Yamana Gold's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.30.14 | About: Yamana Gold (AUY)

Yamana Gold Inc. (NYSE:AUY)

Q1 2014 Earnings Conference Call

April 30, 2014 8:30 AM ET

Executives

Lisa Doddridge – VP, IR and Corporate Communications

Peter Marrone – Chairman and CEO

Ludovico Costa – President and COO

Butch Wulftange – VP, Resources & Reserves and Technical Compliance

Darcy Marud – SVP, Exploration

Charles Main – EVP, Finance and Chief Financial Officer

Hernan Vera – VP, Country Manager, Argentina

Trevor Mulroney – VP, Operations, Argentina

Analysts

Andrew Quail – Goldman Sachs

Dan Rollins – RBC Capital Markets

Patrick Chidley – HSBC

Don MacLean – Paradigm Capital

James Bender – Scotiabank

Steve Parsons – National Bank Financial

Anita Soni – Credit Suisse

Pawel Rajszel – Veritas Investment

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to Yamana Gold’s Q1 2014 financial results conference call and webcast. [Operator instructions]. I will now turn the call over to Ms. Lisa Doddridge, Vice President, Corporate Communications and Investor Relations.

Lisa Doddridge

Thank you 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 first quarter 2014 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 after 12 o’clock PM Eastern Time. Replay information and the presentation slides accompanying this conference call and webcast are available on Yamana’s website at yamana.com.

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

Peter Marrone

Ladies and gentlemen, good morning. I will provide some introductory comments before passing the call over to Ludovico Costa who is our Chief Operations Officer on our operations; Chuck Main, our Chief Financial Officer on the financial performance of the company; Butch Wulftange who is our Senior Vice President of Exploration on our exploration effort; and finally Darcy Marud who is our Executive Vice President of Enterprise Strategy on certain strategic directions of the company.

As a beginning point, you’ve heard me said before that we try to take a balanced approach and balance across many things. At the bottom of this page of the presentation, we’ve referred to production growth which is important, but it cannot be at the expense of costs in cash flow. Our focus is on cash flow, but we try to create that balance between production and the generation to the bottom line. Growth of the bottom line is as important as the growth of the top line.

This is our first quarter. Our first quarter is always our weakest quarter. We recognize that for many, many years, and we anticipate that as the quarters continue to progress, we will begin to demonstrate the strength and vitality of our operations both on the production side and the cost side, and ultimately leading to that cash flow that we anticipate.

We try to maintain a discipline on capital and cost. We try to maximise investments and returns. It is about risk reward. You saw overnight our feasibility study for our Cerro Moro project. We try to balance as adequately as possible the opportunity that Cerro Moro brings with risk mitigating capital and trying to deliver, which we succeeded with our feasibility study, a project that will be recorded and memorialised as one of the lowest cost-producing assets producing gold mines, precious metal mines in the industry. Ultimately, it leads to value creation and our intention continues to be that as we generate free cash flow, we will make distributions and continue to make greater distributions to our shareholders.

In terms of the performance in the first quarter, the production is in line with our budget for our producing mines and that includes Pilar. We had an underperformance of C1 Santa Luz, but overall we were in line with our budget. We apply a reliability factor as you are aware of 5%.

We indicated earlier this year that we have a budget expectation of just over 1.1 million ounces, and we provide a reliability factor to that, and that reliability factor is approximately 5% or 70,000 ounces. We’re on track with that. So, the production is in line with our budget and the costs remain in line with our budget as well. This as I said is our weakest quarter, it always is, and we anticipate being able to demonstrate that vitality of our assets as the months and quarters progress.

We have stable and improving production initially, and we expect that to come from the core initially, and by the year-end by all of our assets. And we have an expectation that C1 Santa Luz and Pilar will reach commercial production in the third quarter. We have not deviated from that, and we continue to anticipate that that will be true. In terms of those core assets, this is important also. We expect that they contribute 70% of our production in 2014, but the core assets also contribute more to the generation of cash flow closer to 90%. And if we look at 2013 as an example, which we think will be emulated in 2014, the core assets delivered 80% of our production at 98% of our cash flow, and again we expect that contribution at a minimum to be consistent in 2014 and likely better.

If we look at the 2014 production, we will anticipate a stronger second half. Q1 production, as I mentioned, is within budget expectations. But if we look at the year to date and one month further into the year after the first quarter, the April production was 105,000 ounces. The second quarter average monthly production is planned to be 16% of an increase over the Q1 average monthly production. This is normal mine sequencing that gets as higher grades at almost all of our mines that are now in operation, and we have a clear line of sight on production from the new mines and getting those to commercial production.

We do anticipate a stronger second half than the first half that is almost always true with our company, but it’s important to say that there is a certainty or a near certainty to that expectation as a result of the normal mine sequencing.

If we look at cash flow then, moving into cash flow, in 2013 we said some something. We had a precipitous drop in metal prices in the first quarter of last year, and we indicated in the second quarter that we were going to affect certain cost mitigation programs, and we were successful by end of year getting that. And by end of year, we also indicated that we would establish a baseline for cash flow, and in the second quarter of last year, we had a cash flow of $0.20 per share, and the average for the quarters to follow was $0.22 per share with a peak of $0.24 per share.

Cash flow is expected to increase over the remainder of 2014. We expect our capital to decline. Q2 is the last of the big capital spends. Even with the modest amount of capital that we have this year, our exploration spending will decline. We’ll front-end load our CapEx in 2014.

Cash costs are contained and stabilizing and other costs continue at the newly established lower levels. We will be increasing production, so when we look at cash flow in 2014, we expect to exceed that baseline average cash flow that we established in 2013.

Now in the first quarter, we generated $94 million of cash flow before changes in working capital, and that represents $0.12 per share, but we anticipate that that will begin to increase.

The quarterly cash flow, it's also important to mention that this quarterly cash flow, with the metal prices that were consistent with our budget, were in line with our budget, and in deed we were above budget by some amount, so we're in good shape to be able to meet that baseline expectation and that increasing cash flows in the quarters to follow.

Let me conclude this front-end of the presentation with a few thoughts on our acquisition strategy and again that balanced approach. On April 16, we announced, along with our partner Agnico Eagle, we purchased jointly of Osisko Mining for total of a portion transaction value of approximately just under $1.7 billion. We will jointly own then the Canadian Malartic Mine, the Kirkland Lake assets, and certain other assets.

We've always said that we like mining-friendly jurisdictions with proven mining competencies, and we can certainly pick the box that this transaction meets that hurdle. We're focused on mid-sized projects and acquisitions, and the addition of another 300,000 ounces initially of annual production should take us a long way toward meeting that objective.

We will maintain the low cost structure of this company. It's consistent with our current cost structure. It will allow us to maximize the sustainable cash flow of the company, and it will immediately contribute to cash flow and to free cash flow. It’s conventional operations with an open pit with conventional processing, and we believe that we have the potential to enhance value through exploration, and we believe that that is true not only at the Canadian Malartic Mine but also at the Kirkland Lake advanced exploration properties.

Ladies and gentlemen, this transaction is accretive across all key per share metrics. It provides robust return with opportunities to further increase those returns. It increases our sustainable production level while maintaining and lowering our cost structure, it provides another cornerstone asset, and it is expected to contribute significantly to cash flow. It positively contributes to mineral reserves and resources with a 4.7 million ounce increase in our proven and probable reserves that represents one-half of the Canadian Malartic reserves, and it is accretive across all key pressure metrics; and with that as an introduction, let me pass you to Ludovico for our operations.

Ludovico Costa

Thank you, Peter. Production in the first quarter was in line with budgets with 271,908 gold equivalent ounces consisting of 228,371 ounces of gold and 2.2 million ounces of silver. Copper production for the quarter was 27.6 million pounds. Cash costs were $450 per ounce on a by-product basis and $640 per ounce on a co-product basis. All-in sustained cash flows were $820 per ounce on a by-product basis and $975 per ounce on a co-product basis.

Costs are expected to decrease over the year. We expect our full-year average all-in sustained costs to be in line with the guidance. Our operations in Chile and Mexico continued to deliver. El Penon exceeded budget per books for the first quarter. The lower feed grades were consistent with mine plan and are expected to improve in the second half of the year.

At Minera Florida, cash flow continues to decline and were 15% lower than first quarter last year. Cost improvement initiatives that began in 2013 are continuing. Their sales performed as expected in the quarter. Rates are expected to improve in the second half of the year.

Our existing operations at Brazil delivered on expectations in the quarter despite the heavier than normal rainy season in some regions.

At Chapada, production was consistent with expectations. Reduced (inaudible) process and installation of the in-pitch crusher is expected to improve throughput throughout the year. The in-pitch crusher will be commissioned by the end of the second quarter.

Corpo Sul is expected to begin operations in the third quarter contributing to their higher grades that are expected in the second half of the year.

Jacobina has continued to improve, and the April production increased to approximately 6,000 ounces which is 1,000 ounces higher than the average in Q1. Oversight for Jacobina is now being provided by our Chilean management, who has considerable underground experience and continuing to intermediate a long-term plan to improve the progress. The initial benefits are expected by the third quarter of this year.

Fazenda Brasileiro was (inaudible), with several initiatives underway to meet the budgeted production levels.

Our new operation in (inaudible) at Pilar, production in the first quarter increased by 13% over the fourth quarter of last year demonstrating further improvement as ramp up continues. New low profile equipment’s improved dilution and productivity is now in use and is expected to be fully operational in May.

Production of ore at Caiamar is ramping up and the development of the Maria Lazarus continues. Completion of commissioning is on track for Q3. Annual production has a potential to increase to 100,000 ounces.

C1 continues as expected. Processing improvements include the introduction of a new thickener and a regeneration kiln (inaudible). These initiatives are expected to significantly improve recoveries beginning in the second quarter. C1 is on track to complete commissioning in Q3. For the longer term, the company plans to install a roaster that would improve recovery rates over 90%. As a result, annual production would increase to 120,000 ounces or more.

At Gualcamayo, production for the quarter increased 28% over the first quarter of 2013, and 10% over the fourth quarter of 2013. High grades were as expected with Amelia Ines (inaudible) and QDD Lower West underground contributing. April production was a record of approximately 20,000 ounces and positioned Gualcamayo to meet budget expectations.

We are on track for budget production of 1.4 million ounces as we expect to continue to deliver on production growth throughout 2014. Total production for the first four months of the year was approximately 380,000 ounces. The trend of increasing production is expected to continue with an average monthly production for the second quarter expected to be 16% higher than the average monthly production for the first quarter.

The overall production, increased outcome, (inaudible) improved grades and production is expected at the El Penon, Chapada, Mercedes, and Jacobina.

I will now turn the call over to Charles.

Charles Main

Thank you Ludovico. In general, the first quarter financial results delivered as we expected according to our budget. Revenues for the first quarter were approximately $354 million. We had adjusted earnings of approximately $12 million or $0.02 per share. Operating cash flow was $94 million or $0.12 per share for the quarter. As Peter has already mentioned, we expect our cash flow for the year to meet or exceed our $0.20 baseline average quarterly cash flow level as production increases and costs come down throughout the rest of the year.

We successfully executed on our plan to contain costs in 2013 and establish some sustainable lower cost structure. A co-product and by-product all-in sustaining cost figures are consistent with the new cost structure as both were low at lower levels than the first quarter of 2013. Costs are expected to decline over the year similar to the quarterly trend we saw last year and given our expectation of increased production. All-in sustaining costs for 2014 are expected to be below from average below $925 per GEO on a co-product basis and $850 per GEO on a by-product basis. We are focused on flexibility and liquidity as we continue to maintain and strengthen our balance sheet. At the end of the quarter, cash and available credit was approximately $920 million. This includes cash and equivalents of approximately $210million.

During the quarter, we increased our borrowing capacity under our revolving line of credit from $750 million to $1 billion. In addition, in April, we received commitments for up to an additional $750 million acquisition facility. The terms and the covenants of this facility are substantially the same as the existing revolver and are subject to the Osisko acquisition.

We did borrow under our facility to purchase an initial share position in Osisko. Depletion, depreciation and amortization was $112 million for the quarter. Corporate G&A was down 14% from the first quarter 2013 to $31 million, and we expect to continue G&A at current levels as a result of the cost containment initiatives that we undertook during 2013.

Exploration expense was approximately $5 million for the quarter, which is roughly $2 million less than the first quarter 2013 exploration program as longer term targets have been met and the focus on Greenfield Exploration has been reduced.

Total capital spend in the quarter was $146 million. This represents a 39% decrease from the first quarter 2013 levels. In the first quarter, capital spending was higher than we expect for the rest of the year as we achieved commercial production at our development projects. This will lead to an increase in cash balance through the rest of the year. I'll now turn the call to Butch.

Butch Wulftange

Thank you Chuck. Good morning. Today, I would like to briefly outline the key objectives of Yamana’s 2014 exploration program. The $70 million exploration budget will focus on upgrading and converting the 2013 mineral resource gains to reserve status.

Exploration programs underway at El Penon, Minera Florida, Mercedes, and Gualcamayo are returning good results that will support the resource to reserve conversion process that occurs during the second half of the year.

The $70 million exploration budget will support discovery of new high quality ounces that are existing in operation such as Chapada and Cerro Moro and all of the properties previously mentioned. An underlying theme to all our efforts is to do more with less. We are already seeing the benefit from this goal at El Penon where our gold company has developed through trial and error process on our current drilling program soon to be a patented system that allows for completing straight holes that's greatly minimized down hole deviation. This system allows our geologists to hit the target on the first attempt and greatly avoid need to re-drill a target due to excess deviation.

Yearly 2014 exploration focus involves drilling, in-fill drilling at El Penon for resource to reserve conversion and limited exploration drilling, which will dominate our efforts in the second half of the year.

The drill program at Gualcamayo began the year with the goal of expanding the Rodado sulphide [indiscernible] and is now tasked with collecting fresh sulphide samples for metallurgical testing to complete it later this year.

At Chapada, early work focused on geologic mapping along with soil and chip sampling to develop new targets to test. Our goal is to find another significant mineral body with insight of the head frame. Exploration will continue in-fill and extension work on Corpo Sul during the year as well.

At Mercedes, our geologists are drilling to extend the Mercedes to Marianas mineral trend, and we'll complete and in-fill program which will convert resources to reserves and help complete the goal of reserve replacement and growth.

At Pilar, mine exploration -- mine and exploration geologists have collaborated to define high-grade and sometimes wider mineral shoots that are currently being drilled to provide higher quality ounces to the plant and will add new ounces to the life of mine profile.

I now would like to turn the presentation over to Darcy.

Darcy Marud

Thank you, Butch. A brief summary of the role of enterprise strategy in Yamana. Enterprise strategy is a new role that was created at the start of the year. It is basically an integrator of technical disciplines that will help us leverage our combined expertise as an organization to better focus on the corporate strategy or creating value for our shareholders through capital cost containment and the focus on high value, high return projects. It will ensure that value maximization occurs from the development of a property right through to operations.

Yesterday, we released the results of a recently completed feasibility study for our Cerro Moro project located in the province of Santa Cruz, Argentina. The study contemplates an initial open pit mine that after three years of production will transition into an underground operation. During phase-1 of the first year, three years of production, ore will be crushed, ground and then recovered in a gravity circuit. Phase-2 of the plant construction will commence in the third year and will add a flotation to Moro core plant to further enhance recovery rates. The estimated capital investment per construction is $126 million and this is based on current cost realities in Argentina that have been verified by our Argentina operations.

The current CapEx will be fine tuned in the short term as we are about to commence the detailed engineering of the processing plant and [indiscernible] structure. It is our intention to build Cerro Moro on EPCM basis and we are currently in negotiations with the well respected contract with current and significant Argentine mine construction experience.

Sustaining capital is estimated at $174 million during the ten-year mine life and the most significant part of this is $133 million for underground mine development. As currently designed Cerro Moro will produce approximately 150,000 gold equivalent ounces annually during its ten-year mine life with estimated cash costs of only $353 per gold equivalent an ounce and all in sustaining cash cost of $525 per GEO.

Cerro Moro is a high grade, high return project and the phased approach to construction and development is a disciplined approach to capital allocation that will focus on grade and short term capital return and enhancement.

We continue to evaluate options for the advancement of another high-grade project in Chubut, Argentina, which is of course Suyai. Suyai is very similar to Mercedes, El Penon and Cerro Moro. All are high grade vein deposits that have demonstrated to be low capital investment projects that returns superlative value.

Currently, Yamana is evaluating an underground operation with mining processing rates of approximately 1000 tons to 1200 tons per day. Yearly capital estimate for a project of this scale based on the work that we currently completed at Cerro Moro, would be approximately $220 million.

Annual production rates, given the current grades, recoveries and capacity of the proposed processing facility would produce approximately 150,000 ounces of gold per year. Yamana is currently working on an environmental impact statement that would allow for the re-commencements of activities at Suyai.

During the last two years Yamana has been evaluating strategies to diversify its jurisdictional risk in the Americas. The (inaudible) focuses during that time has been in Canada. We have evaluated numerous development and production opportunities, but none of these opportunities have ever come close to what we now have achieved at Canadian market.

With the arrangement between Yamana and Agnico Eagle to acquire Osisko, Yamana will own 50% of Canada's largest gold mine. Current production at this facility is approximately 600,000 ounces per year, based on daily production rates of 55,000 tonnes per day. The Yamana share of production will be approximately 300,000 ounces per year and life of mine all-in sustaining cost are estimated to be about $800 per ounce.

The Canadian Malartic Mine will significantly increase Yamana's 2014 production at all and sustaining costs that are comparable to Yamana's already low costs. The Canadian Malartic mine will also significantly contribute to both short and long term cash flow given its volume and low cost profile and will become Yamana's second largest contributor to cash flow after El Penon.

On a resource and reserve basis, proven and probable reserves for Yamana will increase by 25% while M&I resources will increase by approximately 27%. There is still additional room in Canadian Malartic to increase the reserve and resource base as current exploration work is being completed at Odyssey, located at four-and-a-half kilometres from the current mine, is confirmation of this exploration plant.

The Odyssey deposit is currently being outlined by drilling, but initial drill results can indicate a significant underground deposit with grades currently in excess of 2 grams per tonne.

Canadian malartic is not the only quality asset in the Osisko portfolio. At Kirkman Lake significant measured, indicated and referred resources exist at the Upper Beaver and several other historic satellite deposits.

Current exploration completed by Osisko’s outline, significant near service mineralization at Canadian Malartic or at Canadian Kirkman located approximately 25 kilometres west of the Upper Beaver zone. This mineralization is similar in style to that at Canadian Malartic and is an exciting new discovery that was made utilizing the same exploration model as used at Canadian Malartic in the past.

The Kirkman Lake Project comprises 240 square kilometres and mostly contiguous mining claims that provides a large base for future exploration and current exploration results both by offering increasing the currently known resource base. At Hammond Reef, an environmental impact statement is currently being completed. Once done this project will be evaluated by Yamana and Agnico Eagle to determine the best path forward for this large low-grade deposit.

At this point I will turn the call back to Mr. Peter Marrone.

Peter Marrone

Ladies and gentlemen, to conclude then Q1 production was in line with budget on our core assets in particular. Costs remain low and in line with budget. Normal mine sequencing for producing mines will increase production. We're heading into commercial production with our new mines and in the meantime we've established a couple of new cornerstone mines and properties, initially with Cerro Moro and Canadian Malartic and over time Suyai and Kirkman Lake.

As Ludovico mentioned, our budget is 1.4 million ounces and we apply our reliability, tolerance of 5% to that or 70,000 ounces. So looking at then that range we expect to produce towards 1.4 million ounces and between 1.2 or 1.3 million ounces and 1.4 million ounces at a cost of $850 per ounce all in. And if we assume the current metal prices and we're on track for strong cash flow above our established baseline from last year and from Q2 onward, we now head toward our undeniable goal of generating significant free cash flow in this company.

So to conclude the importance of growth top-line and bottom-line, that has been an unwavering goal and approach of ours and that will continue throughout this year. The importance of making sure that we deliver good returns, that we are disciplined, on capital and cost. As Chuck mentioned, we front-end load the capital this year but it diminishes significantly into the balance of the year. And we hope that you will agree with us that we're on track independently of the recently announced acquisition and headed toward 1.4 million ounces and then 1.5 million ounces, adding to which would be, that robust delivery of production, high quality production coming from Cerro Moro and ultimately of course the contribution of that to our cash flow and with that ladies and gentlemen, if we can open up the call to questions.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines (operator instructions). The first question is from Andrew Quail from Goldman Sachs.

Andrew Quail – Goldman Sachs

Morning guys, thank you very much for the update. I have a couple of questions. First one is, of the 70,000 ounces you guys have flagged, what would the -- and it looks like the majority is from the development assets. Can you give some sort of break up where that, where the majority of the 70 of the development assets would be in Brazil?

Peter Marrone

Yes, we would apportion it almost equally, at least a majority of it, of about 20,000 a piece for each of the three assets that include Ernesto/Pau-a-Pique, Pilar and C1 Santa Luz. The balance was in relation to Gualcamayo because of the ramp up of its underground. We are beginning to come to the conclusion that that reliability begins to continuously improve along Gualcamayo, considering in particular its production exceeding budget in the first quarter and the very robust production in April of 20,000 ounces, which is a record for Gualcamayo.

Andrew Quail – Goldman Sachs

Thanks. The second question is obviously on April, looks like a strong month, an improvement specially Gualcamayo. If we look at El Penon and the improving grades. Are we sort of getting back to more of a 2013 grade or something between like Q1 and 2013?

Ludovico Costa

Andrew, it is Ludovico here. Actually in Penon we are going to see improving grades throughout the quarters. The first quarter was the lowest grades that we have and we are going to see basically the same average that we saw in 2013 because we are going to increase the grades throughout the year.

Andrew Quail – Goldman Sachs

Okay, so it's steadily improving from Q1 all the way through to Q4?

Ludovico Costa

Yes, that's right.

Peter Marrone

And I have one point to clarify is that and we tried to say this in our MD&A. We processed more material from Pampa Augusta Victoria, which is a satellite open-pit deposit in Q1. That provided us with higher silver grade, but lower gold grade and that's why the grade was lower in the first quarter then you would have seen last year. That isn’t to say in other words that the grades coming from the other areas of mining, the other ore bodies at El Penon are impacted. It was just a sequencing of providing some of that material coming from that open pit.

Andrew Quail – Goldman Sachs

Yes, right. And last question is that Cerro Moro, looks like the economics –were very strong. Peter, how much of emphasis do you put on sort of this asset being in Argentina and that comes down sort of the construction decision?

Peter Marrone

Yes, I would say that it goes back to what I said at the beginning of this presentation, which is about risk reward and making sure that we mitigate risk and maximize reward and opportunity. You've heard me say now for several years that I believe that the socioeconomic environment in Argentina continuously improves. We said last year that we thought that the peso would devalue and there would be efforts undertaken to contain inflation. The peso has devalued from about 5 or 5.5 when we first announced our study. Our initial study for Cerro Moro was 5.5 or now at 8 pesos to the dollar. So that devaluation has occurred and efforts to contain inflation continue. They will take time to get to a result. What you've heard me say before and the challenge with Argentina is its inflation and the containment of inflation. The data that you have in front of you includes our socioeconomic impacts of Argentina. We think over the course of 2015-2016, certainly by the time when production, much of the socioeconomic issue that people point to will not be there anymore. They will have been dealt with. But in the meantime we think that this is viable and a very robust project, even in the context of that socioeconomic environment.

I'm asked the question would you develop Cerro Moro in light of what's happening in Argentina and the answer is an unequivocal, yes, because we've absorbed all of that socioeconomic impact into the study and the conclusion is it delivers an impressive, very impressive and robust return and very low cost structure. Who could imagine that in today's world including sustaining capital for that underground mine development, we would be able to produce every ounce of gold to $530 to $535 per ounce. So, we think that there's only room for improvement as we look to detailed engineering, possible optimizations, new discoveries that our exploration team will make and in the context of a socioeconomic environment it will improve.

Andrew Quail – Goldman Sachs

Thanks very much, Peter.

Operator

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

Dan Rollins – RBC Capital Markets

Yes, thanks very much. Peter, just maybe staying on Cerro Moro. Could you maybe give an indication on what the after-tax IR and NPV of the project were, just given the technical report has not yet been filed?

Peter Marrone

Yes, we estimate that if we assume $1300 goal, I think that's the number that had been used for the purposes of this return. We estimate a return that is in the range of 42% to 45% after tax.

Dan Rollins – RBC Capital Markets

Perfect, and maybe Darcy, just going through the numbers, I think maybe it has to do with the addition in recycling of the tailings, but the gold equivalent reserve for the project -- is just over 24 gram a tonne, but the life of mine number used and shown in the table is 16.5. Could you give me a little bit of color on the discrepancy there?

Darcy Marud

I think you're partially right there. Some of that is the recycling of the tailing after year 3 once the Merrill-Crowe is installed. But right now we're showing 1:3 of an average cycle grade of 23 grams per tonne. That's going to fall back as we go to the underground mines of about 15 grams per tonne. So if you do the math, that's how we get to that 16-and-a-half.

Dan Rollins – RBC Capital Markets

Okay. So is the current reserve, what this model is based on or is there further dilution in there or only a bit?

Darcy Marud

There is a dilution added in there for mining as well.

Dan Rollins – RBC Capital Markets

Okay perfect, and then just with respect to the cost. Can you confirm if third party royalties are included in your costs as well as mining specific duties enclosed by the Argentina (inaudible) province?

Darcy Marud

They are all included Dan.

Dan Rollins – RBC Capital Markets

Okay, perfect. Peter, maybe just on another topic, Ernesto power peak, it's good to see that you’re looking at divesting that asset. You know there's sort of two different comments made, one in the MD&A, one in the press release. The press release states the recovery of your investment, the MD&A, the recovery of the debts. Could you sort of clarify which is it and how much you're looking to recover potentially?

Darcy Marud

Well, we apologize for the lack of clarity in the words and the confusion between the two. But the good news, however, is that it is the same. We've invested into Ernesto-Pau-a-Pique through inter-corporate loans, and so the amount of investment is the amount of the debt.

Dan Rollins – RBC Capital Markets

Okay. And roughly, do we -- do you know what that level is right now?

Darcy Marud

Yes, we wrote the asset down at the beginning of the year as you might recollect. So we're carrying the value at about $150 million.

Dan Rollins – RBC Capital Markets

Okay. Perfect. And as the end game, just to take an equity stake, in this like Alumbrera or is the end game to completely divest?

Darcy Marud

The end game is not to be distracted by a mine that should produce no more than 55,000 to 60,000 ounces per year in light of the other cornerstones that we have in the company that not only produce more but also generate significantly more cash flow to the company. So our intention is to look at this from the point of view of returning our investment. And then we believe that there's an interest here, a significant interest amongst various parties that really goes to the exploration potential of that area and the exploration potential of Ernesto-Pau-a-Pique.

So we would not be interested in that, other than to the tune of our 49%. So our intention would be to say that we would go through a transition period, we would manage it through that transition period, we would try to maximize the returns to us in terms of that investment or the debt as we mentioned, and then ultimately just look at it from the point of view of a more passive partner where someone else would engage in the exploration effort or we believe at least that that's they would intend to do. We would remain with our 49%.

Dan Rollins – RBC Capital Markets

Okay. And then maybe just one last quick question from me. Pilar and targeted production level of 100,000 ounces, is that based on Pilar alone or does that include Maria Lazarus and Caiamar?

Darcy Marud

Would that include Maria Lazarus and Caiamar? Yes.

Dan Rollins – RBC Capital Markets

Okay. Thank you.

Operator

Thank you. The next question is from Patrick Chidley from HSBC. Please go ahead.

Patrick Chidley – HSBC

Yes, good morning everybody. Just a question on the three projects, obviously Ernesto-Pau-a-Pique has been covered there somewhat and I guess the understanding would be that you're going to sell 50% and -- would you get your return back from selling the 50%? That's the first question.

Peter Marrone

Well, if we look at what we believe is the value of that asset, we believe that the value of the asset presently not including the exploration potential as I mentioned is not more than our investment. And so if you look at it from that perspective, our structure would be to recapture that investment through the payment of these loans progressively overtime.

So in terms of the sale of the 50% of the 51%, that would be at a very modest amount. It would be probably at a nominal amount because most of the value presently in the asset is carried in the carrying value that we would expect it to be repaid.

Patrick Chidley – HSBC

Got it. Okay, so overtime. And then Pilar, you've talked about introducing this low profile mining equipment. As a new part of the plan, you've talked about focusing on basically shoots, high grade shoots. Does that mean to say that some of the -- what's in the reserve today is in between those shoots? And therefore, is that economic?

Peter Marrone

Well, let me begin to address that and I'll pass it to Ludovico with any supplement in terms of the low profile equipment. The low profile equipment was a plan in early 2013. We were met with the challenges in 2013 of the delivery of that equipment. And while it was, as you might recollect, initially planned for the third quarter and then the fourth quarter last year, it only began to arrive at site in February, March of this year. And we're now beginning to deploy it and develop a competency with it. So it's really a March event, and then into April and May, as Ludovico mentioned, rather than a last year event. But it was planned from early 2013. It just happens to be that there were significant delays in terms of the delivery of that equipment.

In terms of the reserves, we mentioned the ore shoots just as a possibility. What we said was that the high grade ore shoots, we would evaluate how much of the proven and probable reserves was in the ore shoots. But we would continue to also evaluate higher grade areas, not just in the ore shoot, but higher grade areas that would be part of the bulk mining.

So that evaluation continues. And we think that this is more likely not ore shoots, but more likely that we have grade areas that will remind us but of lower grade areas as part of the current mining method at Pilar. And we're conducting as part of this, a tightening of the drill spacing so that we have a higher degree of certainty in terms of what we're mining and what grade we’re mining at any particular time, which I don't know if you want to add anything to that.

Darcy Marud

Yes, Patrick. I can give a little more clarity. The reserves will remain as stated, a number of these shoots that was recognized that we do have higher grade (indiscernible) that we look that we have continuity between those. And in fact, yes, we do. And some of the [chutes] are not in the current reserve model there and the resource. So what we'll do is to keep up not only the continuity of those higher grade chutes, but add to the reserve model. We hope to have a lot of that work done by the third quarter and we'll see an update in the 2014 reserve model.

Unidentified Participant

And Patrick, one final point to that that I would make is that, and this is something that was said in prior calls, but some of these higher grade areas are carrying grades. Whereas a reserve grade is just over four grams. These higher grade areas are carrying grades of 6.5 grams to 7 grams. So we think that there's a net benefit to this approach.

Patrick Chidley – HSBC

Okay. Thanks. And then just finally on the $1.4 million GEO target, you said there's potential downside of 70,000 ounces on that? But does that also -- what if you to assume the current ratio for silver gold? I understand that $1.4 million actually uses 50 to 1 ratio.

Unidentified Participant

Yes. Again, as we have said in the past, this is now goes back to many legacy discussions. We tried to apply a consistent ratio for the purposes of just comparing disclosure quarter over quarter and year over year. But we'll always report our silver and our gold separately. So the 1.4 is based on 50 to 1 ratio. But that’s consistent with what we said at the beginning of the year and last year. It would be less than that if we apply a current ratio.

But the way to really look at this is that's only for representation purposes and for comparative purposes quarter over quarter. The real thing to look at is what's the gold production and the silver production. And on the silver production, we're expecting to produce just under 9 million ounces, 8.8 million ounces I think is the number that we published and the balance is gold.

Patrick Chidley – HSBC

Okay. All right. Well, thanks very much.

Peter Marrone

Thank you.

Operator

Thank you. The next question is from Don MacLean from Paradigm Capital. Please go ahead.

Don MacLean – Paradigm Capital

Well, good morning guys. Maybe just a bit of follow up on the mines and start-up at this point. In regard to Pilar, could you give us a sense of what the change in the mining method is going to -- how it's going to impact the cost per ton now compared to what was originally expected in the feasibility study? And then maybe a sense of what the grade outlook will be with this new mining method compared to what was in the feasibility study, but also what was being experienced with the original mining method, little granularity there, please?

Ludovico Costa

Don it’s Ludovico here. Actually, by applying this new mining (indiscernible) law in Pilar, we are going to have a relatively higher dilution on the grades because, as you know, we have applied that to (indiscernible) before. But that we expect to begin production that means in terms of overall cost we are going to be more or less the same.

There's a new low profile equipment that's right on site. Right now it's going to [help Pilar] [ph] on improving productivity and reduce the dilution of what we are experiencing today. The overall [term] [ph] I would say, is going to have a slightly lower grade but much higher production, much higher productive [indiscernible].

Don MacLean – Paradigm Capital

Can you give us a rough sense of -- so you're talking tons per day, will be higher. Can you give us a rough sense of what percentage you would expect and then what percentage lower the grade could be?

Ludovico Costa

Yeah, we are still going through the process. As Peter said, we're just going to have the low profile equipment operating in May. But in overall terms, we expect to have a lower grade in terms of (indiscernible) [20%] [ph] lower than what we said and (indiscernible) basically we expect to have this whole (indiscernible) come into higher productivity in the range of 30%.

Don MacLean – Paradigm Capital

Right. And will that sort of additional productivity - grade that’s very different, but would your cost per ton be roughly about the same then, Ludovico?

Ludovico Costa

Yes, as I said, we are still going through the experience. But I would expect so.

Don MacLean – Paradigm Capital

Okay. That's great.

And then on the C1 Santa Luz, could you just fill us in? It sounds like you're having recovery issues. What was the recovery in the first quarter and what was it in the feasibility and what's your target for the second half of the year once you get into commercial?

Ludovico Costa

Yeah, we’ve planned a ramp up there on the recovery in C1 Santa Luz because we have to have understanding of the new process and adjusting some of equipment. But the average recovery for first quarter was in the range of 45% and we plan to increase that up to 78% by the fourth quarter. Of course, we are going to ramp up, but that's the plan that we have today.

Don MacLean – Paradigm Capital

Right. And then the –

Peter Marrone

And that 78% just for reference is below the feasibility study level that we had indicated. Now we're evaluating the implementation over time likely within a year of commercial production of a (indiscernible). But that's under the evaluation phase. But that would increase recoveries to over 90%.

Don MacLean – Paradigm Capital

And what was the feasibility, Peter?

Peter Marrone

Just over 80%.

Don MacLean – Paradigm Capital

Okay. And was this caused by extra carbon that wasn't expected?

Ludovico Costa

No, no. Actually, we've had the experience and we identified that that was the kind of adjustment on the amount of kerosene that we add in the agitation of the tanks. And as we've said, on the information that we are still adding a new unit to regenerate the carbon, to have a better activity of the carbon.

Don MacLean – Paradigm Capital

And roughly the capital cost for these changes before the smelter and then with the smelter?

Peter Marrone

Yeah, we would expect that the CapEx to commercial production for C1 Santa Luz is in the range of about $15 million to $17 million.

Don MacLean – Paradigm Capital

Not much.

Peter Marrone

And we're just evaluating the longer term prospects of [Luz] so we're just evaluating what the cost of that is.

Don MacLean – Paradigm Capital

Perfect. Okay. Thanks guys.

Operator

Thank you. The next question is from James Bender from Scotiabank. Please go ahead.

James Bender – Scotiabank

Hi. Good morning, Peter, Chuck and Pete and the team. I just have a couple of questions. First, could you remind me what the royalties are at Cerro Moro?

Peter Marrone

It's a 3% royalty to the state, and there's a royalty -- I think it just changed hands. I think it was owned by Angola Gold and it was sold to someone else. I believe it's 2%.

James Bender – Scotiabank

Okay. Perfect. And also, my other question is on the CapEx. Could you provide -- I see here that you're expansionary capital for the year is 150 excluding capitalized interest. Could you provide a breakdown of that for this year?

Charles Main

On the first quarter basis, we were at $59 million, and we'll see that kind of decline each quarter through the year in order to get to that 150 million for the year.

James Bender – Scotiabank

Yes, I'm assuming the spend there is mostly on the three development projects. Could you provide what it is the breakdown on an annual basis, please?

Peter Marrone

No, the majority of the spend this year, or at least the largest single contributor to the capital spend this year is Chapada with the infrastructure and the development of (indiscernible).

James Bender – Scotiabank

Okay. And also on the capital, your sustaining capital for the year of $320 million, does that include capitalized exploration or no?

Charles Main

No. It's primarily development capital.

James Bender – Scotiabank

Okay. Would you be able to provide what your sense is for 2014 overall with expansion capitalized interest, capitalized exploration what you think of their figures for the year?

Charles Main

For the year, I think we've previously guided [323.40][ph] on the -- sustaining the 150 on the expansion area around 55 on exploration. So I think we're still consistently forecasting those type of numbers.

James Bender – Scotiabank

Okay. That's it for me. Thank you.

Operator

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

Steve Parsons – National Bank Financial

Yeah. Thank you. Good morning. Thanks. Thanks for the update. Two questions both on the cornerstone mines, first on Chapada. I would like to get some additional color on Chapada, specifically comments in the MD&A that suggest you're seeing a harder ore and as a consequence modifying the blast patterns and maybe looking to modify some of the grinding circuits. So on that, should we be assuming the harder ore is a discrete zone or is this more of a pervasive consideration for Chapada?

Ludovico Costa

Steve, this is Ludovico here. No, this high-grade - the harder ore is really throughout the [indiscernible] according to our mine plant. We are having this issue before and that's why we are improving our crushing capacity and with the in-pit crushing of course with additional benefits to reduce the haulage cost.

Steve Parsons – National Bank Financial

Okay. And just with respect to the (indiscernible) drill spacing to improve the fragmentation, what should we be thinking about in terms of higher mining cost to achieve that?

Ludovico Costa

Not much because as you see, as I said, we are going to have the in pit crusher by the beginning of third quarter, by the end of second quarter. Meanwhile we don't have this in-pit crusher that's why we are shortening the [drainage base] [ph] in order to have a much better blasting, a much better size of the [ore] [ph] feeding the crushers.

Steve Parsons – National Bank Financial

Got it. Okay. And what about Corpo Sul, is that similarly hard core or is that the softer?

Ludovico Costa

It's similar more or less with the (indiscernible) with some harder ore but some soft ore as well.

Steve Parsons – National Bank Financial

Excellent. Okay. And just on to El Penon, there is a comment in the MD&A that there's a scheduled replacement of equipment. And just generally, when I see the equipment changes can often speak to what's happening with mining with dilution and things of that nature. Maybe could you speak to what you're doing with the equipment and is there a read through there on what's happening in the mine?

Ludovico Costa

No, it's just a replacement of the old equipment, some of the equipment is [dirty] [ph] we have to refurbish. We decide that we’re going to run ore or not. That's just that there's not a change on really on the mining sequence or the mining method after we are having that.

Steve Parsons – National Bank Financial

Okay. Perfect. Thanks for the clarification on that. That's it for me. Thanks.

Peter Marrone

Thank you, Steve.

Operator

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

Anita Soni – Credit Suisse

Most of my questions have been asked and answered. Just the one remaining one, if you could just give us a ballpark estimate on what the roaster would cost?

Peter Marrone

Sorry, it was difficult to hear, but I think you're asking of the cost of a roaster?

Anita Soni – Credit Suisse

Yeah, just a ballpark figure like in the tons of million like just round figures, 10 million, on the roaster.

Peter Marrone

Yeah, we're estimating in the range of $90 million to $100 million at this point. But it's very much an early stage estimate of what the cost of the roaster will be.

Anita Soni – Credit Suisse

Okay. And that would get you potentially up to the 120,000 ounces?

Peter Marrone

Yeah, exactly. We think so. And I think the other point that's important here is let's look at the mineral inventory that we're carrying here in the prospect. We're carrying 1.35 million ounces of proven and probable reserves. It's just under 1.6 grams per ton in an open pit. We're carrying measured indicators and inferred resources of about another 732,000 ounces, 60% of which is measured and indicated and about 40% of which is inferred.

We're also carrying an inferred resource that has the potential to increase on a potential underground of another 820,000 ounces at about a double of the grade that we're carrying in our proven improbable of about 3.3 grams. So it's a very large mineral inventory in open pit and a growing inventory but already a comparatively large inventory in underground. So we're looking at that mineral inventory and saying there's an intermediate term and short-term plan for C1 Santa Luz, which is the thickener and regeneration kiln.

The longer-term prospect we think is a roaster and we're evaluating now what the optimal technical specs of that roster would be. That will go to the price of it, and we estimate now at about $90 million to $100 million.

Anita Soni – Credit Suisse

And so, just to give us a baseline for the recovery rate, what's the baseline recovery rate right now without the roaster or the sort of life of mine plant for those ounces?

Peter Marrone

Well, right now if you look at the original feasibility study just over 80%, where we currently are at above 45% to 47%, although we've seen some significant improvements with the early implementation of some of these steps that Ludovico mentioned over the course of the last several weeks. But we anticipate that getting to 78% by the -- into the third quarter and the fourth quarter this year. And the recovery with the roster will be over 90%.

Anita Soni – Credit Suisse

All right. That's it for my question. Thank you.

Operator

Thank you. The next question is from Pawel Rajszel from Veritas Investment. Please go ahead.

Pawel Rajszel – Veritas Investment

Good morning guys, thanks for taking my question. Just a few on Chapada, you mentioned [inaudible] a 9 million ounce sliver target for the company. How much of that silver comes from Chapada?

Peter Marrone

And Powell, we'll have to apologize but the audibility is very weak. I don't know if others are having the same issue, perhaps if you could repeat the question.

Pawel Rajszel – Veritas Investment

Just based on your, can you hear me better now?

Peter Marrone

Yes.

Pawel Rajszel – Veritas Investment

So based on your, I think you said earlier the 9 million ounces of silver production targeted for 2014, how much of that is coming from Chapada?

Peter Marrone

It's a very modest amount coming from Chapada. Most of the silver at our operation, the 8.8 million to 9 million ounces comes from El Penon and from Florida. A modest amount comes from Mercedes, but the recovery as you know with these deposits similar to the deposits in Mexico. The recovery of silver is lower than it is for Florida and for El Penon.

Pawel Rajszel – Veritas Investment

And based on my understanding going through the financial statements, you don't get paid for the silver of Chapada but you do include it in your production. Is that the case and if so what's the rationale for including that?

Charles Main

Yeah I think the one point to make on the silver at Chapada is very insignificant in terms of dollars and the payable on the silver is dependent on which off take agreements. Some contracts have, [indiscernible] content of your [con] [ph] is more than 10 grams per tonne, then they pay or other ones that might be the content in the [cons] [ph] is more than 15 grams. So it is paid but there are hurdle rates. But I think it's important that really in terms of balance that it's extremely small.

Peter Marrone

Yeah, we need to focus on important aspects here. We disclose it because it's important to disclose all production. But we're talking about 326,000 ounces of production coming, silver production coming from Chapada. So it's an inconsequential amount.

Pawel Rajszel – Veritas Investment

So that's 326,000 for Q1?

Peter Marrone

No, 326,000 for Chapada.

Pawel Rajszel – Veritas Investment

And then with the harder ore at Chapada but including the in-pit pressure, Peter where do you see costs kind of stabilizing as you ramp up Chapada?

Ludovico Costa

We did not foresee a big increase. Actually copper Corpo Sul is going to help because we had much better grades there. That's to compare for instance for the year, the balance of the year. We are going to have a 10% increase on the copper grade just by adding the Corpo Sul.

Pawel Rajszel – Veritas Investment

But then long term as you ramp up your 130,000 ounce target. Where would you see costs kind of stabilizing, assuming spot copper prices?

Ludovico Costa

With Corpo Sul and the main pit is going to be in the same range. We are foreseeing to see an increase in costs. As I said, the grades of Corpo Sul is higher than what we see here.

Peter Marrone

Sorry Powell, we don't know if you were cut off there. Did you get -- were you asking another question or did you get the answer to the question you were asking?

Pawel Rajszel – Veritas Investment

Sorry, go ahead. I guess I'm having some technical difficulties.

Ludovico Costa

No, I think for Corpo Sul in the main pit, of course we did not foresee an increase in [indiscernible]. As I said we have better grades of Corpo Sul in the all the differences. We are going to see that's going to compensate the cost that -- the higher cost that you may have at Corpo Sul.

Pawel Rajszel – Veritas Investment

Great, thanks for answering the questions.

Operator

Thank you. There are no further questions at this time. I'd like to turn it back over to Mr. Marrone.

Peter Marrone

Ladies and gentlemen, thank you very much and perhaps if I could conclude the discussion in this call by saying the following, we did have challenges in 2013. We've surmounted those challenges. We have a clear line of sight on the two operations getting those to commercial production, both in immediate short term and longer term in the case of C1 Santa Luz. We have a very large mineral inventory at these assets and so it merits this slow and steady pace and making sure that we get it right and we we've got lots of time to be able to get the type of production that we anticipative being able to get them from them.

In the meantime we do have cornerstone assets that continue to deliver and we're confident in our ability to deliver our cash flow and cash flow expectation as mentioned on this call and previously. We have a further challenge and I want to begin and end this by apologizing for this challenge and that is a communications challenge. Because we recognize overnight that our communications over the course of this quarter has not been as strong as we would like it to be and we promise you that it will become stronger.

We met our budget expectations for both for production and for costs. April begins to demonstrate the things that we've said, which is both that budget expectation continues, but it continue with a positive trend of improvement to production and improvement to cost and we anticipate that continues throughout the year.

On the communication side we want to make sure that we are clear with market participants and what one should expect from production and for costs. And so to be clear we anticipate that in the second quarter we would be getting production on a month-by-month basis as an average. That is approximately 16% higher than the average for the first quarter. That's what we said during this presentation and in our MD&A. And we anticipate that the third and fourth quarter would be comparatively similar but higher than the second quarter. We have a back end loaded production. But that back end loaded production comes from getting to commercial production onto assets.

But most importantly the lion share of it comes from the normal mine sequencing of our existing operations.

And so with that we thank you for participating and we look forward to seeing you at our shareholder meeting today.

Operator

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

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