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On June 22nd Yamana Gold (NYSE:AUY) updated investors regarding its exploration program after announcing a 25% increase in the 2011 exploration budget from $85 million to $105 million.

The new exploration budget will encompass 420,000 meters of drilling at 20 existing and new projects. Also, $4.5 million of the additional funds will be focused on the newly discovered Pampa Augusta Victoria vein system at El Penon with the goal of completing a mineral reserve and resource estimate by year's end.

Additional drilling at Chapada will focus on the area to the southwest which shows a mineralization similar to what is being mined. The goal of the exploration program is to eventually expand the open pit project to include the newly discovered ore bodies.

A new discovery was made in late 2010 at Arco Sul located approximately 250 km away from Chapada. Arco Sul is in the area of Yamana’s decommissioned Fazenda Nova mine in Brazil and additional drilling will take place to better understand the deposit.

Drilling at the Lagunas Norte ore body at Mercedes will better define the ore body which is currently not included in the resource estimate.

The exploration success at Mercedes opens up the possibility of Yamana to increase mining and production rates. Drilling will continue at the Pilar deposit in Brazil which is expected to commence production in 2013. Mill capacity has increased by 30% from the feasibility study level and the additional capacity will be available by 2014.

Yamana’s organic success with its exploration program benefits investors as it is cheaper to add to existing resources organically than purchasing large deposits. Over the next two years Yamana expects to add more than 400,000 gold equivalent ounces to current production levels with the potential to expand this number from the organic drill success.

Additionally, on May 10, Yamana announced an increase of 50% in the annual dividend to $0.18 per share from $0.12 per share.

When mines are built out cash flow is diverted internally to create future growth instead of being paid back to investors in the form of share buybacks and dividends. In most cases the stock price trades sideways until questions related to the build-out are answered. In Yamana’s case management is confident enough in future cash flows that capital can be returned to investors in the form of an increased dividend while the mines are built out.

Yamana’s dividend increase and organic growth will benefit investors over the coming two years as new mines enter into production and shareholders benefit from rising sales and cash flow.

Investors would be well advised to add Yamana to their portfolio as the stock price has been beaten down unfairly and does not recognize the true value of Yamana’s future growth.

Source: Yamana Gold: Buy on Increased Dividend and Organic Exploration Success