looking for.

Peter Marrone

That’s correct and then – I like the point about taking off running, but I think the important thing here is if we’re not running then we’re at the very fast walk anyway, because I think the way to look at this is that gold price is still $1300 per ounce, it appears that sustainability in that range of 1250 per ounce to 1350 per ounce and so the way to look at this is look I like my safety, if I’m wrong of where gold price will go and it will likely stay within this range of $1250 to $1350 then what we’ve done is we prepare the company to be profitable and to generate very decent cash flow even in that gold price environment.

Neils Christensen – Kitco News

Okay. Perfect. Thank you very much.

Operator

Thank you. (Operator Instructions). The next question is a follow-up question from Don MacLean with Paradigm. Please go ahead.

Don MacLean – Paradigm Securities

Peter maybe I could just chat a bit about the dividend, because we’ve seen Barrick and Kinross both cut back theirs and as you say hopefully the gold price will go higher but in the mean time we have to live prudently with the gold price we have, can you sort of – you maintained your dividend if you look ahead for the next few quarters, what do you think the situation looks like?

Peter Marrone

We pay $195 million per year in dividends, if we look at $0.26 per share given the share count that is outstanding. So approximately $195 million in dividends per year. I think if we look at the financial model for this company its $1250 per ounce, $1200 per ounce, $1350 per ounce particularly looking at it from this point of view Don which is that the capital expenditure of this company after this year is significantly reduced. Now we have to make a decision about Cerro Moro about and I think it will be a positive decision but our CapEx in 2014 and 2015 will be significantly below the level that it has had 2013.

Our exploration budget is expected to be significantly below the current level, because of the huge exploration successes that we’ve already had over the course of the last several years for a period of time we will be on a maintanence approach for that exploration, we will be concentrating on where we can get many more ounces from what we’ve already gotten as a platform.

So when we look at it from that point of view, this company has significant amount of longevity and the ability to pay that dividend of $0.26 per share. We will continue to evaluate it, and clearly metal prices will have an impact, but certainly within the context of what I’ve just described as that a range of metal price, we are not seeing a risk to the dividend and we think that we can take further actions for the improvement to cost to continue to manage that dividend.

Don MacLean – Paradigm Securities

Great, okay. Thank you.

Operator

Thank you. The next question is from Doug Dyer with Heartland Advisors. Please go ahead.

Doug Dyer – Heartland Advisors Research

Good morning everyone. In your press release, you indicated that you have done a thorough review of the properties to see if you needed to charge any of them off and unfortunately you didn’t have to. But did you find any properties that are now and not meeting some of your investment hurdles and therefore maybe that would be candidates for sales?

Peter Marrone

Doug you have asked an excellent question and I think that the only way that I can answer that without more disclosure than is possible is to say that we will critically evaluate everything that has a high cost structure where we don’t believe that we can aim that cost structure everything that has a production level where we do not believe that we can create a sustainably higher production level that maybe better in someone’s hand. So we will continue to look at that at the present time I don’t think that there is anything that fits that criteria of our producing mines.

But we will continue to critically evaluate that and see where the opportunity is not just the present day opportunity but over the course of the next few years to determine what the production is, what the cost is, what the return on our investment is and to see if it is better to try to sell it. I don’t think we are in a market where things are where it is easy to sell something, but I think it is always prudent to look at things and to be governed by a dictate that says when something is not performing to your standards and to your averages and your expectations then it should be up for sale.

Doug Dyer – Heartland Advisors Research

All right. Thank you very much.

Operator

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

Steve Parsons – National Bank Financial

Thank you. Good morning everybody. I would you like to follow-up on the subject of contractor cost cutting, which of your mines have a higher proportion of mine contractors, whether for operations or development and of those operations essentially which have scope for cuts whether because the contract expires near term and or is availability in the country with contractors?

Ludovico Costa

Steve it is Ludovico here. The mine that you have the highest proportion of contract is really Chapada where we had the open pit mine there, this part of the mine there is contract (inaudible) but we do have contracts in other mines for the underground that Jacobina, Pilar, Penon and a little bit Florida, we would normally use these contractors for supply the development that we need to have a plan. And as in this new environment that we have with the falling prices, we are ready to start other negotiations with the contracts to revising their rates and I think we have been successful in this.

Steve Parsons – National Bank Financial

That is fair. I will leave at there. Thanks.

Operator

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

Peter Marrone

Ladies and gentlemen thank you for making the time. I know that many several companies reported last night and I know that there are several things to discuss with what those companies reported and so I know that there are – this is a busy time for everyone, but I would like to conclude with a few thoughts.

We will continue to provide production growth over the next few years and this growth will be delivered at the lower cost regimen which means efficient growth and efficient growth will continue to build shareholder value. We have various opportunities within the existing assets, Butch highlighted only a few but these are very important because of the near-term to bring those ounces, those results to ounces and ounces to production, so those opportunities exist within the existing assets and that should enhance our growth profile.

These opportunities allow us to achieve the original targets of production overtime, but as I say and I emphasize more efficiently exploration continues to find more ounces and operations then will continue to unlock the value in our operating assets. So I’d like to thank you for joining the call and with that, we will look forward to our Q3 call in several months.

Operator

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

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