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Yamana Gold (NYSE:AUY)

Q4 2013 Results Earnings Conference Call

February 19, 2014, 8:30 a.m. ET

Executives

Lisa Doddridge – Vice President, Investor Relations and Corporate Communications

Peter Marrone – Chairman and Chief Executive Officer

Ludovigo Costa - President and COO

William (Butch) Wulftange – Vice President, Resources & Reserves and Technical Compliance

Darcy Marud – Senior Vice President, Exploration

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

Hernan Vera - Vice President, Country Manager, Argentina

Trevor Mulroney - Vice President, Operations, Argentina

Analysts

Andrew Quail - Goldman Sachs

Dan Rollins - RBC Capital Markets

Adam Graf - Cowen & Company

Alec Kodatsky - CIBC

Patrick Chidley - HSBC

David Haughton - BMO Capital Markets

Tanya Jakusconek - Scotiabank

Don MacLean - Paradigm Capital

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to Yamana Gold’s 2013 fourth quarter and year end release conference call and webcast. [Operator instructions.] I will now turn the call over to Ms. Lisa Doddridge, vice president, corporate communications and investor relations. Please go ahead.

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 fourth quarter 2013 results, as well as our management’s discussion and analysis for the same period and other regulatory filings in Canada and the 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. 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 also to all of you for joining us. We have a lot to go through with our various reports last evening. With me are certain members of management whom you have met before, and some whom you have not.

We welcome Butch Wulftange in his new role, heading exploration; Darcy, our manager of enterprise strategy and will be responsible for technical services, integrating various disciplines of the company in relation to new projects. We also welcome Trevor and Hernan, who are presently managing our efforts on Cerro Morro and Suyai, and of course Ludovico and Chuck, whom you have met before.

Ladies and gentlemen, it goes without saying, this is an uncertain time for gold price. We need to be reflective and recognize that volatility creates risk, and principally risk on margin erosion. We should be confident - I certainly am confident and comfortable - in the intermediate term opportunity for gold price to increase, although we need to be sensitive also to the risk of margin erosion during these periods of volatility.

The issue is not a concern about gold price going down. Rather, it should be about the uncertainty that short term volatility creates, and what that uncertainty can do if the focus is only on the top line of production. The opportunity, however, in this period, is to compress costs, focus on margins, focus on sustainability of cash flow. Production is important, and always will be important, although not if there is a risk to margins, capital, or cash flow.

We saw an almost unprecedented, certainly unexpected, and an impressively rapid decline in gold price last year. With the decline of almost 30% from the beginning to the end of the year, we reacted, with a cost containment strategy in the second quarter that was intended to reclaim some of that lost margin.

We created a cash flow baseline with a low point in the second quarter of $0.20 per share, and a goal of remaining at above that baseline quarter over quarter. Now, there will always be some variation quarter over quarter, although our average cash flow per share per quarter was 15% above that baseline from the second quarter onward, and a range of 10% to 20% above.

We are confident in the sustainability of that cash flow, and that we can now build on that. Our 2013 cash flow of $0.94 per share is striking give we were able to achieve that level with that unprecedented fall in gold prices and while we were in development on several new mines.

Now, 2013 was not without its challenges. We produced approximately 1.2 million gold equivalent ounces, although we experienced a shortfall, mostly with new operations, which were met with challenges and delays. Equally, the overwhelming majority of our operations performed at or above expectations, and by end of year we were better positioned for the production expectations of our existing and new mines.

We developed a process to better evaluate what was at risk on certainty and reliability to better manage those risks. We are budgeting a production increase this year over last year, although bearing in mind that that production should not place at risk costs and our margins.

We continue to focus on creating a balance between costs and production, margin preservation, and the protection and generation of cash flow. We took our all-in cost structure, which includes operating costs and sustaining capital, among other things, to below $925 per ounce, and below $850 per ounce after byproduct credits. We are forecasting that cost structure in 2014, as we aim toward our budget production goal.

Our chief financial officer, Chuck, will take us through some additional cost initiatives or cost containment initiatives that we will initiate this year.

So, to summarize, we have a more reliable budget production goal, we try to balance production with costs, and we have a comparatively low cost structure. All of this is aimed at preservation and maximization of cash flow. And on that point, this is important, always.

Always focused, no matter how seductive it is, no matter how seductive is the allure of production top line, on the operations that best and most reliably, and consistently contribute cash flow. That’s our philosophy.

Our top four mines, with 70% of our production, contribute 90% of our cash flow. Clearly, we look at ways for positive cash flow contribution from each and every one of our operations. While some will take more time to get there, that less than a handful of our mines that have demonstrated that they punch above their weight class and carry the load, continue to impress.

That will continue this year. We have planned improvements at a couple of our new mines, although the backdrop is that our other mines support 85% of our cash flow generation. This prior year, we also delivered significant increases in resources, as we indicated in last night’s announcement to reserves and resources.

We maintained a flat gold price to the previous year’s, for reserve estimates of a modest $150 per ounce. We showed great improvement, particularly at our core cash flow generators. We showed a significant increase in resources, again mostly at our cash flow generating operations. Similar to 2008, we end 2013 with what I believe is an impressive resource increase that we plan to infill to reserves beginning this year.

Now, I have focused on cash flow generation, although I don’t want to leave the impression that we pay no attention to our new operations, even if their cash flow contribution is, will be, and would always have been, modest. We experienced challenges at C1 and Pilar last year, although we have identified solutions which are now methodically and systematically being implemented at these operations.

Similarly, we were delayed last year with our Gualcamayo expansion, although we began operations there in December of last year, while we had anticipated to be there earlier than December, and now it continues to progress. Although we are now progressively increasing production, we’re also ensuring that we continue to manage our costs.

And now that leads us to our new suite of development stage assets. We highlight Cerro Moro and Suyai for these reasons. They are within our wheelhouse for competence, similar to Mercedes and El Penon. They are impressive, high-grade deposits. They allow us to significantly increase production without risk to cost, indeed lowering our overall cost structure. They are small sized on capital, throughput, and plant size, making development and operations easier to manage.

Cerro Moro’s over 24 grams per ton - and I emphasize again 24 grams per ton - is very impressive and forgiving. Its capital requirement is modest, our mining rate is very manageable, and for Suyai we have developed a plan for an underground operation to produce a high grade concentrate. So it fits squarely within the current legal and community framework where that property is situated. We feel this is a time to now apply for permitting, after considerable effort has been undertaken at developing a project that meets everyone’s needs.

And with that, ladies and gentlemen, as an introduction, I will pass it to our chief operating officer, on our operational performance.

Ludovigo Costa

Thank you, Peter. Production in the fourth quarter was 303,768 gold equivalent to ounces, consisting of 260,187 ounces of gold and 2.2 million pounds of silver. For the full year production, it was approximately 1.2 million gold equivalent ounces, consisting of 1.03 million ounces of gold and 8.4 million ounces of silver.

Total copper production for the year was 150 million pounds. As expected, the production in the second half was stronger than the first half. Our portfolio of core assets continues to deliver us [unintelligible]. Our operating mine [unintelligible] operation [unintelligible] in 2013. The shortfall between production guidance is attributable entirely to the new operations. Our new operations continued to improve in the quarter, increasing confidence for 2014.

Our operations, chiefly in Mexico, continue to deliver. All three operations increased production compared to 2012. El Penon exceeded expectations for the full year, with slight production increases over 2012. El Penon is expected to produce approximately 448,000 gold equivalent in 2013.

Minera Florida increased production by 12% compared to 2012. Cash costs continued to decline quarter over quarter, and for the full year, we are 6% below the end of 2012. Minera Florida is expected to produce approximately 114,000 gold equivalent ounces in 2014.

[Mercedes] full year production was 12% higher than 2012. Mercedes is expected to produce approximately 129,000 gold equivalent ounces in 2014. Our [unintelligible] operations in Brazil delivered on expectations at [unintelligible].

Our Chapada production was consistent with expectations. In 2014, Chapada is expected to produce approximately 103,000 gold equivalent ounces and 134 million ounces of copper. Jacobina may had to revise [unintelligible] in the first quarter of 2013.

Near term objectives are [unintelligible] and the underground [unintelligible] of the [unintelligible]. The longer term objective of development of [unintelligible] is in progress. Production at Jacobina is expected to continue improving to approximately 89,000 ounces in 2014.

Fazenda Brasileiro production in the fourth quarter was 9% higher than the third quarter of 2013. Fazenda Brasileiro is expected to produce approximately 64,000 ounces in 2014.

At Gualcamayo, production for the quarter increased [26%] over the third quarter of 2013. Production in December and January was [unintelligible] 14,000 ounces per month.

The [unintelligible] lower west underground extension began contributing to [unintelligible] and production is expected to ramp up each quarter in 2014.

With the [unintelligible] operation ramped up, we expect Gualcamayo to produce approximately 170,000 ounces in 2014. Production and cash [unintelligible] at [unintelligible] were as expected, approximately 45,000 ounces [unintelligible] in 2014.

[unintelligible] work continues at our three new operations. C1 Santa Luz continues to reach a steady state ramp up. Recoveries have been impacted by the amount of carbonation [unintelligible] we have encountered. We are making improvements to increase [unintelligible] including the additional new [unintelligible] and a new regeneration furnace.

We are also now through the transition to [fresh water supplies]. We also created a stockpile during commission, which will help to provide flexibility as we deliver on expectations in 2014.

C1 Santa Luz is expected to produce approximately 92,000 ounces in 2014. At Pilar, production [unintelligible] increased by 116% over the third quarter, demonstrating improvement. To further improve efficiency in the mine at Pilar, new low profile equipment has been brought to the site, to improve dilution in productivity.

We are also evaluating the opportunity to more selectively mine in the higher grade ore chutes, which would have a positive impact. We feel Pilar is well-positioned to meet 2014 expectations, producing approximately 90,000 ounces in 2014. [unintelligible] production increased by [46%] over the third quarter.

In the quarter, work started on a ramp to reach near surface underground [unintelligible], and [unintelligible] is expected to produce approximately 58,000 ounces in 2014.

I will now turn the call over to Chuck.

Charles Main

Thank you, Ludovico. In general, the fourth quarter financial results delivered on expectations. Revenues for the fourth quarter were approximately $420 million, taking full year revenues to over $1.8 billion. We had adjusted earnings of over $36 million, or $0.05 per share, taking full year adjusted earnings to over $273 million, or $0.36 per share.

Operating cash flow, before changes in noncash working capital, was over $165 million, or $0.22 per share in the fourth quarter. This exceeds the cash flow generated in the second quarter, which better reflects the normalized level in the new gold price environment.

For the full year, we generated $707 million, or $0.94 per share, of operating cash flow, before changes in noncash working capital. Despite the continued downward pressure on commodity prices, we continue to focus on delivering bottom line growth in the quarter

We continue to maintain a conservative approach to protect and grow the strength of our balance sheet. At the end of the year, cash and available credit was approximately $830 million. This includes cash and equivalents of approximately $220 million.

Depreciation and amortization was $404 million for the year, and with the new operations coming onstream, we expect this to increase in 2014 to approximately $470 million. Corporate [G&A] was down $10 million from the prior year to $135 million, and this is down significantly from the original guidance of $155 million to $160 million. And we are expecting a similar level for 2014. This means zero increase for inflation. Inflation will exist, but our plan is to keep these expenditures completely flat year over year.

Exploration expense was $30 million for the full year, which is approximately half the amount for 2012, reflecting the reduction in exploration as part of our cost containment initiative. Total capital expenditure was approximately $1 billion. In 2014, our capital is expected to decline significantly.

Total capital is expected to be approximately $480 million, and this includes $320 million to $340 million sustaining and $150 million in expansionary. As our new cost structure stabilizes at a sustainably lower level, and expansionary capital levels are reduced, we expect continued balance sheet strength this year.

With the success of our 2013 cost containment initiative, we expect all-in sustaining cost to average $925 per kilo in 2014. We will continue to actively manage all expenditures, cash costs, all-in sustaining costs, including sustaining capital, and expansionary expenditures. In a volatile price environment, it is important to manage all the different types of expenditures.

We will continue the programs and constraints that we put in place during 2013. We will look for further cost reduction and improved efficiency in maintenance area, increase our focus to reduce our power costs, and improvements to our procurement pricing. We have a plan for 2014 that significantly reduces capital and exploration spending. All of these efforts will continue.

The income statement includes an impairment expense of $672 million, which on an after tax and after noncontrolling interest, is $536 million. This is consistent with our previous indication of not being more than 6% of total assets.

We perform impairment tests at least annually, and performed a review during the second quarter and concluded that an impairment was not necessary. An impairment review was carried out for the December 2013 year-end, using an assumed gold price of $1300 per ounce of gold and $3 per pound of copper.

The company will continue to monitor the valuation of its assets and the impact of changes in economic assumptions and mine plans on these valuations. It should be noted that positive changes to these long term assumptions and plans could lead to a reversal of these impairments up to the amount of the original impairment.

Many factors are considered in these evaluations. In addition to reductions in metal prices, other factors that could lead to impairment include increase in future operating costs, increases in future capital costs, reduction in the amount of recoverable reserves and resources, and negative changes in economic conditions, such as strengthening foreign exchange rates.

We have already discussed some of the capital [unintelligible] for the year, and I would now like to turn to the focus and strategy for financial management. We are committed to building on the progress to date by continuing to ensure the stability of our new, lower cost structure. We have achieved success with our cost containment initiatives, and will continue to look for additional opportunities for efficiencies to further reduce costs.

Through a cost contained structure, we can better detect and enhance margins and generate cash flow. It is important that as we generate cash flow, we continue a disciplined approach to capital spending. Diligence and prudence in capital spending is especially important in this current environment, and we are committed to ensuring discipline with our capital spending, to areas where the most sustainable value can be created.

And finally, we remain focused on maintaining our balance sheet strength. With that, I’ll now turn it over to Butch.

William (Butch) Wulftange

Thank you, Chuck. This morning, I’d like to present just a few of the exploration accomplishments made during 2013. At Chapada, a closer space 50 by 50 meter infill drill program identified and allowed geologists to follow several high grade trends within the copper, gold, mineral body, which added ounces and grade to the Corpo Sul deposit.

At El Penon, exploration drilling from surface and underground drill stations discovered two new important mineral bodies. The first, located between [Providencia and Dorada], are a series of three northwest trending link structures that range from less than a meter wide to plus two meters in true width that carry well above average grades in both gold and silver. Each of these structures are at least 400 meters along strike, and we’ve identified 100 meters of dip extend.

The second discovery is named Borde Oeste, which is located east of Cerro Martillo Complex and directly south of Bonanza. Again, the true widths are narrower than average for El Penon, but carry grades well exceeding the mines average grades and rivaling [unintelligible] Colorada numbers.

At Gualcamayo, the exploration teams located and continue to expand new sulfide mineralization beneath the QDD lower west and this mineralization has grown to well over 1 million ounces in size and remains open to depth on a long strike.

At Cerro Moro, the first holes of the year discovered a new mineral structure named Margarita, which geologists believe has similar characteristics to the Escondida structure, the principal host at Cerro Moro.

Turning the slide, maintaining and increasing the mineral resource base is as important as adding to and growing the reserve base. This slide shows proven and probable reserve growth, combined with measured and indicated resource growth since 2009. One can observe consistent year over year growth in both proven and probable, and importantly, measured and indicated resource categories.

Inferred mineral resources performance as shown alongside the P&P and M&I, is an extremely important component to the growth of both mineral resource and mineral reserve base. These are the initial ounces that are found by exploration, and upgrading with additional drilling to measured and indicated will provide further material for reserve categorization. This year, the reserve of inferred resource grew 32%.

Turning to the next slide, the exploration objectives for 2014 are clear. Focus on converting mineral resources to reserves. We have the inventory to do so, and will be aggressive on this front during the first half of the year.

Mine exploration programs with obvious initial success will receive additional funds to continue reserve expansion. We will be throttling back on grassroots exploration programs, but will maintain existing projects and indeed we will expand when the best opportunities present themselves.

I will now turn the call over to Darcy.

Darcy Marud

Thanks, Butch. The role of enterprise strategy, which I am now in, was created as an integrator of technical discipline. By leveraging the expertise of exploration, technical services, and operations at all of our operations and projects, we will better be able to focus on the corporate strategy of predictability, reliability, and cash flow.

This multidisciplinary approach will ensure that we evaluate all our options available at each operation and project and maximize production, but only through a complete analysis of all the underlying costs, risks, and opportunities. We will also use the same approach to evaluate other opportunities within Yamana, as well as external opportunities and evaluate these against our current portfolio of operations and projects as we look for ways to maximize our ability to generate value and free cash flow.

As a case in point, I’d like to review Chapada as a case study for this new approach. During the last three years, exploration has been successful in outlining two new but different near mine deposits in Suruca and Corpo Sul, and a new regional discovery in Arco Sul.

These new discoveries have resulted in resource and reserve growth, but also present a challenge in evaluating where to focus future development to efficiently maximize production and cash flow. With the integrated effort of exploration, technical services, and operations, we’re evaluating the best sequencing of development and operational processing enhancements, and refinement, to maximize the stable production of cash flow going forward.

We will expand this approach to other operations and projects as we look for the best approach to stay focused on increasing margins and cash flow. As part of this effort, we have refocused our attention on two very high grade, high margin deposits that are currently in the Yamana portfolio. I am, of course, referring to Cerro Moro and Suyai.

At this point, I’ll turn the call over to Trevor Mulroney, vice president, operations, Argentina, to discuss Cerro Moro, and Hernan Vera, vice president and country manager of Argentina, to discuss Suyai. Trevor?

Trevor Mulroney

Thank you, Darcy. At Cerro Moro, we are continuing to update the feasibility study, which we expect to complete during this year. The plan we are now contemplating requires a fairly low capital of approximately $150 million. The new concept involves the operations beginning with an open pit, while the underground is being developed for mining after the second year.

The process plan throughput is now expected to be below 750 tons per day, resulting in production of 150,000 gold equivalent ounces a year. In addition to the studies that have gone to the feasibility study, we are also doing some predevelopment work by way of production ready declines into one of the biggest ore bodies. This was an approach that was used at Mercedes, and provides better information on the ore body, allowing for better preparation and planning.

If all goes as we plan, Cerro Moro could be in production in 2016. At this point, I’ll hand it over to Hernan to discuss the Suyai project.

Hernan Vera

Thank you, Trevor. Suyai is a project that has been a part of Yamana for some time. This year, we will be applying for a [unintelligible] permit to move forward with the project. We are evaluating a new plan for Suyai that involves a full underground mine and the production of a concentrate to be sold, shipped, or processed offsite. This eliminates the need for cyanide, and will fall within existing regulations.

The capital [unintelligible] is expected to be approximately $220 million, with a throughput rate of 300 pounds per day. The expected annual production is approximately 150,000 ounces. Suyai is a high quality asset that has the potential to generate significant margin.

Now I will turn it back to Peter.

Peter Marrone

Hernan and Trevor, thank you very much. I would like to make a few comments on our dividend, and then some concluding comments before we open the call up to questions.

Ladies and gentlemen, we recognize the importance of cash distributions to our shareholders. I hope that our dividend declaration last night, which annualizes our dividend to $0.15 per share, demonstrates the importance we’ve placed on the dividend. The company is committed to the sustainability of dividends, which are in part determined by margins achieved, current and future cash flows, and the expectation that margins and cash flow are sustainable in the current or future metal price environments.

We had a rapid change in metal prices in the past year that has significantly compressed margins, notwithstanding the most successful efforts that we’ve ever taken to reduce costs. So the decision to declare the dividend at the current level takes into account the margin reduction since late 2012 because of lower metal prices. It takes into account the need to balance distributions to shareholders with the capital needs of highly prospective and high quality opportunities.

This year, the company will determine the development plan for Cerro Moro and Suyai, which look very promising. These are two high grade projects currently advancing through the company’s pipeline. Deploying capital toward projects that deliver future cash flow and increases in cash flow, we believe, is prudent when balanced with a fair dividend to shareholders.

I think the illustration on this slide is interesting, as it highlights what a dividend means from a gold production and sales point of view. We took our dividend at the prior level and said this, how many ounces of gold does it represent at our prevailing margin at the time, late 2012 being the time. What would that many ounces be worth today at our current margin, and how confident are we that we can preserve and then increase that margin?

So purely mathematically, if we took the number of ounces that were represented for the payment of the dividend at the margin at the time, the math would suggest that the margin of this time would support a dividend of just over $0.11. We then applied a qualitative test to it, and asked ourselves this question: Can we do better than what the margins are suggesting, to get to a higher level of dividend? And the conclusion that we reached is that we should be able to do so.

So the dividend that we declared last night is an annualized $0.15 per share, and we are confident that that is sustainable in the context of the current gold price environment and the current margin environment that we have, and we are confident being able to say to our shareholders that as we see our margins improve because of further efforts to reduce costs, further increases in metal prices, and both, then we will continue to increase the dividend above this baseline.

So to conclude, this is the balance: contain costs, spend wisely, and increase production and get increasing cash flow. Where there is a risk, lean toward certainty, generate sustainable cash flow, contain costs, because production growth which follows will be more reliable and better able to contribute significantly to cash flow.

So this is not about cost cutting in this company, it is about certainty and sustainability as a platform leading to further growth of production aimed at sustainable increases in cash flow. We recognize the importance of distributions to shareholders as part of value creation, although with an eye to margins, cash flow sustainability, and potential capital improvement investments that can further contribute over time to all of these goals.

And with that, ladies and gentlemen, I will open the call to questions.

Question-and-Answer Session

Operator

[Operator instructions.] Our first question is from Andrew Quail from Goldman Sachs.

Andrew Quail - Goldman Sachs

One on Argentina. Gualcamayo, obviously good grades last quarter, and you guys have got it for 170,000 ounces in ’14. Can you sort of break that down through what you expect compared to Q4 ’13 in terms of tonnage, grade, and recovery?

Ludovigo Costa

In terms of throughput at Gualcamayo this year, we expect to be in the range of almost 6 million tons, with a grade in terms of 1.4. And the overall recovery for the year on the [unintelligible] recovery, around 7%.

Andrew Quail - Goldman Sachs

And Peter maybe one for you, just on broader Argentina. Can you just talk further about, given how good Cerro Moro looks, what you guys are seeing on the economic front and maybe the political situation and how that’s impacting your decision making in the country?

Peter Marrone

It’s a good question, and it’s a question that requires a considerable amount of effort to go through. But I think as you’ve heard me say before, I think we need to look at the socioeconomic environment in a particular country, in the context not of what it was or what it is, but in the context of what one can anticipate it to become, based on actions that are being taken or in some cases actions that are not being taken.

I think it’s too easy to lump a country, particularly in an emerging market, into the basket of emerging market countries. Argentina distinguishes itself because it does not fit within the basket, and sometimes that’s for positive and sometimes for negative reasons. But what is happening in Argentina is not the result of a sucking out of investment in the country, because to say it in a simple way, investment was not made in the country over the course of the last 10 years.

This is not like Turkey or Brazil or other emerging markets. To some extent, the issues in Argentina socioeconomically are self-inflicted, but to a great extent, the country is doing some of the things that we believe are important for the ultimate improvement to its socioeconomic state. When we bought Cerro Moro, when we bought Extorre in 2012, that gave us Cerro Moro, we looked at it from the point of view of what do we believe will happen in the country?

Well, first of all, we bought something that already had priced into it the risk that people perceived in Argentina. So we bought something at a comparatively cheap price. This was a steal in many ways. Remember that we have 24 grams per ton, and this is a very high grade deposit, and it’s very forgiving of many things, not only technical things but also socioeconomic things. So we tried to protect the downside by buying something that was comparatively cheap.

We also said something in 2012 that I think has proved true by 2014. We thought that the current would devalue, it has done that. We thought that there would be a more deliberate effort to allow the currency to float to the U.S. dollar. It has done that. We thought ultimately that the challenge of the country would be to detain its inflation rate, and we believe that the country is taking the active steps to encourage or to at least take the steps to make sure that inflation ultimately comes down.

So the challenge of the country is not that the currency has devalued, because there’s been a suck out of investment. The challenge is that some of the policies of the past have come home to roost on a high inflation rate, and now they’re taking the steps to make sure that that inflation rate comes in line and is tamed.

But we’re encouraged by many things. We’re encouraged by the promotion of mining at a national and provincial level, the organizational efforts between national and provincial to encourage investment through mining. We’re encouraged by some of the challenges that we’re seeing in late 2012 and 2013 on importation of equipment and materials and supplies, some of that being liberated and becoming easier today.

We’re also encouraged by what’s happening with the efforts on the currency devaluation at roughly 8 pesos to the dollar, when a year ago it was 5.5 pesos to the dollar. This is an impressive devaluation that we think the government is taking active steps to make sure that they allow that currency to float.

The inflation rate is the next block and tackle that the country has to undertake, and they’ve taken the steps to do that. With its recent efforts to reinvigorate discussions with the Paris Club and the IMF, with its recent efforts to change its inflation index to an inflation index that is supported internationally, including by the IMF, and recent efforts to increase short term interest rates so that it encourages savings rather than consumption, we think that these are very positive steps going forward in terms of what happens socioeconomically in the country.

But this is also true: We believe in our safety nets. So we looked at Cerro Moro and said, this is a very forgiving deposit with a very high grade. And so from that perspective, do we have to spend $400 million in the context of these movements in the socioeconomic points, do we have to spend $400 million to get over 200,000 ounces, or can we afford to be more generous to our capital, spend $150 million or less, and allow us to be able to get 150,000 high quality ounces. Our conclusion is that that is the better way to deliver a risk-reward to our shareholders, and to deliver return to our shareholders.

And in the context of all these things that are taking place, and the positive and encouraging events, particularly for mining, we decided, after several years of study and investigation of Suyai as an underground project, where we would not be engaging in chemical processes for the recovery of gold, producing only a concentrate that fits squarely within its laws, within the local community requirements in each, we decided that this would be a good year to pursue Suyai for permitting.

That would be my summary of Argentina and what we’re doing there.

Andrew Quail - Goldman Sachs

One last question is on Brazil. Do you see that the growth from ’14 to ’15 - obviously you’ve given guidance in some of the slides - is that sort of coming, the majority, from the development projects in Brazil in ’15? And especially Ernesto/Pau-a-Pique, do you think that gets to where the company planned it months ago?

Peter Marrone

We see it coming from a number of different sources, from ’14 to ’15, and we’ll provide better indication of our expected production platform and costs for 2015 as the year unfolds. But we see it coming from the new development stage projects, not Ernesto/Pau-a-Pique, but the potential for Pilar and for C1 Santa Luz. We see it coming from Chapada and with Corpo Sul.

Of that $150 million of capital to which Chuck referred, a significant portion of that is being allocated to Chapada’s optimizations, and also the development of Corpo Sul. So we see that contributing positively to gold and copper production from 2015 onward. And what we’re evaluating now, then, is the further production growth that would come from Suyai and Cerro Moro.

One of the things that I think is important to highlight and to punctuate is that Trevor mentioned that we expect to be in production at Cerro Moro in 2016. Bear in mind that this is a comparatively easy plant. This is a comparatively easy mine to put into production. We’re talking about the first three to four years of an open pit operation, not an underground operation, that we believe there is sufficient competency locally and in country to be able to permit that to occur.

And simply put, we may be in production sooner than 2016. So what we’re doing is we’re evaluating what is the overall positive impact to production in 2015.

Operator

The following question is from Dan Rollins from RBC Capital Markets.

Dan Rollins - RBC Capital Markets

Just to start off, on Cerro Moro, the capital now is about $150 million, but on the call you mentioned that it will start off as an open pit. Is that $150 million just to get to initial production from the open pit? And if so, how much do you envision having to spend on underground development over the first two years?

Trevor Mulroney

It will be less than $150 million. But that provides for the build of the infrastructure and for the development of the open pit. The underground development would take place after the start of the mine, and has a cost of around $160 million, which would be in sustaining capital.

Dan Rollins - RBC Capital Markets

And then just moving on to Gualcamayo, there was noted in the reserve update that a significant portion of the reserve reduction came from reclassification of some of the material. I guess what’s happened here, and maybe you can confirm, this material that maybe was transitioned before, that could have been put on the lease pads, is probably not as [unintelligible] and really is relying on a mill being put in there? Is that correct?

Peter Marrone

That’s correct. The overwhelming majority of that roughly 690,000 ounces of move from reserve to resources is the underground areas. And with the continuing increase in the size of the resource, with the Rodado in particular, our conclusion is that we would be better off to evaluate that as proven and probable reserves once we have a study completed, which is planned for this year, once we have the study completed on the processing of that sulfide material. So you’ve got the point correctly.

Dan Rollins - RBC Capital Markets

Just in regard to the dividend, with it being cut, is the intent this year to start to sort of pay back some of the revolving credit facility you drew on this year? Sort of rebuild the balance sheet?

Peter Marrone

I’d like to address the question first from the second part to what you asked, which is rebuilding the balance sheet. When we bought Extorre in 2012, you might remember that what I had indicated, what we collectively had said, is we’ve spent roughly $450 million, the majority of which is with our cash.

And our intention was to rebuild the balance sheet from that point forward. I think it’s fair to say that certainly the reduction in gold price early last year, if not unprecedented, certainly was unexpected. And so what that does is it requires that in rebuilding the balance sheet one has to pick a longer period of time.

We’re taking that longer period of time, and so part of the dividend at the level that it is at is to help rebuild that balance sheet, not necessarily for debt repayment, because our debt repayment, the overwhelming majority of our debt, the overwhelming majority, is long term debt, and principal repayments are not due until 2017, 2018 to start, and then in the years to follow after that. So this is true long term debt.

I think the more important thing is to look at it from the point of view, as you said, rebuilding the balance sheet, bringing more cash onto that balance sheet and evaluating what to do with that cash. It would not necessarily be to reduce debt.

It might be to see how we fast track and accelerate Cerro Moro and Suyai, because once those feasibility studies are completed and some of the other work that we’re doing, predevelopment work that we’re doing, we may find ourselves in a position, particularly if I’m right about what’s happening socioeconomically in the country, we may find ourselves in a position where we want to take advantage of that devalued currency to allow capital investment into the country to build these very prospective and high grade projects.

So that’s really the reason for bringing the dividend to the level that it’s at. Again, I don’t mean to pontificate, but I think this is an important point also. And again, it’s just an approach that we’ve taken at a board level to review the dividend. We’re a gold producing company, and a gold producing company produces gold and sells gold. We monetize gold.

We look at it from the point of view of what does it mean to pay $198 million of dividend if we look at our margin, that’s really how we make our profit and cash flow, if we look at our margin in 2012, when we took the dividend to $0.26 per share, or $198 million in total, what’s the number of ounces to be able to sell in order to be able to monetize to that level of dividend.

And interestingly, and this is really where the rubber hits the road, the conclusion that we came to is that’s a number of ounces which came to about 260,000 ounces in this mockup analysis, based on the margins today, it’s worth a lot less. And so what we’re trying to do is we’re trying to say, if we looked at it from a gold equivalency point of view, we’re trying to be static on what we’re paying as a dividend. It’s just that the monetized value of that is a lot less.

Dan Rollins - RBC Capital Markets

And just one housecleaning question for me, and I’ll go. Just on the $150 million in growth capital, does that include capitalized operating costs at the three development projects before they reach commercial production? Or would that be in addition to the $150 million?

Charles Main

That would be included.

Operator

The following question is from Adam Graf from Cowen.

Adam Graf - Cowen & Company

A few questions regarding Argentina. Where do we stand now on the proposed tax on reserves in the Santa Cruz province? And also, taxes and royalties proposed in the province where Suyai is located?

Peter Marrone

The local legislature in the province of Santa Cruz passed a law that imposes a tax on reserves. The tax is on proven reserves. We don’t believe that it applies to probable reserves. And that is consistent with an approach that other mining companies that are in Santa Cruz have taken. There is a challenge being put forward on that law relating to the constitutionality of it.

Interestingly, in my view at least, more interesting than the legal challenges is the political will and the political events. Politically, the government is not pushing the enforcement of this. Indeed, they’re pushing an approach that would make the royalty more in line with what is happening in San Juan province, which is a truer royalty structure, roughly a 3% royalty.

So we are looking at it from the point of view of what does it require to comply with the law, what are the legal challenges constitutionally to that law, but also from the point of view of what is a cooperative approach that we believe the government would encourage that would allow us to be able to enter into arrangements for a royalty structure that is more consistent with San Juan and more consistent with what we see in other parts of the world. That’s what we think is happening with Santa Cruz’s royalty.

Adam Graf - Cowen & Company

And just refresh my memory, Suyai is located in San Juan?

Peter Marrone

No, Gualcamayo is in San Juan, Suyai is in Chubut province.

Adam Graf - Cowen & Company

And where do things stand there as far as their proposed taxes and royalties?

Peter Marrone

Well, the royalty structure would be similar to what would be done nationally, and that’s that 3% royalty. Again, if I could take a step back, the royalty structure, and that’s the constitutional issue with Santa Cruz, the royalty structure is nationally imposed and then provincially administered. So we believe that Chubut province will impose a royalty structure that is consistent with the national requirement of 3%, similar to what we have with Gualcamayo in San Juan province.

As you are also aware, Chubut province has a ban on open pit mining, and a ban on the use of cyanide for processing gold. What we’ve tried to do over the last several years, in conjunction with local community support and provincial support, is to develop a plan that is neither open pit nor requires the use of cyanide, which would mean that as our plan is now an underground operation, and with the processing of a concentrate that we would then overland transport abroad or to different facilities for processing, it means it would fit squarely within the requirements of the law.

So whereas in 2012 we looked at can the law be changed to accommodate a mining project such as this, in 2014 we developed a plan that fits squarely within the law, fit squarely within the requirements of the local community, and we believe positions that asset well for permitting this year.

Adam Graf - Cowen & Company

And Peter, my recollection is that, is it Chubut province, or maybe it was in Argentina in general, that has a tax on the export of concentrate?

Peter Marrone

Yes, it does. There’s a 10% tax on the export of concentrate. But part of what we’re evaluating with this very high grade gold concentrate is not to take it out of country, but to process it in country. And we have an optimal opportunity here which we’re evaluating this year on processing it at Cerro Moro.

Adam Graf - Cowen & Company

And would the national royalty then be collected for Suyai actually in Santa Cruz?

Peter Marrone

Very good question, and perhaps if I can turn to Hernan on his view on that.

Hernan Vera

In Santa Cruz, they are also collecting this 3% of mouth of mine royalty, and the new task is to increase the collection to the reserves. But once again, I repeat Peter’s words, this tax is for proven reserves. We now only have probable reserves. But in addition, most of the mining companies are anticipating that there are some challenges with constitutionality and so that is the same position [unintelligible] is taking.

Peter Marrone

I think to pick up on what Hernan was saying, if one assumes, and it is a very, very unfair assumption, because we do not believe that the government of Santa Cruz is intent on imposing the collection of a royalty based on proven reserves. They’re looking to do something different and the political will is to do something different.

Part of the reason for the imposition of that law is that the province of Santa Cruz is trying to balance its books. Since the passage of that law, the national government has provided more economic assistance to the province, the result of which is that the zeal and effort to try and impose that royalty tax on reserves has lessened, and lessened substantially. So we think this is a good opportunity to be having different types of discussions about what we would be prepared to do on royalties.

But interestingly, if it is a royalty based on proven reserves, then it would not apply to Suyai. And so that gives us, I think, an excellent discussion point with the government of Santa Cruz on what should be a good royalty structure, an agreement between us and the province, on the royalty structure that allows them to be able to collect something for the processing of Suyai ore without continuing to look to the enforcement of a law relating to reserves for royalty.

Adam Graf - Cowen & Company

And before we get off of Argentina, and I don’t want to monopolize my time here, just talking about the currency devaluation that has occurred there, how do you think that is going to impact your cost structure of your existing operations in Argentina versus the existing opposite impact of continued inflation?

Peter Marrone

We’re trying to leave it as hopefully a positive surprise on our capital costs, but when Trevor refers to $150 million, that was calculated at less than 6 pesos to the dollar, and it was also calculated based on the current inflation level. In other words, we’ve inflated the number that we’re seeing in the drafts of the feasibility study and the studies that are accumulating toward that feasibility study.

The number is substantially lower. What we’ve done is we’ve increased it to try to accommodate for the worst case scenario. But you’re quite right, with the devaluation of the currency, now at a level of approximately 8 pesos to the dollar, and as we see the taming of inflation, we might actually be coming out with a capital structure on Cerro Moro that is below and well below $150 million.

Adam Graf - Cowen & Company

And your operating assets in Argentina, they might see a cost per ton and a cost per ounce decrease coming forward?

Peter Marrone

That’s correct. We have budgeted in our budgets for our cost structure for the entire company, and for Gualcamayo in particular, that is our only producing asset in the country presently, we have budgeted currency that is at an inflated level to 8 pesos to the dollar. In other words, exchange rate is below 8 pesos to the dollar. But we should see some improvement to our cost structure with 8 pesos to the dollar.

What we’re evaluating is what is that impact on inflation? I don’t mean to dominate the time with an answer to this question, but Argentina is an important country to discuss, and the issues to discuss.

What we are considering is, when we look at an inflation rate in the country at the present level, when we see the currency devalue from 6 to 8 pesos to the dollar, is the inflation already baked into an expectation that the currency would go to 8 pesos to the dollar?

Our expectation is that over the intermediate and longer term, the answer is yes. There might be some short term upward movement in inflation, but we think that what the local marketplace was pricing, when the peso was 6 pesos to the dollar, in its inflation rate was an anticipation that the peso would devalue, and that devaluation would go to 8 pesos to the dollar.

Operator

The following question is from Alec Kodatsky from CIBC.

Alec Kodatsky - CIBC

Just curious what we might look forward to on the permitting process for Suyai going forward, when we might hear something? Just sort of a general refresher as to how prescriptive the process is and major milestones to watch for?

Peter Marrone

We’ve indicated that we intend to apply for permitting this year on a very conservative timetable that would mean that the permit would be issued by the middle of 2015.

Alec Kodatsky - CIBC

And I guess the second question, with respect to the new operations, just in terms of the outlook, I think you indicated for an [unintelligible] commissioning ending in Q2, and then for the other two, commissioning ending in Q3. And just curious how that relates to declaration of commercial production. The reason I ask the question is, if you look to Q4 performance in terms of output, clearly the run rates for 2014 are substantially higher. And I’m just trying to get a sense of when we should expect some of this material kicking in more aggressively. Is it skewed toward the back end of the year is essentially my question.

Peter Marrone

And the answer is, we should have said with more clarity that when we talked about the Q3 and Q2, what we should have said, to be fair, is that we expect the overwhelming majority of the production from C1 and from Pilar in particular to come in the second half of the year, rather than trying to pinpoint exactly when we would be in commercial production at each of those.

I think it’s important to highlight these points. At C1, we’re beginning to complete the transition and go into fresh ore. We will have a better view on recovery when the thickener has been installed, which is in April, and the regeneration furnace in April. So while we may be in commercial production as commercial production is defined, and as we’ve historically defined it, sooner than what we have indicated in our MD&A, the better view on the sustainability of production is that it will occur after these things are in place.

In the case of Pilar, it is about experience with equipment, equipment that is now at site. It’s about experience with mining high grade ore shoots, and making sure that we properly identify the number of ounces in those high grade ore shoots. So the better view on sustainability of production is after this is in place.

So as this is a process issue at Pilar on the mining, and on developing experience, commercial production may be sooner. But I think the way that, hopefully, you can look at this, is that the overwhelming majority of the commercial production will be coming in the second half of this year. Whether or not we’re in production at the beginning of Q2 or the end of Q2 or the start of Q3 is less important than when the majority of that production will be contributing to cash flow, which we anticipate in the second half.

Operator

The following question is from Patrick Chidley from HSBC.

Patrick Chidley - HSBC

Just a question back to Suyai, I’m afraid. The plan to go underground and create a concentrate, I thought that had been around for quite some time, and I’m wondering what’s changed on the ground there in the town of Esquel. Has there been any vote or any agreement among the local community to accept that plan?

Peter Marrone

Let me clarify. The first is that the underground plan has been around for some time. The second is that the idea of producing only a high grade gold concentrate or precious metals concentrate is more recent. Certainly over the course of the last year. And then it’s important to distinguish that taking something from concept and plan to making sure that the mine plant can support, making sure that we’ve looked at rock conditions, recoverability, making sure that we’ve done enough metallurgical work on the concentrate, that we’ve looked at the logistics of what to do with that concentrate, that’s something that has occurred more recently.

So those things are more recent, and in terms of the local community, I would say that nothing geopolitically has changed in the local community, other than what I would describe as the following things. One is we fit squarely within the requirements of what the local community has said they would like to see at a mining project. It is small scale, it is underground, and the use of certain chemicals for the recovery of gold is not contemplated. It fits squarely within the legal requirements.

And the other is that over the last several years, I think that the local community has come to recognize that they need to look at alternatives for investment with dwindling revenues coming from royalties on oil and gas. They need to look at alternatives, and we’ve seen a significant, perhaps negatively impressive, increase in the unemployment rate that has required many in the local community to say we need to rethink what is responsible mining.

And so we’re looking at that as an opportunity to work cooperatively with the local community, the province, and the national government, for the development of Suyai.

Patrick Chidley - HSBC

In terms of logistics, what sort of grade of concentrate are you aiming to generate in terms of gold grade? And how would you get that, and why would you take it all the way to Cerro Moro, rather than maybe take it to an industrial site on the coast?

Hernan Vera

The concentrate will be between 3 and 4 ounces per ton of [lead]. The option in Cerro Moro, this is one of the options. We also consider the alternative of sending to Gualcamayo. There are other alternatives, going by road up to some harbors in Santa Cruz. You know, there are many up there, [unintelligible], [unintelligible], and there are also some alternatives to identify in the smelting, inside of Argentina, in northeast Argentina, so we can also treat concentrate up there. This is the preliminary logistics we are thinking about.

Peter Marrone

We have not committed to taking the concentrate, although I think it’s important that we’re talking about over 3 ounces per ton. And forgive me, I heard your reaction to that. I think I heard the word “wow.” This is an impressive grade and concentrate. I think the important thing here is we’re looking at all options on then how to take that concentrate for the ultimate recovery of gold.

Taking it abroad is an option that is available to us, either across the Chilean border or to a coast, to a port, on the Argentine side. Those are options that are available to us. We will have to look at the economics of that.

As you are aware, we have to look at it from the point of view of what would be the payable gold at a smelter if we were to ship that concentrate overland and then ship it abroad. And the payable gold often is substantially below the amount of gold that is in concentrate, often in the range of 90% is payable gold rather than higher than that. So we’re looking at all of these options to see what delivers the optimal number of ounces of gold production that are attributable to us that we can monetize.

Presently, because of that very forgiving grade, in the concentrate, because of that very high grade, it looks as if the transport, the overland transport to either Gualcamayo or Cerro Moro, would be the optimal from an economics point of view. But these are things that we’ll evaluate this year.

Operator

The first question is from David Haughton from BMO Capital Markets.

David Haughton - BMO Capital Markets

An area that’s not been touched on, you’ve got a number of assets performing well. One that’s still a little bit of a laggard is Jacobina. Can you just give us some insight as to how that turnaround is going, well underneath the reserve grade. And I know that you’ve invested quite a bit on the development. Can you just give an update as to what to expect going forward?

Ludovigo Costa

Actually, you are right. The issue here that we see at Jacobina is to really improve the development of the [unintelligible]. Our focus for the years forward is to be on that. We are developed, as I said on the release, that we are focused on the development of this high grade area, that mainly came from [unintelligible]. But [unintelligible] in the other mines you have a sequence there. That’s why we are taking this time to really have a specific plan with a focus on development.

David Haughton - BMO Capital Markets

With that in mind, how much of the capex in your budget would be put toward Jacobina for 2014?

Ludovigo Costa

Actually, the development [unintelligible] including the sustaining, it’s the all-in cost, you know? But for 2014, we are planning to do something around 10,000 meters to 12,000 meters on development. In the years to follow, we intend to increase that to 15,000 meters.

David Haughton - BMO Capital Markets

And how does that translate into millions of dollars on an annual basis?

Ludovigo Costa

It’s around 3,000 per meter. That’s around $40 million per year, $50 million per year.

David Haughton - BMO Capital Markets

The other one is Gualcamayo. Currently the throughput rates are below your capacity. I know that you’ve got different ore sources coming in with QDD lower west contributing. Do you see the throughput getting up towards the 25,000 tons per day kind of level? What do you have in mind for throughput there?

Ludovigo Costa

Actually, as we are having high grade, and the ore came mainly from the underground, we are not expecting to increase the throughput on average that well. As I said, the throughput is going to be in the range of 6 to 7 million tons per year. And if you take 25,000 tons per year, that would be up to 9 million. But we are going to be in the 6 or 7 million per year.

David Haughton - BMO Capital Markets

But with a focus more upon the better grade material that you’re getting from the underground?

Ludovigo Costa

Yes, that’s right.

Peter Marrone

Just to clarify the answer to the question, $50 million to $60 million is over the next couple of years. In our budget we’re assuming, again, in sustaining capital. So when we refer to that 925 per ounce, we’re including it in there, is $30 million at Jacobina.

Operator

The following question is from Tanya Jakusconek from Scotiabank.

Tanya Jakusconek - Scotiabank

I just wanted to come to Chapada, on the gold reserves, and maybe just the philosophy, Peter, on how you approach your reserves. You did add quite a bit of tonnage at lower grade at Chapada on the gold only side. And I’m just wondering, when you looked at that, did you have a specific hurdle rate that you looked at in terms of did it have to meet cost of capital for it to move from the resource category to reserves? Or how’s your approach in terms of the movement of resources to reserves?

Peter Marrone

Yes to all of that. We looked at cost of capital. But what we do is we start with a blank slate in terms of what is the life of mine plan and build on that to, is there an improvement in probable reserves based on what we see as the cost structure going forward, what we’ve assumed as metal prices, and what is our historical experience in terms of processing and recovery? So we build the model from the bottom up on the determination of what would be classified as proven and probable reserves.

Tanya Jakusconek - Scotiabank

And would that also have your sustaining capital in there? So yes, it’s all your mine site costs, but then your sustaining capital, and then you have a hurdle rate above that to be classified as reserves?

Peter Marrone

Yes, we include sustaining in that, and we assume then a hurdle rate above that. Implicit, of course, in the hurdle rate, as you can appreciate, is what are we using as the metal price.

Tanya Jakusconek - Scotiabank

Understandably, yeah. I’m assuming it’s 950.

Peter Marrone

That’s correct.

Tanya Jakusconek - Scotiabank

And with the hurdle rates already be above your cost of capital?

Peter Marrone

Yes.

Tanya Jakusconek - Scotiabank

And then my second question is just on M&A. I know you’ve talked a lot about your two high grade development projects that you have. I just wondered how you’re thinking about M&A in this market, given the valuation of some of the other assets out there versus your internal opportunities. Maybe your philosophy on that?

Peter Marrone

I’m going to be a bit tongue in cheek in saying that we think about M&A a lot. And we really think about M&A a lot in the context of the current environment. But it has more often than not ended at the thought process and hasn’t gotten to the execution process, and in part because of what we think is impressive opportunities inside the company.

So part of what we’ve been doing is evaluating, as we’ve done in the past, using the internal benchmark to evaluate external opportunities and to determine where we’re better fit to deploy our capital.

And if we’re going to use our shares to buy something, not just cash, we look at it from the point of view of what’s the cost of doing that with our shares? It’s the equivalent of cash. So with that internal benchmark, we compare it to external opportunities.

Part of the philosophy, as you’ve heard me say before, is what we look for is something that is more a bolt-on rather than transformative. We look at the jurisdictional competency and relevance. Do we have an understanding of the jurisdiction? Preferably, does it have the sort of mining culture, pedigree, or background that allows us to be able to say we’ve got a confidence level in being able to get permitted, being able to develop the timeframe for that and then being able to operate?

But we also look at what I’ve described as “wheelhouse of competency.” We like something that fits more closely to what we’re already competent at being able to do. Again, similar to the approach that we took with the purchase of Extorre that brought us Cerro Moro. We were just coming off of a development of Mercedes and Cerro Moro will be very similar to Mercedes, certainly on processing. And yet at a multiple of the grade at Mercedes. And the similarity to El Penon.

So we look at those things, and then we look also at grade. Grade is the cure to all evils. It is the one thing that is important to focus on. So we look at things that improve our overall grade in the company.

Jurisdictionally, more broadly, we prefer the Americas rather than something that is outside of that, mostly because that’s where we think we can provide the best value-added. That’s the approach that we’ve taken to M&A.

Tanya Jakusconek - Scotiabank

And it appears from what you’re saying that you’re looking more at early stage development projects rather than producing assets?

Peter Marrone

I think you can take from what I said that we’re looking more at early stage or near development stage projects. I think part of the reason for that is because we can spend more of our effort in delivering value added. We have a lot of producing assets. It’s either a fix it situation or it is already priced into the share price. So from our point of view, it is something that would be in the second tier. That isn’t to say that we wouldn’t look to something that is producing, if we thought we could provide value-added that would allow us to be able to increase the production, reduce the costs, or both.

Operator

The first question is from Don MacLean from Paradigm Capital.

Don MacLean - Paradigm Capital

The three new small mines seem to be struggling to some extent, and you’ve given us guidance for 2014. Can you give us a sense of where you think the cash costs will settle out once you’re into production and through commissioning?

Peter Marrone

It’s a fair question. We’ve indicated what is our overall cost structure in the company. We have not given an indication of by mine. That’s consistent with what we have done in previous years. We get a few months or perhaps quarters under our belt before we’re in a better position to forecast what would be the cost structure.

With the opportunities and the optimizations that are planned for Pilar and C1, as we transition into the fresh ore, as we install the regeneration furnace, the thickener, all of which will occur in April, we will have a better sense of what the cost structure is at that point in time, and we’ll give a better indication of the marketplace, of the specific cost structure for that operation. The same will be true for Pilar.

As we garner more experience with the use of this smaller equipment, and do the development work into these higher grade ore chutes, we’ll be in a better position to say what the cost structure is.

Presently, the cost structure for C1 and for Pilar is above our average cost structure. It drives up our average cost structure. What we’re looking to do is see how we can bring that to our average cost structure. Presently, we’re above $1,000 per ounce all in. And by April, we think we’ll be in a better position to determine what would be the true cost structure going forward.

Don MacLean - Paradigm Capital

And so on timing, getting some sense of this, because we’re all kind of left out here. We’re trying to make projections about what the costs will be, as you know we have to do. Timing on maybe when you can get that guidance?

Peter Marrone

I think by the middle of the year, when we plan to be past the point of commercial production. I think by that point in time we should be at a cost structure that is in the range of $1,000 per ounce. That’s a very broad brush assumption at this point, but I think it’ s one that you should credibly look at, because that is our objective and our budget plan.

Operator

That is all the time we have for questions today. I would like to return the meeting to Mr. Peter Marrone.

Peter Marrone

Ladies and gentlemen, thank you for making the time for the quality and the quantity of questions. And we look forward to meeting all of you, of course, across our travels as we engage in some of our marketing efforts. And we look forward to our next shareholder meeting and we look forward to seeing everyone at our shareholder meeting on April 30. Thank you.

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