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Yamana Gold, Inc. (NYSE:AUY)

Q3 2010 Earnings Call

November 4, 2010 11:00 a.m. ET

Executives

Peter Marrone - Chairman and CEO

Ludovico Costa - President and COO

Charles Main - CFO

Analysts

Dan Rollins - UBS

Brian Christie - Desjardins Securities

Anita Soni - Credit Suisse

David Haughton - BMO Capital Markets

Steve Butler - Canaccord Genuity

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Yamana Gold's Third Quarter Earnings Conference 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 condition of Yamana Gold. Forward-looking statements 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 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 third quarter results and our management's discussion and analysis for the same period. As well as other regulatory filings in Canada and 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 14351681. As well the presentation slides accompanying the conference call are available on Yamana's website www.yamana.com.

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

Peter Marrone

Good morning. Thank you, Beth, for the introduction and thank you to everyone for your attendance. We will begin with the brief overview and I will then pass the conference over to our President and Chief Operations Officer, Ludovico Costa who will discuss our operations. Chuck Main, our CFO, is here also and he will discuss our third quarter financial results.

I will then provide an update on our development stage projects. Although, we do have Evandro Cintra, our Senior Vice President of Technical Services and Darcy Marud, our Senior Vice President of Exploration in attendance on this call to answer any questions you may have.

Darcy is remote although on our conference line, so there may be a modest delay in his ability to answer any questions. Also with us, is Lisa Doddridge, whom we welcome as our new Vice President of Investor Relations and Communications.

Just before I elaborate on our record third quarter results. I would like to reiterate some of the key objectives of this company. We have four core themes of growth in other words what growth means to us, which is growth in cash flow, growth in production, in resources and ultimately growth in net asset value. The starting point is our steady focus on operations, development stage projects and on our exploration program.

We are well on tack to achieve these four objectives and indeed we just achieved a record cash flow in the quarter, which represents an increase of 24% over the same period last year and 42% higher for the comparable nine month period.

Our cash balances are increasing and all of this is in advance of significant resource growth this year and production growth to follow, which will further contribute to our cash flow and increases in cash position. Our overall mission is to build on our existing base significant gold production through optimization of operating mines, expansions and developing new mines. In addition, we will continue to advance our very promising exploration opportunities and properties.

As we have indicated during 2010, we expect this year to be a strong year for reserve and resource increases, which is the second of those core themes for growth. This will underpin the significant production growth, which is now just around the corner for us. Although, please bare in mind that we mentioned that this year's effort was efficiencies and optimization at existing mines, which as already shown on over 5% growth in production quarter-over-quarter.

We have a philosophy of building two tiers of gold mines. Those that produce above 200,000 gold equivalent ounces per year from our flagship mines and those that produce over 120,000 ounces of gold and gold equivalent per year from those other mines.

In either of these tiers, we look at where there is a reasonable expectation for expansions that will lift those thresholds. We have a solid track record of expansions that we intend to rely on for further evaluation of increases in those thresholds.

With the discovery of new resources, our mines and projects provide us with an excellent opportunity to pursue such expansions. We will provide later this year an exploration update as part of this progression toward the discovery of new ounces at our mines and projects that will soon become mines.

We are geographically focused and concentrated by country and by region as shown on this map, and that is very deliberate on our part. It has been part of our strategic plan from the inception of this company.

We have an Americas focus, although for today in four core countries. We have as key objectives, sustainability in operational excellence in four high quality places for mining. We take a portfolio approach to the mines and mine clusters we own and operate, intending to maximize our competitive advantage in the countries and regions that we are in.

Production from Brazil and Chile accounts for approximately 75% of current production, and that increases to approximately 85% by 2013. This concentration of operations provides the company with excellent synergies and efficiencies of management, personnel, administration, mining expertise, and more.

Concentration by country and by mine cluster makes it easier to mine and manage operations, regardless of their size. We are concentrating on our new mines primarily where we currently operate, which gives us an advantage on development of these assets.

We have a strong growth ahead of us and we will complete this presentation with that growth, that begins in 2012 at an annual rate which is approximately 46% more than the current level, and that progresses throughout that year, in 2012, and onward into 2013. Although we will begin with increases in resources and reserves this year and in the year to follow.

We set various new earnings and cash flow records in Q3. As previously guided, production increases would continue quarter-over-quarter and production increased again this quarter by 5.6%, building on the production increases already achieved in Q2. As a result of increased production, as well as increased commodity prices, revenue, mine operating earnings, adjusted earnings, all increased substantially as compared to 2009.

Cash flow is the measure that we consider paramount in the longevity and success of a gold mining company. Cash flow increased 24% for the third quarter, and 42% for the first nine months of this year as I mentioned before, both as compared to the prior year.

This results from cost containment, production increases and metal price performance. We are generating significant cash flow, and expect our cash flow growth to continue. Q4 should see more production, better costs, and we believe higher metal prices.

Yamana has delivered adjusted earnings this year which have increased sequentially throughout these first nine months from $0.10 per share to $0.12 per share, and now in Q3 $0.16 per share. Our focus remains on sustainable reliable production and building value for our shareholders.

Our cash costs are amongst the lowest in the industry, and more than that we have revised our cash cost guidance for this year downward, to less than $175 per gold equivalent ounce, and we have reaffirmed our annual production guidance. Our results confirm that we are achieving the goals and objectives that we have laid out for ourselves this year.

Now as a result of our increasing cash flow and available cash position, that more than adequately funds all of our growth we have decided to increase our dividend again this year. This is our third dividend increase this year. This is the 17th quarter in which dividends have been paid in this company.

Our dividend has now increased three-fold since the beginning of the year, and the annual dividend has increased to $0.12 per share from its latest increase in Q2 of $0.08 per share. At the beginning of this year it was $0.04 per share. We have declared a special dividend immediately so that that increase is effective now.

Our inaugural dividend was paid prior to the start-up of our flagship Chapada mine in 2007 in anticipation and recognition of the contribution that project was going to make to our cash flow. Our dividend increases this year are in recognition of strong cash flows and commodity prices, but also as a demonstration of our confidence in future growth of those cash flows, and balances of cash as we execute on our growth plans for the next few years.

We remain committed to delivering value to shareholders, and that includes value in cash yield. As our cash flow continues to increase we will periodically evaluate the dividend level again. We now have an exemplary track record of dividend payments and growth in dividends also.

With that introduction, let me pass it to Ludovico for our third quarter operational results.

Ludovico Costa

Thank you, Peter. Production increased this quarter by 5.6% versus the previous quarter of 2010. Continuing to build on the production increases we have seen sequentially throughout the year, with Q3 exceeding Q1 production by 11.5%. We continue to expect production to increase quarter-over-quarter again in Q4, as we have demonstrated during this first nine months of 2010.

We are on track to produce between $1.03 million to $1.1 million gold equivalent ounces as previously guided. Chapada had a stand-out quarter achieving record concentrate in copper production. At Chapada, we completed the expansion to 20 million tons per year last year, and the optimizations to increase throughput to approximately 22 million tons per year are currently underway.

We also transitioned to larger trucks this year. As a result of these initiatives, gold and copper production increased in the third quarter by 33% and 16% respectively over Q2, as grade and recover increase in Q3 as planned. We have achieved the expectations and operational improvements quarter-over-quarter at Chapada and expect to achieve annual guidance. Production in the fourth quarter is expected to be higher still, similar trends in 2009. Cash costs at Chapada declined by 14% versus the second quarter this year, despite the strength in reais currency mostly due to increased production levels.

El Penon production was around 105,212 gold equivalent ounces for the quarter, a 4.7% increase compared to the previous quarter. Cash costs were $461 per gold equivalent ounces higher than Q2, mainly due to the depreciation of the Chilean peso.

As we continue to develop El Penon as a result of the transition to owner mine, we have turned our focus towards cost improvements, such as maintenance schedules, and reducing the costs for consumables. We expect costs to improve going forward, and we continue this quarter to advance the development of higher grade veins, such as Bonanza, which we will be mining in Q4 and into 2011.

The average gold grade mine at Penon improved 10% from the second quarter and further improvements are expected in the fourth quarter. We remain confident in achieving the annual guidance, and we continue to evaluate further optimization strategies at Penon, to increase production from the current levels.

Quotas are expected to decrease in the fourth quarter as savings continue to be realized from the transition to an owner mine, recent plant expansion, and resource contribution from newly discovered high grade veins recently, Pampa Augusta Victoria, will further support this objective. Grade in Q3 increased as planned, and we expect to further increase in Q4 and 2011.

Production decreased to 31,972 ounces in the third quarter at Gualcamayo, as the mine commenced an upgrade to plant capacity to increase throughput to 1,500 tons per hour. The expansion or the accelerating will improve productions in 2011, and to accommodate expansion related to QDD Lower West.

A higher carbon content increases with recover time and increased inventory on heap leach beds. This has also impacted production recoveries and costs. Cash costs increased to $480 per ounce. The company experienced a longer percolation time, as in some of the area on the bed we are on the third and fourth lift increasing inventory, which is mostly expected to be recovered in future expansions.

Gualcamayo has just completed its first full year of productions, with an annual production level of around 160,000 ounces expected going forward. We anticipate gold recovery to improve in the fourth quarter, and most of the inventory to be recovered in the future quarters.

Jacobina performed extremely well despite where our production was, 33,607 ounces, 13% higher than in second quarter. The improvement in mining planned and increased number of working stops provide a platform for growth.

We are on track to achieve production guidance at Jacobina. Exploration efforts are focused on the new discoveries at Lagartixa and Canavieiras, both of which demonstrates to be substantially higher graded than the currently reserved grades. Cost per ounce are down 33% since the first quarter of this year, and were 463 per ounce in Q3.

Production at Minera Florida was 27,652 gold equivalent ounces in the third quarter. A 9% increase over the previous quarter. Cash costs were 425 per ounce higher than the previous quarter, due to the depreciation of the Chilean peso, and the higher electricity and labor costs.

Production at Fazenda Brasileiro was 17,161 ounces, approximately 6% less than the previous quarter. Higher maintenance on equipment was required during the quarter. Exploration efforts continue to focus on two newly discovered areas, in CLX2 and Lagoa do Gato, which represents potential to extend the mine life with a higher grade ore.

Peter Marrone

Thank you for that, Ludovico and now if we can turn it to Chuck to go into further detail on the financial side of those results.

Charles Main

The third quarter was an exceptional quarter. Revenue hit a record this quarter with total revenue of $454 million, which was 36% higher than the same quarter a year ago, and 29% higher than the previous quarter, as a result of higher metal prices and increased production.

Our year-to-date revenue was $1.2 billion. Average realized gold price for the quarter was $1,235 per ounce, an increase of 28% versus a year ago in the same quarter. Silver realized price was 1,973 per ounce, and copper was $3.27 per pound.

Mine operating earnings were $201 million, that was an increase of 48% versus a year ago, and reflects strong metal prices and Yamana's sequential quarter-on-quarter production growth. Gross margin per GEO sold was $1,077 in the quarter, an increase of $153 per GEO, and a 17% increase versus Q2, and it was $955 for the first nine months of 2010.

Net earnings were $121 million, which increased 98% versus a year ago, and 33% versus the last quarter. Adjusted earnings were almost $119 million, or $0.16 per share, which demonstrated in the consecutive quarterly earnings growth Yamana has achieved this year, going from $0.10 in the first quarter to $0.12 in the second quarter, and 16 in Q3.

Operating cash flow before changes in non-cash working capital was $209 million, and represented an increase of 24% from last year's same quarter, and an increase of 55% versus the previous quarter. Operating cash flow for the first nine months of this year is 42% higher than the first nine months of 2009. Byproduct cash cost guidance has been lowered to less than $175 per GEO, from our previous guidance of less than $200 per GEO.

I would like to pick up another point that Peter has made, that we are expecting significant growth in our reserves and resources for the year end 2010. It is worth noting that this will help reduce our depreciation expense in 2011. Our tax expense was 30% of pre-tax income for the quarter. This is lower than we had originally expected, but we undertook a tax reduction transaction that enable us to lower the tax rate for the quarter.

Going forward, we expect a tax rate of approximately 33%. We continue to make capital expenditures at our mine, to increase capacity and improve operational efficiency. We spent $127 million in the third quarter, and that included $22 million for the constructions of our Mercedes project.

Also, we maintained a strong Brazilian reais hedges at the quarter end, with R$95 million that were hedged at a rate of 2.14 to the US dollar over the next three years. Cash increased again this quarter to $280 million. This is an increase of more than $100 million since the beginning of the year. In addition, we have made debt repayments of $45 million during the year.

As we continue to achieve production growth, we anticipate cash flow will remain robust. Once again, we iterate that we are fully funded for growth for our new mines going forward. Peter?

Peter Marrone

Chuck, thank you very much. I would now like to provide a brief update on the development stage projects that will increase our production to 1.5 million ounces in 2012, and then the additional projects that will take us to 1.7 million ounces as we exit 2013, which includes Pilar, which will begin operations in 2013, and the expansion at Gualcamayo to take into account QDD Lower West. Any new project or expansions, including the gold area at Chapada Suruca will add to this level.

At Mercedes, permits required for construction have been received and construction began in May. Production will begin in mid 2012 at an annual rate of 120,000 ounces per year. Further drilling this year indicates a high likelihood of increases in resources and reserves, and these increases will allow us to evaluate how we can increase the currently planned production level after startup of operations.

In the case of C1 Santa Luz, engineering work is on schedule, and construction and environmental licenses are expected to be obtained in late 2010. Production is expected to start in 2012 at the rate of 130,000 ounces. C1 Santa Luz and Fazenda Brasileiro are within very close proximity to each other and we are looking at treating these under common administration and management. This cluster of mines between Brasileiro and C1 Santa Luz will produce 200,000 ounces of gold per year.

At Ernesto Pau-a-pique, or EPAP, construction and environmental licenses are expected in late 2010, with production startup targeted for 2012 at the annual rate of 120,000 ounces of gold. Pilar, we made a construction decision this quarter, and we expect to be in production in 2013. Potential for increased reserves and resources both at Pilar and the adjacent Caiamar area continued. We will evaluate how we can increase the current planned production level as those resources increase.

Our newly discovered Suruca deposit, which is gold only, located only 7 kilometers from Chapada, continues to be drilled to expand the size and resources of the deposit. The strike length has now doubled, and been traced over 1,800 meters. We will be completing a new production plan for Chapada by the end of this year, to take into account ore from Suruca.

With our exploration at Jacobina in high grade areas, we are now contemplating a further expansion, now that we have reached a sustainable steady state of production in the range of 120,000 ounces per year.

Let me emphasize the plant capacity as Jacobina has already been increased to accommodate this further increase in production. The objective being to have more ounces in high grade material to process through the plant to increase our production level.

At the Jeronimo project in Chile we have advanced metallurgical test work, we now expect to deliver a feasibility study on the project in late 2011, with a production plan that will take this new project to a mine that will produce between that second tier that the referred to before of 120,000 ounces per year, and the first tier of 200,000 ounces per year. Somewhere in the middle of that would be our expected production from Jeronimo, as we complete the feasibility study.

Any new ounces from Suruca, an expansion at Jacobina, any other possible expansion, and from Jeronimo will further supplement the production thresholds to which we refer, that give us the 66% increase in production from the current levels into our expected production into 2013.

To conclude, ladies and gentlemen, Yamana has now demonstrated consecutive quarters of sustainable production and production growth, with low cash costs, which has translated into higher margins and cash flow.

Margins continue to expand a trend that we expect to continue for the balance of this year. We have just announced a special dividend of $0.01 per share, and we increased our quarterly dividend to $0.03 per share. Since the beginning of 2010 our dividend has increased three-fold, and makes ours one of the highest dividend yields in the industry.

Yamana was an early innovator in the commencement of dividends starting back in 2006, and this is our commitment to deliver value to shareholders, which as you have heard me say before, includes cash value to shareholders.

With the substantial cash flow that we are generating all of our new projects are fully funded. As we head into the fourth quarter of 2010, we are well-positioned for continued production and cash flow growth with three new mines coming on stream in 2012, and further production increases in 2013 from the addition of Pilar and our Gualcamayo expansion.

I believe that this uniquely positions us with strong and robust cash flow, significant cash balances and growing cash balances fully funded, and growth. That I believe makes us very unique in this industry.

Thank you to all of you for attending the conference call today, and we will now open the call up to questions.

Question and Answer Session

Operator

(Operator instructions) Your first question comes from the line of Dan Rollins. Your line is now open.

Dan Rollins - UBS

A couple of quick questions. At Gualcamayo, you mentioned that you are looking at a long run steady state production of around 160,000 ounces. I was wondering if you could confirm if this includes QDD Lower West?

Peter Marrone

It does not. Very good question. QDD Lower West was always planned, we described that as the expansion at Gualcamayo. It was always planned to supplement that level of production that takes that mine to a sustainable production level over a longer term of an average of 190,000 ounces per year. As you may recollect when we delivered the feasibility study for QDD Lower West, in the first few years, the production level well exceeds 200,000 ounces.

Dan Rollins - UBS

Moving on to Suruca, in the MD&A you mentioned that you are looking at trucking this directly to the main processing plant. Is this material likely to sort of replace some of the copper/gold ore in the current system?

Peter Marrone

Dan, we are looking at various options and tradeoffs for the processing of that gold ore body. One option is to build a parallel plant to what we have at Chapada, so that we continue with the processing of Chapada ore and Suruca ore. There is a capital cost to that, but that delivers more gold and does not impact the copper and gold production coming from the Chapada ore body. The other alternative available to us is to create some form of a blend.

The third alternative that is available to us is to look at it from the point of view of, can we capture some of those ounces during the mine life of the Chapada open pit, the main Chapada open pit, and supplementing the gold production with further gold production to come on the back end of the Chapada mine life.

We are looking at all of those options as to what delivers the best value. The one thing that is a certainty here, is that we will be recovering more gold coming from Chapada. It will be sustainably at a higher level than we see now, and will see into years to follow. What we are doing now is we are evaluating the various tradeoffs that deliver the best value.

Dan Rollins - UBS

Just on Chapada the current recoveries, they are around 63, and over the last couple of quarters you mentioned that they should be going higher. What is your target rates on the gold and copper recoveries at Chapada going forward?

Peter Marrone

Let me turn that to Ludovico.

Ludovico Costa

We expect the Chapada recoveries on copper to be in the range of 87% to 89%, and for gold to recover from 63% to 67%. That, of course, will depend somehow on the grade, but that is the range that we are looking for.

Dan Rollins - UBS

Great, thank you. One last question, Peter. It is great that you reaffirmed production guidance. It is good to see your byproduct cash cost guidance has fallen. At the beginning of the year you highlighted co-product cash cost guidance of 360 to 400. Year-to-date excluding Alumbrera you are running at 440. What is your new guidance on a co-product basis?

Peter Marrone

It is a very good question, Dan. As you know, at beginning of the year when we provide guidance on cash costs we always look at it from the point of view of what are the inputs, and we also give sensitivities on the inputs, and currently one of the more important inputs is local currencies. I am sure that everyone on this call is aware that local currencies including the Chilean peso have appreciated significantly to the U.S. dollar.

The Chilean peso has appreciated approximately 10% to the U.S. dollar. That will have an impact be on our cost structure. So I hope that I can start answering your question by saying that when we guide up to $400 per ounce that is always premised on the assumptions that we make on the inputs, some of which are out of our control, and the one that is very much out of any company's control is what happens to local currencies.

If we look at it from the point of view of where those currencies are trending, and what they have been for the first nine months of this year, we should anticipate a cost structure that is in the low 400s up to the level we have seen at the end of Q3.

Q4, we anticipate lower costs, in part as a result of higher grade at Penon, and part of it is a result of Jacobina's continuing performance, and then part as a result of Chapada's higher grade, better recovery, and continuing improvement in performance. We do anticipate Q4 cash costs to be lower.

Why I continue to emphasize the importance of looking at byproduct cash costs, though, is because the difficulty with cash costs is always those inputs, and what is unique about Yamana is that with roughly 35% to 40% of our production coming from Chile and the Chilean peso's appreciation, a direct correlation that that appreciation is copper price.

What you have heard me say before is that we have this inherent natural hedge in this company with copper, as the Chilean peso appreciates which erodes our cost structure with the operations in Chile, we should expect that there will be more copper revenue. The result is a direct trade-off, and that is we look at that byproduct cash cost.

On a co-product basis, we will expect cash costs to be lower in Q4 than they were for the first three quarters of this year because of operational increases, production increases, and some of the things that Ludovico mentioned that would improve costs at Penon in particular.

I don't believe that we will be at $400 per ounce because of the changing currencies, the increase in consumable costs, we will be in that lower end of the 400s. Somewhere between $400 and where we were to the end of Q3. On a byproduct basis, we expect to be below $175 per ounce.

Operator

Your next question comes from the line of Brian Christie. Your line is now open.

Brian Christie - Desjardins Securities

A couple of questions here for Chuck. I see that you had higher sales than your production, Chuck. I assume that that material probably came out of inventory and hence the inventory adjustment. Then just wondering there seemed to be a pretty good jump in accounts receivable. Can you give any color on that?

Charles Main

Yes, on the sales versus the production, the inverse was true in Q2. So we had a bit of a buildup of inventory that we basically sold in the third quarter, so that was expected. On the receivables, it is two impacts. One, Chapada had record sales of 80,000 dry tons of concentrate this quarter, so your receivables are going to be higher. Also those receivables are marked to market at the quarter end metal prices, which had continued to rise so that would have increased the value of receivables as well. Does that cover your question?

Operator

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

Anita Soni - Credit Suisse

First of all, you said Jeronimo, Jacobina and Suruca, those are the ones that will get you to 1.7 million ounces, was that in 2013, the tail end?

Peter Marrone

Let me clarify. I'm sorry, Anita when you first came on the line you were fading into the question. You were asking if Jeronimo, Jacobina and Suruca?

Anita Soni - Credit Suisse

Yes.

Peter Marrone

Would be adding to that production level that takes us to 1.7...

Anita Soni - Credit Suisse

Basically, I'm just asking when are the startups, mid year, Q4 or Q3?

Peter Marrone

Yes, and what I wanted to clarify is that 1.5 million ounces, and then 1.7 million ounces, is based on projects where we have delivered feasibility study and made construction decisions. What I said in the presentation is that it does not include Jeronimo, it does not include an expansion at Jacobina, and does not include any production that will come from Suruca. I will be very reluctant to say to you if that's 2013 or beyond, or how many ounces will come from it, other than broad guidance, because we are now working through the feasibility studies.

Anita Soni - Credit Suisse

Then the ones that you've got feasibility studies delivered on, or are working on are Mercedes, with the startup of mid-2012 of about 120,000 ounces for the annualized. The C1 Santa Luz, when is the start-up of that one?

Peter Marrone

We're expecting that that would be some time late in 2012.

Anita Soni - Credit Suisse

Late 2012 and then Ernesto/Pau-a-Pique is more specific than 2012 ...?

Peter Marrone

Again, same thing, late 2012.

Anita Soni - Credit Suisse

I'm not quite getting there in terms of the 1.5. Is there any other substantial increase?

Peter Marrone

Yes, remember we're doing an expansion at Minera, Florida. That accounts for the tailings that we are processing, that should be another 40,000 ounces. Add if we add that to the production level that we expect to be at in 2011 with improvements at Penon that take it to the higher end of our guidance at 400,000 to 420,000 ounces. Jacobina, the same thing, we expect to be at about 120,000 ounces or a bit higher than that, you should be getting to a number that is 1.5 million ounces.

Anita Soni - Credit Suisse

By the end of 2012?

Peter Marrone

By the exit of 2012.

Anita Soni - Credit Suisse

Sorry. What are your expectations for Chapada in 2012?

Peter Marrone

We will get you the number, Anita.

Anita Soni - Credit Suisse

Okay.

Peter Marrone

As we published what is the mine plan for Chapada but as you know, we accelerated the 22 million ton expansion. So that as Ludovico mentioned in his presentation we are now near complete that expansion. So why don't we get you the number of what we now expect to be the production level in 2012.

Anita Soni - Credit Suisse

Then my second question is with respect to the Gualcamayo. You said you're experiencing longer leach recovery times, or that you had more ore in inventory for the third quarter. When do you expect that to reverse, fourth quarter, or fourth and first?

Ludovico Costa

Anita, Ludovico here. Some of that, yes, was back in the fourth quarter, but the other was during 2011.

Anita Soni - Credit Suisse

More of a delayed kind of draw down for over the entire year, or just all in the first quarter?

Ludovico Costa

No, it's going to be throughout the year.

Peter Marrone

May I clarify also that, and this may have been part of Anita's question. When we refer to the production levels of 1.5 million and 1.7 million ounces and Chapada's production. Again, we will get back to you, Anita, on what that production is with the 22 million tons, but we're not including any ore coming from Suruca in that. We're not including any production coming from Suruca. That would supplement any production to what we expect to produce.

Although I would find it again, we will be optimistic always, but it would be difficult to see that we would be in production with Suruca by 2012. It would more likely be in 2013. We will keep everybody informed as we complete that production plan by the end of this year.

Anita Soni - Credit Suisse

Just not to belabor the point and just to clarify, when you say 1.5 million ounces, do you mean annualized production and that is what you will exit 2012 at, or that you actually produce 1.5 million ounces in 2012?

Peter Marrone

No, as you see in our presentation, Anita, the second to last slide, we are expecting 1.3 million ounces in 2012, as we ramp up the operations and then we would be exiting 2012 with 1.5 million.

Operator

Your next question, David Haughton. Your line is open.

David Haughton - BMO Capital Markets

I saw in your MD&A that you are referring to an optimization study at El Penon. What are you looking to get out of that?

Ludovico Costa

Basically, David, we look for two things there. One is the opportunity that we have in the plant, as you know we have increased the grinding capacity at Penon, and with that we have seen that we can have a better recovery there, as we have seen there this quarter and this quarter. That is one thing and the other thing is we are always looking for new opportunities on the new veins discovered there at Penon, and that of course would depend on the grades that we have. As you know, this year we are starting to develop the Bonanza vein in the fourth quarter. That is going increase the grades for next year. This is the kind of optimization we are looking for.

David Haughton - BMO Capital Markets

So it is really at the moment your mills go to capacity of 5,000 tons a day, you are currently mining around about 4,000 tons a day, so is it to fill that gap, to see if you can get your mining rate to more closely match your milling rate?

Ludovico Costa

That can be an opportunity, but we are basically looking for better improvements on the mine with the higher grades, and perhaps with lower dilution, and so on.

Peter Marrone

We will always keep some capacity in the plant. We won't go to 5,000 tons. We will stay, our expectation on this optimization presently, David, is in the low-4000s. To highlight what Ludovico mentioned, the optimizations include how can we mitigate dilution, how can we accelerate higher grade areas, and higher grade veins.

David Haughton - BMO Capital Markets

On average, what kind of dilution are you looking at the moment?

Ludovico Costa

From 27% to 35%.

Peter Marrone

Which is consistent with the historical levels at Penon.

David Haughton - BMO Capital Markets

Just switching to another mine, Jacobina. When would you expect to be processing the higher grade Canavieiras ore?

Ludovico Costa

We are processing some of the Canavieiras ore right now, David, and we are always looking to increase there. As we mentioned, if we have a better reserves there, and as we can expect it, then we are always keen to put more ore from Canavieiras. I say right now we can estimate for the end of 2011, or 2012.

David Haughton - BMO Capital Markets

What sort of contribution would you be thinking about from that higher grade ore, which is nearly double the grade of the other ore body that you have got there?

Peter Marrone

Again, a very good question, but I hope you bear with us, because that is part of what we have described as that expansion plan at Jacobina. The expansion plan is essentially getting more proven and probable reserves in the higher grade areas that include Canavieiras, and then we have the plant capacity, and the idea is then with the higher grade, the plant capacity, we should be getting more ounces of production. So, I hope you bear with us as we complete that expansion analysis. We should be in a position to report more on that early in the New Year.

Operator

Your next question comes from the line of Steve Butler. Your line is open.

Steve Butler - Canaccord Genuity

Gualcamayo, Peter, Ludovico, you mentioned in your address the higher carbon, I believe that must be higher carbonaceous ores or at least in the limestone, any comments there or any concerns that you have on carbon in the ore?

Ludovico Costa

No, we don't have, Steve, we've just identified that there are some areas that has this carbonaceous ore, but it varies by area, we just had to really kind of control the quantity that we place on the pads, and if that's necessary to avoid to even place on the pads but up to now, is a very small area.

Steve Butler - Canaccord Genuity

The new conveyor belts with the greater speed if you will, or throughput per hour, is that expansion done yet, or is it still in progress?

Ludovico Costa

Most of this is already done, basically from the secondary crusher up to the pads is already done, and we are now working on the primary crusher.

Steve Butler - Canaccord Genuity

So, that's a Q4. Still going to be therefore some delays in production in the fourth quarter, as you complete that other leg of the conveyor system?

Ludovico Costa

No, I don't think so is this, because we have already built a stockpile from the mine up to the secondary crusher there, and while we're improving our upgrade on the primary crusher, we're going to use that stockpile.

Steve Butler - Canaccord Genuity

You mentioned that dilution you guys are at El Penon about 25%-37% consistent, Peter with historical levels. So there is not a concern, is there, for the dilution being restated at year end for El Penon's overall reserve base, which is 7 grams?

Ludovico Costa

No, I don't think so Steve. Of course, that's always going to depend on the new discovery and size of the veins, but I don't think so, because what we are seeing is more or less of the same width of the veins.

Steve Butler - Canaccord Genuity

Then the North Block area, I mean that has been, I assume there has been some production contribution, although it has obviously been quite insignificant. Can you say which veins you have been mining in the North Block area, it sounds like Bonanza itself has actually not mined at all perhaps now in Q4 and next year?

Ludovico Costa

Yes. We have a very good contribution from less right now, and the Bonanza very small, I would say in the range of 7% to 10% for both areas.

Steve Butler - Canaccord Genuity

7% to 10% on a combined basis?

Ludovico Costa

Yes.

Steve Butler - Canaccord Genuity

You expect that to be a little bit better number in the fourth quarter here?

Ludovico Costa

Yes, from 12% to 15% perhaps if we get right.

Operator

(Operator instructions)

Peter Marrone

I don't know if the absence of further questions is because Steve had mentioned that it is almost lunch time. Perhaps if we can just leave it open for a few more minutes on any questions. Are there any other questions?

Operator

No further questions at this time, sir.

Peter Marrone

Then, thank you very much for that. Perhaps I can conclude the presentation with just a summary of upcoming events. We have a tour of some of our mines. This will include Chapada and Minera Florida, along with the Pilar project, which begins on November 16. We will provide an exploration update before end of year.

We will provide our production plan for Chapada based on our Suruca discovery around year-end, and we have scheduled an Investor Day on January 12 next year, which will highlight our guidance going forward, what we believe to be the positive impact of our resources growth and our future developments. With that, thank you very much, ladies and gentlemen. We look forward to reconvening at our next conference call.

Operator

This concludes today's conference call. You may now disconnect. Thank you.

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