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Yamana Gold, Inc. (NYSE:AUY)

Q2 2010 Earnings Call Transcript

August 05, 2010 11:00 am ET

Executives

Peter Marrone - CEO

Chuck Main - CFO

Ludovico Costa - COO

Evandro Cintra - SVP Of Technical Services

Darcy Marud - SVP Of Exploration

Analysts

David Haughton

Anita Soni

Dan Rollins

Barry Cooper

Steven Butler

Operator

Good morning ladies and gentlemen, and thank you for standing by. Welcome to Yamana Gold second quarter earnings release call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time.

This conference call will contain forward-looking statements that involve a number of risks and uncertainties concerning the business, operations and financial performance and conditions of Yamana Gold. Forward-looking statements include, but are not limited to statements with respect to estimation of mineral reserves and resources, the timing and amount of estimated future production, costs of production, capital expenditures, future metal prices and the cost and timing of the development of new deposits.

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 of yesterday announcing our second quarter results and our management discussion and analysis for the same period, as well as other regulatory filings in Canada and inside the United States. Accordingly, you should not place undue reliance on forward-looking statements.

I would like to remind everyone that this conference call is being recorded and will be available for replay today at 2:45 PM Eastern time. The replay number is 416-849-0833 or toll-free 1-800-642-1687, both with the passcode 84950126. As well, the presentation slides accompanying the conference call are available on Yamana's website at www.yamana.com.

I will now turn the conference over to Mr. Peter Marrone, Chairman and CEO. Please go ahead, sir.

Peter Marrone

Thank you very much, and good morning to all of who are in attendance on the call. I would begin with a brief overview, and then I will pass the call to our President and Chief Operations Officer, Ludovico Costa, who will discuss our operations; Chuck Main our CFO will discuss our second quarter financial results.

We had lot to report yesterday, and so Ludovico will also give us an update on our development stage projects, although I am also pleased to let everyone know that Evandro Cintra, who is our Senior Vice President of Technical Services and responsible for our development stage projects is also here to answer any questions. Darcy Marud, our Senior Vice President of Exploration will join them in a discussion of the exploration to date and the potential that we continue to see at our projects, and principally at the projects that are in development.

We have four core themes of growth in this company, growth in cash flow, growth in production, growth in resources, and growth in net asset value. As a result of our steady focus in the first half of the year, on our operations, our development stage projects and exploration program, we are well on track to achieve these four objectives.

Our overall mission is to build on our existing base of significant gold production through optimization of operating mines, expansions throughput increases and developing new mines. In addition, we will continue to advance our very promising exploration properties and opportunities.

We are geographically focused and concentrated by country and by region as is shown on this map. We have quality operations with the target to produce above 175,000 gold equivalent ounces per year from our flagship mines, and at least 120,000 ounces gold equivalent per year for our other mines, either individually or as a cluster of mines that are near to each other or where operational, administration, management and cost synergies are possible.

There is purpose to this. Our mines either individually, or as a close cluster should be meaningful contributors to overall production, although always bearing in mind also that this is about quality advances, as much as quantity advances, that is our focus. We have as a key objective, sustainability in operational excellence in four of the best global places for mining, Brazil, Argentina, Chile and Mexico.

We take a portfolio approach to the mines, and mine clusters we own and we operate intending to be dominant in the countries or regions in which we undertake those operations. We have strong growth ahead of us, beginning with resources and production, although all of which fits into this geographical and strategic model that I've just identified.

Lets' discuss the second quarter. In the second quarter, we achieved strong operational and financial performance. We increased production across nearly all of our owned mines. Total production was approximately 253,000 ounces representing a 6% increase from the first quarter this year, and a 5% increase from the comparable period last year.

We expected production to increase sequentially throughout the year; we said that at the beginning of the year, we said that on our last conference call, which is occurring. And we expect that trend to continue into the second half of this year.

Our financial performance continued to demonstrate significant double-digit growth. Revenue increased 48% from the second quarter of last year to $351 million. Adjusted earnings increased to $86 million. Mine operating earnings increased 78% against Q2 of last year, to $146 million. And cash flow, a driver of this company and the value in this company that we've always highlighted, increased 32% to $135 million or $0.18 per share, and that again as compared to the same period year.

We continue to maintain an edge with industry low byproduct cash costs. We are generating significant cash flow, and expect our cash flow growth to continue. And as a result, our cash flow on a ratable cash position more than adequately funds all of our growth, leaving us with the good news for our shareholders with residual cash.

Into the years to follow, we plan to continue to have amongst the best level of free cash flow of our peers. This is important for us, as we believe the free cash flow into 2012 will drive value in this company, and perhaps if we can humbly in this industry.

We have a consistent pattern of paying dividends. We increased our dividend for the second time this year, increasing it 33% from our last quarter or 100% from the prior quarter. We are now paying a dividend of $0.08 per share on an annualized basis, or $0.02 per share per quarter. This increase will be effective for shareholders of record on September the 30, of this year.

We remain committed to delivering value to shareholders, and that value includes value in cash and in yield. And as our cash flow continues to increase, we will periodically evaluate the dividend level in the company.

This quarter we also focused on our development stage projects. Last night we announced that we have made a construction on decision Pilar, which will become our newest mine in Brazil. We provided its first mineral reserve estimate, which increased our total mineral reserves across the company by full 7%. And we provided an update on Gualcamayo to include QDD Lower West.

QDD Lower West is expected to contribute to production in early 2013, which is ahead of the originally planned schedule as all might remember of 2015. These two new developments are expected to add an additional 200,000 ounces of gold production bringing further growth to our initial production target of 1.5 million gold equivalent ounces from our mines and projects that are either in operation or already in development today.

This quarter has been a busy quarter, as we also advanced those development stage projects, and Mercedes in particular, which is ahead of schedule, although perhaps more importantly and as we have highlighted when we made our construction decision in the middle of last year, it continues to grow in terms of total resources.

And now perhaps if I can turn to Ludovico to discus our operational performance for the quarter.

Ludovico Costa

Production increased this quarter by 6% from the first quarter this year. We continue to expect production to increase quarter-over-quarter throughout the year. At the second half of the year, typically is or rather half is for our production. We are on track to achieve our annual production guidance. I would like to review our six mines which demonstrates strong operational results, with production increasing in all our mines and cash cost remaining consistent while improving from the first quarter.

At Chapada, we completed expansion to 20 million tons per year last year, and optimization increased throughput to up to approximately 22 million tons per year at currently underway.

Production was higher in the second quarter. We also transitioned to larger trucks fleet last year. As a result, we expect efficiency and the operational improvements to begin to realize throughout the year. Production in the second quarter was 30,450 ounces, increasing 10% from the first quarter. Production in the second half of 2010 is expected to be higher levels similar to trends in 2009. We believe we will achieve production guidance for the year.

Cash costs at Chapada also remain consistent with cash costs in the first quarter. El Penon production was 100,485 gold equivalent ounces for the quarter, a 90% increase compared to the prior year period. Cash costs were $449 per gold equivalent to ounces, higher than Q1, as expect, as we focused on the successful transition to owner mining. We have now turned our focus on cost improvements, such as maintenance schedules, and reducing the cost for consumables.

We expect costs to be improving going forward. This quarter we also advanced development to work at new venues. We remain confident in achieving annual guidance, and we continue to evaluate further optimization strategies at El Penon to increase the production from the current levels.

We think plants expansions and research contribution from the newly discovered high grade vein systems, Pampa Augusta Victoria, will further support these objectives. We made efforts in the first quarter at Gualcamayo to improve waste removal, allowing us to access higher grade benches and allowing for better mine planning. We saw the benefits of these efforts in this quarter.

Production increased to 37,567 ounces, 27% higher than the first quarter. Cash quality improved to $427 per once, $16 lower than the first quarter. And the grade improved from the first quarter, a trend that we expect to continue throughout the year.

These trends are similar to what was experienced last year as production, tonnage and grade improved throughout the 2009. We believe we are on track to achieve the Gualcamayo annual guidance this year.

In the second quarter, production at Jacobina was 29,785 ounce, 19% higher than the first quarter. We are on track to achieve production rates at Jacobina as well. The exploration efforts are focused on the new discoveries Largartixa and Canavieiras, both of which demonstrates a distinctively higher grade than the current reserve grades.

Last quarter, we stated that an objective that is Jacobina this year is lowering the cost. To achieve this objective we need to find a balance among the different mines at Jacobina. Quarters at Jacobina should also improve significantly, as we continue to improve availability and maintenance.

We are focused on these objectives and we have already seen the cost improve by 22% in this quarter to $100 to $534 per ounce at the kind of $153 per ounce from the first quarter. We expect quarters will continue to improve, throughout the year.

Production at Minera Florida was 25,274 gold equivalent ounces, 22% higher than the first quarter. Production for 2010 remains in line with the pervious guidance. Our teams, process and project at Minera Florida we expect to add an additional 40,000 gold equivalent ounces per year, with operations beginning mid of 2012.

Production at the Fazenda Brasileiro was approximately 18,333 ounces of gold, 24% higher than the first quarter. We are on track for production guidance for the year, although there will be variations quarter-over-quarter as we mine our existing reserves. Explorations at CLX2 and Lagoa do Gato continues and reserves to the date are promising, giving us confidence that we can increase our mine life at Fazenda Brasileiro.

Peter Marrone

Ludovico thank you for that and Chuck perhaps if you can go through in further detail our financial results.

Chuck Main

Revenues in the second quarter were $351 million, just 48% higher from the second quarter last year, as a result of robust precious metal prices and increased production. Revenues in the quarter reflect an average realized price of $1,201 per ounce of gold, $18.45 per sliver ounce and $3.07 per pound of copper.

Revenue for the first half of 2010 was $698 million, which was 55% higher than last year. Mine operating earnings increased 78% from last year to $146 million in the second quarter and increased 88% in the first half to $275 million.

Gross margin per GEO sold was $924 per GEO and $887 on the year-to-date basis, representing a 38% increase from the prior year. Net earnings increased over 800% to $91 million in the quarter and increased 78% to $170 million for the first half of 2010.

Adjusted earnings were $86 million for the quarter, or $0.12 per share, an improvement from the first quarter this year. Earnings were negatively impacted by a one-time increase in copper and gold inventory of 3,000 ounces of gold and 4 million pounds of copper, which has a value of $19 million or a margin of $7 million. And that translates into a $0.01 per share impact on the EPS.

Earnings were also impacted by the difference between the equity earned from Alumbrera, and the cash dividends that we received. Cash dividends from Alumbrera were approximately $18 million, which is $10 million more than the equity pick-up that we show in our income statement. This also translates to $0.01 per share impact on EPS.

We restructured our inter-company holdings in Brazil to accommodate new tax rules to allow better deductibility of interest, although this resulted in a one-time tax expense of $10 million in the second quarter.

Operating cash flow, before changes in non-cash working capital was $135 million for the quarter, representing an increase of 32% from last year.

Cash flow in the first half of the year was $272 million, a 58% increase from last year. As we received a full year of commercial production at Gualcamayo, and higher production at El Penon, we anticipate further significant cash flow growth in 2010, so all in all a very solid financial quarter.

Our cash position continues to strengthen, increasing to $262 million at the end of the quarter compared to $222 million at the end of the first quarter. We also repaid $21 million of debt during the quarter. Our net debt is now $250 million, and we have $700 million of total cash and undrawn credit available.

At the end of June, we had networking capital of $360 million. We've continued to increase the strength of our balance sheet. As we continue to focus on margin expansion and production growth we anticipate cash flow to remain robust. Production in the second half will be stronger than the first half, and unit costs are expected to be lower. As a result, we are fully funded for our growth initiatives going forward.

Peter Marrone

Chuck, again, thank you for that. And Ludovico if you can take some time now to discuss the announcement that we made yesterday evening highlighting Gualcamayo's QDD Lower West and Pilar, and Darcy perhaps if you can be available to discuss, to speak to the exploration potential that we see at each.

Ludovico Costa

We have updated a production plant for Gualcamayo to include the results of the recently completed feasibility study updated for QDD Lower West. The plant is a underground ore body below the current QDD open pit operations. And you have made a construction decision for the development of QDD Lower West.

Capital required for QDD Lower West is estimated approximately $85 million, primarily for mining development. All this is expected to be processed through exiting heap leaching operations in facilities at Gualcamayo.

With the addition of QDD Lower West we expect 10 million tones of ore to be treated per year at the Gualcamayo. And cumulatively cash flows are expected to be between $395 to $415 per ounce. Recall that QDD Lower West is expected to be approximately 65% with cumulative recoveries from Gualcamayo to be between 65% to 75%.

While we are recovering we will be lower from QDD Lower West, than the main open pit. Gold will be recovered from the heap leaching already in operations at Gualcamayo, which reduces the need for additional capital.

In addition, ore from QDD Lower West has increased the overall rate at Gualcamayo, so increased overall production. We are currently, as far as the option we are adding a new processing facility, which will further increase recoveries and production. The prospect of a new will be further evaluated in late 2011.

Production from QDD Lower West is expected to begin in early 2013, ahead of the original plan in 2015, and provide us with the answers of production to 2019, initially based on current resources. This should increase the recently discovered revenue assets.

We view this increase in production from QDD Lower West as a basic case scenario, and may be improved upon, with more ounces discovered and recent evaluation of the milling concept, as I just mentioned. We are evaluating how additional mineral resources will further contribute to gold production, particularly in the later years. Sustainable production is expected to exceed an average of 190,000 ounce per year to 2019, based on current resources.

Total mineral reserves and mineral resources at the midst of Gualcamayo increased from those who prophesized at the end of 2009. Revenue in copper reserves increased by approximately 6%. And recent upgrade of inferred resources measured in indictor resources increased by approximately 29%. We have a robust exploration plant at Gualcamayo, and we believe the mineral resource will continue to significantly increase particularly at QDD Lower West, which could result in further production increase in later years.

Thus, perhaps you could go in more details on our progress to date.

Darcy Marud

During the first half of this year, we completed 40 holes, totaling about 10,000 meters from underground development at west end of QDD Lower West. The drilling was designed to upgrade in the third mineral resources, and resulted in an increase in the measured and indicated categories Ludovico stated, and confirmed that the QDD Lower West ore body remains open to the west.

One kilometer further west at the 3D target through a data was tunnel was completed to a length of 300 meters and underground drilling has commenced at that site at the end of May. The strike length of QDD Lower West has the potential to double to more than 2 kilometer with this new development.

Ludovico Costa

We also have made a construction decision for the development of Pilar basin, on a recently completed positive feasibility study which delivered the first mineral reserves estimate for Pilar.

We estimate a total capital required for the development of Pilar to be approximately $180 million. Average price cost is expected to be between $430 to $460 per ounce. Ore process is expected to be approximately 1 million tons per year, with an average annual production expected to be 120,000 ounces over the initial mine life of nine years.

The recovery rate is expected to be 95%. This is a conventional side graphed in CIP plant. During the permitting period, which is expected to continue to first quarter of 2011, will continue to advance exploration development work to increase the mineral resource.

Construction is expected to take from 24 to 30 months with production targets to begin in the mid of 2013. The recently completed feasibility study delivered by Pilar first mineral reserves estimate of 1.1 million ounces of gold. This increases the company's total proven and probable mineral reserves by 7% to 18.7 million ounces of gold.

Total mineral reserves including reserves for the newer deposits, Pilar increased by 32% from the previous estimate from mineral resources at the end of 2009. Based on production, mineral reveres and mineral resources, and anticipated the further exploration success, Pilar now represents one of the most significant projects for Yamana.

Again, if I could let Darcy speak on that it has seemed today that Pilar showed exploration efforts there.

Darcy Marud

We continue to focus on increasing the overall resource, that's the number one goal. The drilling during the first half lf of the year focused on extending the main Jordino mineralization down dip.

Today, 18,000 meters of diamond drilling has been completed, and we continue to see positive results as reported yesterday, mainly in the north portion of the Jordino trend where a 700 meter down dip extension of the mineralization has been confirmed with significant gold grades along the strait length of approximately 400 meters.

The down dip extension is currently double the dip length of the current resource and applying significant exploration upside in resource growth. An additional 15,000 meters of drilling is expected to be completed in the Jordino deposit to extend the deposit down dip along its entire strait length of more than 1,200 meters.

Based on the current drill results, the mineral resource has the potential to significantly increase from the currently estimated size. An updated resource estimate is expected to be completed by the end of this year.

Pilar will get bigger during the construction period, which is also true for Gualcamayo. We took a similar approach in Mercedes last year. With that we made construction decision and after that we saw our resources increase by 50% from the end of 2008 to the end of 2009.

Turning to Mercedes, we continued with our exploration program this quarter and drilling to date has been very positive. We had expanded the resource and identified new epithermal veins within a 1,080 meter strike length of the Barrancas structural corridor, including whole empty 490D with a drill intercept of 27.46 meters at 10.5 gm per ton goal and 94 gm per ton silver.

And we have intersected a significant new mineralized zone named Diluvio within the Lupita Vein structure further to the northeast, including the discovery hole L10-073D with a drill intercept of over 30 meters at a grade of 8.4 gm per ton gold and 12 gm per ton silver.

At least 7,000 meters of core drilling is currently budgeted to continue exploration this very perspective new target. Mercedes has planned its initial 120,000 gold equivalents ounce per year mine for a period of ten years, although we will further evaluate the annual production increase potential given the exploration result to date.

With the Barrancas extension Lupita discoveries we expect to see similar resource and reserve growth this year as last year. That was our plan build it with enough resources, critical mass and increased resources during the construction phase.

Now I will turn it back to Peter.

Peter Marrone

Before I conclude, I would like to summarize, our production growth profile. Building on the success of our producing mines, we have three development stage projects for which we have previously made construction decisions and these are C1 Santa Luz in Brazil, Mercedes in Mexico and the Ernesto Pau-a-Pique also in Brazil.

These projects are either permitted or under going permitting. At Mercedes, we have already begun construction. These three projects are expected to commence production throughout 2012, an increase our annual production to approximately 1.5 million gold equivalent ounces. By the end of that year, we will have this production level going forward. We have now made construction decisions for Pilar, and the supplemental production at Gualcamayo, which will further increase that production level.

Please remember that Pilar is only 80 kilometers from Chapada and QDD Lower West is the underground deposit at Gualcamayo. So these two projects bring substantial production with minimal risk. That has been our goal, to mitigate risk and develop new mines in places where we are familiar and have existing infrastructure, with sufficient time in which to build these mines.

We have also focused on increasing our production at existing mines. Gualcamayo with QDD Lower West was our first mine undergoing this plan. At Suruca the gold area at Chapada we are currently advancing to a feasibility level study. This will be announced when completed which is planned by the end of this year.

As I conclude, I would like to highlight to you that this is a high growth company, a low cost and intermediate sized company with the focus on the Americas and principally Latin America in places where there is mine friendliness and the support for commerce and more importantly for mining.

Our overall mission is to build on our existing base of significant gold production, through optimization of upgrading mines, expansions, throughput increases and developing new mines.

In addition we will continue to advance our very promising exploration properties and opportunities. We encourage our shareholders to note the growing cash position and robust cash flow of this company. We encourage our shareholders to look at the cash flow and free cash flow as one of the important drivers of share price appreciation going forward.

With a byproduct cost of under $200 per ounce, we are encouraged by the cash flow generation of this company. And with that I will open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Haughton. Your line is open.

David Haughton

Yes, good morning, and thank you Peter for hosting this conference call. I have a question in relation to QDD Lower West. And wondering if you could provide some guidance as to what your expectation is of tons and grade coming out of that, because I didn't see a break of the reserves in your global Gualcamayo breakdown.

Peter Marrone

I'll turn to Ludovico in a moment, but what we try to do is highlight that Lower West is just one of the areas, one of the ore bodies at Gualcamayo. We looked at it from the perspective of the cumulative mine, rather than the individual deposit at QDD Lower West. And in part, the reason for that is because the goal that we expect to recover would be for the existing heat bleaching facilities. So from that perspective, we didn't provide a specific breakdown, because we thought it was more important to highlight cumulatively what Gualcamayo is about.

We're happy to provide you with a bit more detail on QDD Lower West alone, but I hope I can leave you with an impression that our view was that it really is about the global Gualcamayo or the cumulative Gualcamayo rather than a specific area of mineralization.

Why Ludovico will have a bit of a challenge in addressing the number of tons per year is it will vary, it will fluctuate from year-to-year, because we will be mixing and matching ore from QDD main deposit. We will also be including QDD Lower West and one of the things that we did not highlight, is that we have also completed the metallurgical test work that we promised to do late last year for Amelia Ines Magdalena. That is the satellite deposit at Gualcamayo.

We expect to begin production from Amelia Ines Magdalena later this year. And then into 2011 a larger contribution will come from it into 2012. I don't know Ludovico if there is anything else that you can supplement to that.

Ludovico Costa

The average underground production that is going to be in the range of 1.8 million tons per year and the grade is going to vary from 2 to 2.5 grams per ton.

David Haughton

The numbers that had been provided for the outlook from 2011 through 2015, Peter, given your comments then include AIM, and includes QDD Lower West.

Peter Marrone

For Gualcamayo, yes.

David Haughton

For Gualcamayo, in total.

Peter Marrone

The production contribution from AIM in 2011 is modest. It will increase into 2012; we've always looked at AIM as a transition as we go from QDD exclusively to the second of the largest ore bodies. I think the one that will become the largest of the overall ore bodies and best contributor to production which is QDD Lower West into 2013.

David Haughton

And in relation to AIM there had been some challenges with regard to metallurgical recovery on the pad. Have you resolved that, or are you just going to live with that lower recovery?

Peter Marrone

We expect it to be lower recovery. We will live with that lower recovery. The production numbers that we are referring to and the cost structure and the cumulative recovery that we referred to last night, includes the contribution coming from AIM. We can recover the gold on the heat leach pads. We will have dedicated areas of the heat leach pads on which we will recover that gold. It will be a more modest contributor than we had anticipated at initially for AIM in late 2008 early 2009, but it will contribute to production in 2011 and 2012, more than where we had guided at the beginning of this year.

David Haughton

I am looking at page 22 of the presentation that accompanies this talk and that gives a schematic section of what Gualcamayo could looklike. I see that you have got a tunnel already underway and I presume that given that QDD Lower West is going to be a sub level case that a tunnel takes it down to the base of the SLC?

Peter Marrone

Darcy perhaps if you can address that.

Darcy Marud

Yes at this point Dave the tunnel is just for exploration only, but in talks we've had with technical services, that could potentially be one of the tunnels that you use to access QDD Lower West and yes it would go to the base of QDD Lower West.

David Haughton

And could the QDD Lower West move on this mode, I don't get a sense as to north or south, but move to the right of that chart to pick up some of the other ore bodies identified as an underground potential feed?

Darcy Marud

Well that tunnel is designed specifically for the drilling at QDD Lower West. We believe that the 3D target is the surface leakage anomaly of the QDD Lower West below us, and we developed that tunnel only for the drilling and the exploitation of QDD Lower West.

David Haughton

All right. My last question is in relation to Chapada. You've got a target that seems pretty ambitious for the full year and puts a lot of emphasis really on the second half performance. I am wondering if you could talk us through why you are so confident of a significant improvement in your gold and copper production in the second half.

Ludovico Costa

The first quarter of the year as you normally know, we have issues with the rainy season. But during the second quarter, we are taking the opportunity to increase the way we move there, and better preparing the mine.

And as we mentioned here, as well we are going to be completing the 22 million tons expansion. But right now actually there is a shutdown today to do the upgrade, and few other upgrades is during the August and September. And we have better mining prepared and with the expansion almost completed there on the plant, we are quite confident that we can excel better grades, and also to 3D are higher amount of sugar on the newer plant.

Peter Marrone

Just to highlight that point David, the expansion to 22 million tons, I believe which are at the beginning of the year would be completed by the end of 2010, early 2011. Ludovico just mentioned that we're in progress on completing it now. And so, we're confident that we'll meet production expectations on copper and gold.

David Haughton

Because it does imply something in the order of 97,000 ounces of gold and about 90 million ounces of copper, which would mean an improvement of the grade by perhaps one-third compared to what we've seen the first half.

Peter Marrone

Well it will be a mix of grade of throughput and of recovery. So we're anticipating that those three will blend together, will not only be grade. But if we blend the three together we will expect to get to that production range that we gave at the beginning of year, both for copper and for gold.

And as you can see on the copper side, we are on track for that. We're on track to pass the mid-point of our production range for the copper production even where we stand at the middle of the year.

Operator

Your next question comes from the line of Anita Soni. Your line is open.

Anita Soni

Good morning Peter. Just a quick question with regards to the recovery rate at Gualcamayo this quarter, could you talk a little bit about the improvement measures you're opening there?

Ludovico Costa

Sorry, Anita, do you want to know the overall recoveries or the recovery that we're getting now?

Peter Marrone

What I think Anita you're asking is what measures have we put in place to improve recovery this year.

Anita Soni

Yes, I just noticed it was down a little this quarter from the last quarter, and just wondering.

Ludovico Costa

Actually, if you see when we increased the amount sugar that you place in the pads, we have more or less a 60 day leaching time there. That's the main reason why we did recovery showing quarter is lower than the first quarter.

We placed much more ounces in this quarter then there was in the first quarter of the year. And that's the main reason why the recovery rate has lowered in the second quarter.

Although we're taking additional actions to try to further increase recovery there, we already increased the flow on the pads. We're trying to put a way to add more oxygen on the paddles as well that is going to help us increase the recovery there.

Peter Marrone

You may have noticed that our in-circuit inventory at Gualcamayo increased and that goes to the point that Ludovico is mentioning that is we look at it from beginning of quarter to end of quarter, the recovery rate is lower, but we also have a significant amount of inventory on the pads that we expect to recover into Q3.

Ludovico Costa

We have not experienced any issues with the recovery action by the rate of pads that are finished, the recoveries is still in the range of 8%.

Anita Son

So you are showing I was just about to ask, and the normalized recovery you would estimate is still along 90% to 80% then?

Ludovico Costa

Yes, that's right.

Anita Soni

And then could you just elaborate on the difference between, consensus estimates and what you guys reported. You mentioned something about the timing of the Alumbrera receipts of payment. Do you know if next quarter you will expect to get that payment back?

Chuck Main

Yes. There is kind of tos and fros to the payment. But when we are looking at what the investment community was forecasting for Q2, it was more in the 15 to 18 million range. So that's the amount of the dividend we actually received. The cash is what's most important to us. So that was most reflective of what we think of the underlying economics. I think going forward we are looking at roughly that 15 million range on the quarterly basis.

Operator

Your next question comes from the line of Dan Rollins. Your line is open.

Dan Rollins

Touching base on Gualcamayo at the beginning of the year you had about a 20% decline in the reserves ounces there and I assume a lot of that was from pulling AIM out of the reserves given the sort of the unknown if you are going to be able to treat that ore. The new reserve update, does that include AIM in it or will that be a separate update towards the end of the year?

Peter Marrone

It includes AIM, it includes QDD Lower West and it includes the QDD main.

Dan Rollins

On your pad, I was wondering if you might be able to touch base a little bit on the low gold recoveries. You mentioned being impacted by oxide material and I was wondering if you could maybe elaborate on what you are doing to improve that, given it seems to be about almost a 10% drop from previous quarters last year?

Ludovico Costa

Yes, as I mentioned we are taking the opportunity to open mine in order to improve the availability of the ore there. And while we are opening the mine, we have to access there are parts of the ore that are oxide. And that has some impact than the ore. That was the main reason there. We also have the recent update on the plant we are going to improve the exploration recoveries there. Based on this, we expect to have a better ore during the second half of the year and with an increase on the grades we are going to see this, we are going to be better than what we are expecting in Q2.

Dan Rollins

And just following up on that. You've talked about getting a feasibility study done on Suruca and you basically said in the press release you can't quite tracking that to the main mine. Is it oxide grade material and if it is what do you expect to have the same impact when you start running it through your float cells or you maybe looking at just building a standalone small little plant adjacent to the main plant to treat it?

Ludovico Costa

Well there are several opportunities there, but because Suruca has some oxide material there is more operation in mainly sulfide material. We are trying to see the both opportunities to treat the existing plant to add an additional plant just to treat this Suruca. The main in this plant is because Suruca doesn't have any copper on it until upto now. Then that would be lowering our corporate grade on the concentrate, but we are still evaluating perhaps a small amount of the ore could be treated to the existing plant and the other could have to be a different plant. But in any case we are going to operate it in the existing site.

Peter Marrone

For the oxide material, remember we'll also have an oxide stockpile at Chapada. We're looking at the opportunity for a small heat leaching facility. For the sulfide material, which is most of Suruca, we're conducting as part of this feasibility level study; we're conducting a trade off. If we process that material to the existing plant what does that do to the copper production recovery and production would increase. The gold production obviously impacted the copper versus spending the money for a new line that would allow us to recover only gold from Suruca and keep intact the gold and copper recovery from our existing plant. But all of it would be at existing facilities as we mentioned Suruca is roughly six, seven kilometers away from the Chapada plant.

Dan Rollins

Just switching gears, just on the G&A, backing out the stock base comp that was put into the casual statement. It looks like your G&A was about $26 million this quarter, up from about $18 million last quarter. Is $26 million on the high end or is that going to be a more of a typical run rate for you at Yamana going forward.

Peter Marrone

I think the answer is a typical run rate. We've always taken the position that its important build out the operations of the company to hire people before one gets to a certain production level. So what we're doing is we're effectively building out that G&A for the purposes of anticipating, we will be on our production.

So it's a reasonable number to assume in your models that it is $26 million per quarter.

Operator

Your next question comes from the line of Barry Cooper. Your line is open.

Barry Cooper

Just wondering in the release, you talked about Gualcamayo having the conveyor down for repairs in the third quarter, yet you talk about tonnage being up, can you just walk me through that dichotomy of thoughts there? Because I would have thought if the conveyors are down, your tonnage would drop?

Ludovico Costa

Yes, the idea there for the shutdown of the conveyor during this quarter is really to do an upgrade on the throughputs there. We intend to increase the throughput to 1,500 tons per day per hour sort of after the shutdown there. During this shutdown time, we're going to truck some of the material to the pads. And probably that is not going to interfere with the production.

Barry Cooper

And what are you looking at, a couple of weeks for that?

Ludovico Costa

Actually in the range of 20 days.

Barry Cooper

20 days, okay. Good. Then on Pilar it kind of looks like in your reserve number that you come out here that you basically have taken 100% of the resources and applied them into the reserves and used about what appears to be something a little bit less than a 20% dilution factor for calculating that reserve on a minable basis. Yet when I look at the drilling that's been done on the deeper parts of the zones there, a lot of that things mineralization that's down in the 250, 350 meter level which I assume are drill rates rather true wits, so true wits were going to be less than that, would suggest that dilution factor should be heck of lot higher than 20%, can you just walk me through that?

Peter Marrone

Please go ahead Evandro.

Evandro Cintra

About the reserve, this reverse includes 26% dilution. So the research party considered the reserve is about 7 billion tons from the total of 8.8 billion tons. So it means that 1.8 billion tons is a material that's considered wasted, rating 0.41 which is the dilution for the reserve. So it's not so close from the average indication of the total reserve.

Barry Cooper

Okay. So this whole JD311 to whatever it is 344, are they representative of the widths that you are going to be mining?

Darcy Marud

No Barry, those are the extensions, this is Darcy by the way. Those are the extension holes off to the northwest.

Barry Cooper

Okay. So what's the normal width for what you are going to be mining at Pilar?

Darcy Marud

About a meter and half to a little over that, maybe a meter six.

Barry Cooper

Okay. Do you think that 26% dilution is sufficient then?

Evandro Cintra

Yes, we think so. But anyway in the next six months we are extending the declaration rate and we will fulfill the dilution of (inaudible) mine.

Barry Cooper

And then on Jacobina you have found a new zone there where you say the grades are higher than average, can you just tell us what those are? Although the prospect of higher grades is always good, I haven't really seen the effect come through on kind of various, which was a significantly higher grade than Jobelo and other parts of Jacobina. So should we get overly excited about these higher grades, because they don't seem to have materialized as you've gone in mining at kind of various?

Darcy Marud

Yes, Darcy again here, Barry. I think the higher grades the larger (inaudible) aren't reflected any new resources just because it's an exploration prospect. Hopefully drilling this they will pull in some resource if not it will be the year after that. And those grades are typically in the 4 to 5 gm per ton range. And I think this year you are going to see the big kick up coming from Canavieiras as we are doing all our infield drilling at Canavieiras and we hope to have Canavieiras be 30 to 40% of the reserve numbers. So then you'll see the reflection in the grades, and the grades at Canavieiras should be anywhere between I would think 3 to 3.5 gms per ton on a reserve basis.

Barry Cooper

So when you say 30 to 40% of the reserve it should be assumed that 30 to 40% of the mill feed then as well?

Darcy Marud

I'll turn that to Ludovico.

Ludovico Costa

Yes, it is going to depend on the development yes, but we are seeing some thing like that, yes.

Barry Cooper

Okay. So you should be getting back to 2 gms material then I suspect.

Ludovico Costa

Yes. Actually we are seeing that it is going to be 2.1 to 2.2 in the further years.

Barry Cooper

Okay. And then finally for Darcy, you indicated that you are expecting a similar increase at Mercedes. What you didn't specify is that absolute ounces or is that a percentage of the 50% increase because they are quite two different things?

Darcy Marud

Right. Our goal right now Barry would be on absolute ounces. I mean, we with the results that we have seen at Lupita, Diluvio in particular is the most potential for increase because it's open in all direction. I think we're looking at that anywhere between 300,000 to 500,000 ounces this year at Mercedes.

Operator

Your next question is a follow up from Anita Soni. Your line is open.

Anita Soni

I just wanted to say that I would appreciate a break out of the reserves and resources by deposit for Gualcamayo, IM, QDD Lower West and QDD pit. And then also if I'm modeling QDD Lower West, again, it was 1.8 million tons per annum kind of starting in 2013 to 2.5 gram per ton, and recovery rates of about 65% for that portion?

Ludovico Costa

That's right.

Anita Soni

Okay. And then so the aggregate, this is 71% as a total of the two? And then all the parameters that you put up on costs on slide, I guess, 19. Is that on the cumulative basis or is that just the QDD Lower West portion?

Peter Marrone

That's cumulative.

Anita Soni

Okay. And so when we're thinking about this is there any difference in the costs between the two? Obviously there's going to be mining cost differential between underground and pit but.

Ludovico Costa

No. Of course the open pit is going to be in the rage of $1 per ton and the underground in the range of $8 to $12 per ton.

Anita Soni

$8 to $12. Okay. Thank you very much.

Operator

Our next question is a follow-up from Dan Rollins. Your line is open.

Dan Rollins

Yes, thanks. One last question Peter. You gave the outlook for 2010, seems unchanged for production. But you didn't mention anything about your cash cost guidance, which I believe before just on the attributable consolidated basis was $360 to $400 an ounce. And right now you're probably running around $435. Are you still comfortable of being able to make that cash cost guidance for this year?

Peter Marrone

Dan, its a really good question. We're comfortable clearly with the production expectations. Where we have not changed the guidance in relation to cost, because in part it will depend on the units of production and how that impacts the unit cost, it will depend on where currencies are.

If we use assumptions that we've used at the beginning of the year for currencies and where we expect to be in production by the end of the year, we would be within that sticking distance of that top-end of the guidance number.

So I can't say to you that we would be closer to $360, I can't say to you that we would be in that range of $400. We're not yet in a position to be able to say that it will be $390 or $410, but we do expect that the cost will improve in the second half, and they will contribute positively toward taking us toward that production guidance. It will depend as all things on consumable costs; it will depend on fuel costs, and on the currencies. If we use the assumptions that were in our guidance at the beginning of the year for what we see in production through to the end of year, we will expect to be within a striking distance, a small plus or minus of the higher end of that cost guidance.

But, and this important because we look at our cost per unit of goal that we produce on a cumulative basis. We publish cash costs, but we include into that G&A, we include into that sustaining capital, we include all of the items that go into it to determine what our true margin for every ounce of gold that we produce is.

And that's why it's important to look at it from the point of view of a by-product cash cost. And why we do that is because we say we can either apply all of these other costs proportionately to copper into gold or we can apply copper as a credit to gold production, and then we're looking at our all in cost for every ounce of gold that we produce. And on a by-product basis we published that we would be below $200 per ounce on a by-product cost basis and we're very confident that it would be below $200 per ounce.

Dan Rollins

Okay, you brought the by-product cost up, you do break it out for Alumbrera, but I do not see anything in the numbers here on by-product cash cost for Chapada. Can you really maybe provide those in separate email to the group just so we can keep track if that's how you are going to give us two numbers and you are sort of looking at that all in gold price, weighing it per ounce of gold, it would be great to see that and track that on a quarterly basis.

Peter Marrone

We are happy to that. Yes.

Operator

Your final question comes from the line of Rahul Paul. Your line is open.

Steven Butler

Peter, its Steve Butler here. The Pilar update is appreciated, is there an update you expect to make this year or do we wait year end of a Caiamar initial resource, and will Caiamar be something that integrates into Pilar, or is it a satellite development like in the future on its own?

Peter Marrone

Pilar is expected by end of year, I would love to be able to say that it is in advance of that. Any update to Pilar, I mean, in terms of resources. I wouldn't anticipate that Caiamar would be sooner than that. We are still expecting end of year early next year. We are not anticipating that Caiamar would be processed at Pilar. If we are to find a new mine there, I would like it to be a standalone operation. But as you know it's within very short distance between Caiamar and Pilar.

Steven Butler

Right. Okay, Peter. And then lastly, at Mercedes of your 624,000 ounce reserve, is it exclusively on the Mercedes vein or Mercedes and Klondike? Thanks.

Darcy Marud

Its on Mercedes and Klondike, although I would say the vast majority is Mercedes.

Steven Butler

You're targeting reserves additions right now, would you suggest Barrancas potentially and Lupita this year, reserve increases?

Darcy Marud

Principally Barrancas.

Steven Butler

And is Mercedes itself vein open to extensions?

Darcy Marud

Yes it is, but that was going to be done from the underground and that development right now priority is being given to develop the mine, so we do not have the development for underground drilling. So that's why the focus on Barrancas right now.

Operator

As there are no further questions in the queue, I will turn the call back over to Mr. Marrone for closing remarks.

Peter Marrone

Thank you very much ladies and gentlemen for attending. Clearly, I hope you can sense that we are excited by what we have in front of us with Pilar, with Gualcamayo, with where we anticipate Suruca and Chapada to be. That one is clearly one that is very exciting to us.

What we are seeing is resource growth, what we'll ultimately see, is production growth, and the continuing focus of the company in the jurisdictions in which we operate. But one important message that I'd like to continue to focus on and I hope resonates, is we increased our dividend last night. And that's the second time this year that we have done that.

We believe at delivering value to shareholders includes doing that on a cash basis and on yield, but it is important to appreciate that we could not do that unless we had growing cash balances and robust cash flow. And that is the real driver in this company, and again as I said before as a shareholder in this company I am encouraged by the hope that of our shareholders are encouraged by the growing cash position of this company, the robust cash flow of this company, the low by product cash costs that allow us that margin, to which I have referred to before, and that expectation that we have, that very solid expectation that we have of the increasing free cash flow generation of this company into the years to follow. So thank you very much.

Operator

This concludes today's teleconference call. You may now disconnect.

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Source: Yamana Gold, Inc. Q2 2010 Earnings Call Transcript

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