Yamana Gold's (AUY) CEO Peter Marrone on Q2 2016 Results - Earnings Call Transcript

| About: Yamana Gold (AUY)

Yamana Gold Inc. (NYSE:AUY)

Q2 2016 Results Earnings Conference Call

July 29, 2016, 09:00 AM ET

Executives

Peter Marrone - Chairman and CEO

Daniel Racine - SVP, Northern Operations

Gil Clausen - CEO, Brio Gold

William Wulftange - SVP, Exploration

Barry Murphy - SVP, Technical Services

Jason LeBlanc - SVP, Finance

Yohann Bouchard - Vice President, Northern Operations

Gerardo Fernandez - SVP, Operations

Analysts

Botir Sharipov - HSBC

David Haughton - CIBC

Anita Soni - Credit Suisse

Steven Butler - GMP Securities

Operator

Thank you all for joining us this morning. Before I turn the call over, I need to advise that certain statements made during this call today may contain forward-looking information, and actual results could differ from the conclusions or projections in the forward-looking information, which include, but are not limited to, statements with respect to the estimation of mineral reserves and resources, the timing and amount of estimated future production, cost of production, capital expenditures, future metal prices, and the cost and timing of the development of new projects.

For a complete discussion of the risks, uncertainties and factors which may lead to actual financial results and performance being different from the estimates contained in the forward-looking statements, please refer to Yamana's press release issued yesterday announcing second quarter 2016 results, as well as the Management's Discussion and Analysis for the same period and other regulatory filings in Canada and the United States.

I would like to remind everyone that this conference call is being recorded and will be available for replay today at 12:00 P.M. Eastern Time. Replay information and the presentation slides accompanying this conference call and webcast are available on Yamana's website at yamana.com.

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

Peter Marrone

Thank you very much. Ladies and gentlemen, thank you for joining us today. Speakers today include Daniel Racine, Gil Clausen, William Wulftange, Barry Murphy, and Jason LeBlanc. Also here with us are Yohann Bouchard, and Gerardo Fernandez, our two Senior Vice President for Operations.

I would like to begin the call today by reviving some key themes that summarize our performance for the second quarter. To start, we remain on track to meet consolidated gold and silver production guidance. Second quarter operational performance was in line at all of our operations except Chapada.

Overall however, second quarter production was in line with our expectations and tracking our yearly guidance. That anomalous performance at Chapada negatively impacted production and cost in the quarter. This is one of our cornerstone mines. And as such it has a significant impact on our consolidated performance. In the second quarter the impact was negative and of course it will improve over the course of Q3, Q4 and its long term prospects remain intact.

A few observations. Second quarter operational performance was inline as I mentioned on all of our operations. At Chapada there were several factors that impacted production and that included where mechanical failure with our in-pit crusher. There were also weather related issues which made access to higher grade ore more difficult.

The operations would have been able to compensate for the disabled in-pit crusher while it was under repair by mining higher grade softer ores. These softer ores could be processed directly at the plant and bypassing the in-pit crusher, the in-pit crusher creates more efficient management mostly for harder and lower grade ores. Those of you who are aware know that Chapada has three crushing units. So operationally the mine and the plant were fine.

However, higher grade softer ores required significantly more development work and the access to that was meaningfully delayed because of restrictions created by adverse weather. Operational management have developed and initiated a plan to repair and improve reliability with the intent of avoiding similar issues into the future.

Now the in-pit crusher is now operating as expected and in order to further optimize that in-pit crusher’s performance, the operational management is planning to replace the mantle and concave during the next planned maintenance shutdown. So will not impact operations and production and that's scheduled for the fourth quarter.

So as a result of the production shortfall in the second quarter, production in Chapada is now expected to be 110 million pounds of copper and 106,000 ounces of gold for this year. And so while the size and scale of Chapada implies that now at full operation more production is possible, we believe that that production expectation is a reasonable baseline for level of production for 2016.

Costs were higher in the second quarter than in the first quarter but we had anticipated an increase. However, costs were higher than forecasts as the planned increase was accentuated by the impact of lower production from Chapada despite and this is important, Chapada is still having relatively low cash costs.

Higher costs were mostly due to foreign exchange rates for local currencies that have been significantly stronger than our original budget assumptions, the most notable of which would be Brazil's and Chile's currencies.

Our forecast for the Brazilian currency end of last year, at the beginning of this year was 4.2 real to the dollar but the Q2 average was around 3.5 and the current spot is in the range of 3.3 to the dollar.

Our forecast was based on the best information available at the time including the geopolitical and socioeconomic situation in the country at the time. Frankly, we are surprised by the strength of the real. We're not alone, Brazilian authorities and so many others have been surprised by the strength of the currency. Senior officials in the country have indicated that it is an anomaly but we’re adapting to it. And so going forward into 2016, our new foreign exchange assumptions are flat to current spot rates.

Picking back up on operational performance most of our mines are performing according to plan and at certain mines we’re delivering very strong performance. At Jacobina we undertook an effort to improve the mine and in the past few quarters it has delivered strongly.

Production was up 36% compared to the second quarter of last year. And cash costs and all-in sustaining costs were down a full 28% and 22% respectively. We’re seeing improved grades as development and production from higher grade areas continues to advance.

In our Brio division, it also turned in another strong quarter. Pilar in particular continues to demonstrate that it is a quality mine as quarterly production hit another record at reasonable and decreasing year-over-your costs.

Both El Penon and Gualcamayo produced in line with our expectations. At Canadian Malartic, we’re starting to see the benefits of the plans and initiatives we’ve implemented to optimize the mine. In the quarter we had a record average throughput and total first half throughput was at record levels.

We achieved these levels in part due to the profile or hardness that is more cyclical in nature but also because of improvements in the SAG mill to availability by optimizing scheduled maintenance and the configuration of the secondary crushers. We are advancing through the permitting process for Barnat extension, the public unit process is underway and once permitted Barnat will provide further flexibility to improve sequencing and create even more value Canadian Malarctic.

And that's not all, we see additional upside at Canadian Malarcticwith Odyssey, the Odyssey deposit. We announced promising drill results from Odyssey. We have allocated more resources to exploring Odyssey. Odyssey has the potential to become an ongoing improvement part of the ongoing other improvements to the mine life and the mine plants in Canadian Malarctic. Now picking up on that theme of creating value we're really pleased with the progress we've made with C1 Santa Luz.

Last night, we announced the decision to recommission C1 following the completion of detailed financial and technical analyses which included an updated mineral reserve and mineral resources. Now Gill will run you through the specifics of C1 but I thought I would highlight some really impressive and important results.

Overall mineral resources increased by full 21%, proven and probable reserves of 1.2 million ounces, annual production is expected to average 114,000 ounces of gold over an initial mine life that is 10 years, production in the first full year is expected to be over 130,000 ounces of gold.

All-in sustaining costs are expected to be below $850 per ounce. C1 Santa Luz a modest capital cost and we expect the production to begin in 2018.This is a high-value asset with an impressive return and there is a resource conversion and exploration upside. You've heard me say before that I believe that cash was a very important measure for assessing a mining enterprise and in the second quarter and first half of this year; we delivered year-over-year improvements in margin and in cash flow. Jason will speak more to that soon.

We will discuss financial results in more detail but generating cash flow is always been a key theme of this company and we expect that to continue. We also have numerous opportunities within our portfolio to increase net asset value, another measure that is important for mining enterprises. We are showing the potential for C1 and Cerro Moro as we move into production. At our newest operation RDM we are -- which we acquired for modest cost we believe there is good potential to refine and improve this mine and studies are currently underway to explore the various opportunities to optimize RDM at Agua Rica.

This is another asset that is significant potential to create value for the company. We are taking steps to mature the project through the development cycle and to evaluate potential transactions that can surface value in Agua Rica always with Yamana as a participant in the project. We also have ongoing initiatives to review what we refer to as dormant assets and these are quality projects and properties that offer further optionality within our portfolio. And lastly on the themes I would like to touch on the sale of Mercedes.

We announced the sale to Premier Gold last night. We are very pleased with this strategic transaction. We will receive $122.5 million in cash, 6 million common shares of the company and an additional 3 million common share purchase warrants. With the proceeds we will be able to make significant reductions to our net debt. This is the first of a series of steps this year to decrease our overall debt. So as I said most of our mines performed as expected in the second quarter and we're on track for full year gold and silver production.

We continue to expect between 1.26 million ounces and 1.34 million ounces of gold and 6.9 to 7.2 million ounces of silver that was our original guidance at the beginning of the year modified to include RDM that continues to be our guidance today. We are also expecting over 110 million pounds of copper from Chapada this year. We’ve updated our full-year consolidated cash costs and all-in sustaining costs guidance for this year.

We have revised cost expectations to update our foreign exchange assumptions. We are now expecting cash costs of $635 to $675 per gold ounce and all-in sustaining costs of $880 to $920 per ounce.

For silver cash costs are now expected to be over $8.50 up to $9 ounce and sustaining – all-in sustaining costs between 12 and 12.50 per ounce .And for copper we're expecting cash costs between $1.55 to $1.75 per pound. We remain poised to increase production decreased cost for the remainder of 2016, the second half of the year continues to be a poised for a better production and lower cost in the first half of the year consistent with prior years and strategically it means that our portfolio provides numerous opportunities to increase value.

Very quickly turning to Q2 operational highlights. Again operational performance as I mentioned was in line with expectations for most of our mines in the quarter, as we focused on operational execution and generation of cash flow and net free cash flow. Overall operational performance for production was in line for the quarter. We produced 313,000 ounces of gold at a very respectable and low cost of 664 per ounce and $964 on an all-in sustaining basis.

Mining companies can be measured quarter-over-quarter but longer term is always better. So for this first six months, we produced 601,000 ounces of gold tracking very nicely to our guidance for the year at $627 per ounce cash costs and $875 all-in cost. Production is entirely in our guidance and all-in sustaining costs well above our forecast of $845 per ounce is mostly due to currency. Silver production was 1.8 million ounces and cash costs of $8.50 and all-in costs of $4.31 and of course we produced just over 23 million pounds of copper as well.

We generated $202 million of cash flow in the quarter that represents an increase of $52 million compared to last year. And net free cash flow also increased as we generated over $37 million of net free cash flow which is almost $15 million more than the second quarter last year.

And I will now turn the call over to Daniel Racine to talk about our operations.

Daniel Racine

Thank you, Peter. Peter summarized very well the challenges we have faced at Chapada with the in-pit crusher and weather. Like mentioned we are now fully back into production and our Arsenal plant for Q3 and Q4 remain unchanged. We have updated our 2016 production for Chapada in light of the second quarter performance. We are now expecting full year production of 110 million pounds of copper and 160,000 ounces of gold. It is important to note the challenges in the quarter has not impacted our long-term outlook for this world-class asset and 2017 and 2018 guidance remain unchanged.

In addition during the quarter, we completed changes to the flotation circuit during the second quarter which we expect to increase recoveries. Highlighting this improvement of the circuit we have seen copper and gold recoveries in the last week of July of 83% for gold -- copper and 56% for gold. Respectively up from 74% and 52% in the first half of this year. Further we continue to believe there is a significant optionality at Chapadaand one of these opportunities is Suruca. We are in the process of updating our study at Surucato current economic input and targeting a startup of production in the first quarter of 2019.

Annual production for Suruca is expected to be in the range of 40,000 to 60,000 ounces per year. At El Peñón we continue to focus on improving operational efficiency and near mine exploration. Despite foregone condition at Orito and lower grade in narrow veins impacting production during the second quarter.

In line with the mine plan, mine development increased significantly compared to the first quarter to support production from narrow vein areas with an over 13% increase compared to the base line at the beginning of 2016. Other improvements also continue to advance El Peñón and we review the mining method and mineral reserve with the objective of improving ore recovery and dilution.

At Canadian Malartic we continue to optimize planned maintenance shutdown and advance other improvement which are contributing to increase throughput. In the second quarter we achieved record average quarterly throughput of above 55,000 ton per day. This contributed to record total throughput in the first half of this year.

Opportunities for cost and production improvement within the mine continue and in the second quarter a new remote shovel was commissioned which has since provided more operational stability. The exploration program at Odyssey continued to return favorable result and we will provide more details later in this call.

Jacobina continued to exceed expectations in the second quarter with further improvements in production and costs. Production and cost were positively impacted by higher throughput and sheet grade. Development and production from higher grade areas continue to advance at Jacobina and the operations has the flexibility available to increase throughput and grade.

At Gualcamayo strong performance continue with increased production, the result of higher throughput and recoveries from inventories. Production is expected to increase quarter-over-quarter for the remainder of the year due to plan higher grader supported by increased throughput from the buildup of all inventory on the leach pad.

Higher grade are also expected with the ramp up of sub level caving in the underground mine. Exploration drill result of Cerro Condor and potentials near mine target which were defined by surface sampling in and around the QDD remained bit in the first quarter has returned positive results. Further drilling and technical work will be completed during the third quarter with the goal of extending the mine life of the open bit.

Infill drilling during in the Las Vacas surface mineralization has also had positive result during the quarter. The deep carbonate project advanced during the quarter with a detailed review of mining methods alternatives.

Production was in line for the quarter at Minera Florida and it is expected to increase over the remainder of the year as throughput increases. Increased production is expected to contribute to reduce overall costs at the operations. Efforts to decrease downtime in the underground continued in the quarter, as did initiative really to the process plan. Improvements at the processing plant are aimed at improving recoveries which are expected to be realized in the second half of 2016.

At Mercedes the revised mine plan and cost structure and more selective mining continued to support improve operational performance. During the quarter an oxygen injection system began commissioning at the plant which is targeting to increase gold and silver recovery and expected to begin realizing result in the fourth quarter of this year.

Pilar and Fazenda Brasileiro continue to deliver. Pilar had another record quarterly production and Fazenda delivered increased year-over-year production at lower costs.

RDM, in the quarter RDM became our newest operation when the acquisition closed at the end of April. We believe there is a good potential to optimize and improve this asset and studies are underway to that end.

Our current focus is on staggering water availability to support steady state production at RDM. We are concurrently advancing two options to obtain water to support the 2017 production. At full production, RDM is expected to contribute - general production of over 100,000 ounces of gold.

I will now turn the call to Gil to discuss C1 Santa Luz.

Gil Clausen

Thanks, Daniel.

We completed work on the final technical report on the re-commissioning of C1 Santa Luz. Now we are moving to the execution phase of the restart plan.

Since last October we drilled about 16,400 meters in order to build a full geo-metallurgical model and to expand and convert the mineral resources the results of which were shown on this table. As Peter mentioned, the 21% increase in global resources and just over 1.2 million ounces improve and improbable.

This larger resource allowed us to increase the planned capacity to about 2.7 million tons per year with the addition of vertimill mill in the grinding circuit. Now we have a 10 year mine life averaging 114,000 ounces per year over the first 7 years of production.

On top of that, we have a large underground mineral resources of - on resource about 575,000 ounces that we planned to evaluate later this year. In doing our comprehensive metallurgical test work, we determined that about 60% of the gold at C1 is associated with sulfides and about 40% in silicates. So our decision to use a whole ore leach process was a good one. We can recover all the gold that are constituent within the lithology is that we have at C1.The reserves are roughly 50-50 clean dacite and carbonaceous ores and we can easily separate them in the mine plan.

We have very large wide zones in fact we intend to run several weeks or months on one ore type before switching over to the other with actually only modest stockpiling in the plan. So it's a very efficient mine plan. The dacite ore will be processed conventionally grinding and then through to a CIL circuit when running the carbonaceous ores we will add kerosene in the grinding circuit in order to blank the organic carbon. And then turn on that kerosene organic carbon removal circuit very simple flow sheet to pull the kerosene and our organic carbon out before any cyanide is added in the CIL circuit and we run the CIL circuit again conventionally.

Our recovery success with this flowsheet during our comprehensive testing phase has been very impressive. In carbonaceous ores we’ve be receiving between 81 depending on the carbon content between 81 to 84% recovery. And we've had very little scatter, a very tight distribution on recovery ranges which was very, very promising. The dacite ore should recover a normal ore similar to our MFP operation about 86, 87% in the study we have 86% dacite recovery on a conventional circuit.

Here are the operational and economic highlights of the project and this is just for the open pit reserves. We have a total CapEx of approximately $84 million. We have a very straightforward capital construction. We are adding a vertimill, we’re building some new tankage on the Leach circuit, CIL circuit, a new detox circuit expanding and lining the tailings facility et cetera. All-in CapEx including community aspects as I said are 84 million. If you look at the economics with a reasonable assumption of gold price in exchange rates, we can see a very robust after-tax IRR in the range of about 50 to 90%. So, indeed C1 Santa Luz is a very nice-looking project.

Now I’m going to turn it over to Barry Murphy to discuss our other project developments.

Barry Murphy

Thanks very much, Gill and good morning everybody on the line. Cerro Moro continues to advance ahead of schedule in all three of the main areas of activity first, being the underground mining, the site construction works and the detailed engineering. Through the underground mining, we are getting a bit understanding of the actual rock conditions underground which would allow us to optimize the mine plan and ensure that we don't have any surprises when we move into commissioning in 2018.The project expenditures is tracking according to planned the $20 million spent to-date this year and $47 million in total on the project. Expected expenditure for this year is $53 million.

The actual progress in the areas as Gill referred to earlier as shown on the next slide, with 325 meters of the 617 meters underground development complete year-to-date. The detailed engineering is sitting at 73% which is on target for us to achieve at least 85% complete by the end of this year.

In terms of site activities the bulk earthworks for concentrated plant and the infrastructure was completed last month ahead of schedule. And the next major contractor which is the concrete has mobilized a site.

Procurement is also advancing well with most of the key long lead items procured including the mold thickness and the refinery package. And finally on the exploration front, drilling continues as planned with approximately 10,000 meter full cost. Drilling plan for 2016 this drilling will allow us to improve by the categorization of the resources as well as allow us to show an increase in the total resource size. Thank you.

William Wulftange

Thank you, Barry and good morning everyone on the call. I’d like to provide a brief update on our exploration efforts of Odyssey and elsewhere in the company. As you know the Odyssey deposit lies within the Canadian Malartic mine concession boundaries and it is important -- and important gold producing property jointly operated by Yamana and Agnico Eagle on a 50-50% basis. The mineralization was discovered in the number 12 porphyry in 2014 and follow-up drilling outlined the potential resource contained within two mineral horizons the North and South zones during the 2015 exploration program.

The goal of the 2016 program was to complete a 100 by 100 meter spaced drill program to establish an inferred mineral resource. That initial program is complete and has successfully established the initial size, shape, grade and bulk tonnage deposit. Additional funding has been allocated just recently by the management committee to continue to drill the program – the drill program through the end of the 2016.The extra 5.5 million Canadian will allow the geologist to complete an additional 35,000 meter of infill drilling concentrated on at least two zones within the North mineral deposits.

The initial infill program will -- also encountered three unexpected high-grade mineral intercepts the other peers strike north-south crosscutting the east-west trending main Odyssey deposit. These structures will also be further drilling to be completely understood.

Companywide exploration programs, the exploration programs in Brazil, Mexico, Argentina and Canada had returned positive results during the second quarter and first half of 2016.Drilling of the Sucupira deposit at Chapada continues to define the high grade cigar-shaped copper gold mineral bodies probably with the well grade copper halo adjacent to the Chapada pit.

Exploration drilling is in the early stages of defining a mineral body immediately beneath the Chapada pit as well. Extension drilling of the Suruca and Hidrothermalito oxide mineral deposits occurred during the second quarter and the program now has evolved into an infill drill program of the Suruca oxide deposit.

At Jacobina a broad delineation and exploration local exploration program continues to encounter multiple intercepts of above average grade mineralization and many of the holes drilled. We are very excited about the upside potential along within this mineral belt.

At Mercedes new targets developed during the following the 2015 program and that will be drill tested with positive results especially at Klondike, Rey del Oro. At Gualcamayoas mentioned previously testing the targets defined by channel sampling in around -- in and around the main QDD pit have returned positive results that may extend the mine life of the main pit.

Infill drilling of the Las Baucus area 2 kilometers to the northwest shows promising intercepts in the oxide mineralization as well. And Monument Bay, the exploration camp was reestablished late in the second quarter and placed in the platforms are now under review for the summer drill program. Our principal goal here will be to define - to further define high-grade shoots while completing additional sampling of the old core that is on-site.

I’ll now turn the program over to Jason.

Jason LeBlanc

Thanks Butch. In the second quarter we delivered a 3% increase in revenues driven in part by higher gold and silver prices in gold sales. This was offset by significantly lower copper prices and lower copper and silver sales. We expect same production growth in the second half of the year to contribute significantly to revenue in the third and fourth quarters.

As you’ve seen costs were from Q1 of this year and I’d like to run through the main drivers, some of which were planned and others are compounded expected cost increases. Higher cash cost were impacted by a 12% increase in secondary development from quarter-to-quarter. This was in line with plans. However, local currencies in our three main jurisdictions continue to strengthen. The Brazilian real, Chilian peso and Canadian dollar were up 11%, 4% and 7% respectively compared to the first quarter. These increases were further influenced by the lower production at Chapada that we’ve already discussed.

When we look at on sustaining cost we see a big impact due to the timing of planned capital spending which increased 55% compared to the first quarter again this was in line with budget but when we apply the foreign exchange rate differential seen in the quarter to capital spending we saw an amplification of their impact.

Also in Q2 we had an anticipated increase in G&A compared to the first quarter which contributed to the higher all-in sustaining cost compared to Q1. I want to highlight that we’re on track for fully G&A guidance and that the Q2 spend was in line with plan. Lastly there was also a planned increase in expiration spending for the quarter. Despite these cost increases since Q1 2016 you can see that our average cost structure year-to-date through Q2 is comparable to that of last year.

Turning now to earnings. Net earnings and adjusted earnings were up compared to 2015 with increases of $39.9 million or $0.04 per share and $1.3.7 million or $0.02 per share respectively. Increased earnings were drive in part by higher mine operating earnings and lower G&A and depreciation.

Looking at cash flow we see a strong performance as we continue to focus on generating sustainable and increasing cash flow. During the balance of the year we expect the performance and trend to continue as production is weighted to Q3 and Q4.

We’re also continuing to show strong margins. Gross margin and EBITDA margin which we began highlighting recently both increased in the second quarter and first half compared to 2015. We’re focused on improving both dollar and percentage margin through higher production and constraining our cost in a favorable gold price environment.

The significant financial performance is also continuing to translate into increased net free cash flow. In the quarter we generated just over $37 million of net free cash flow up almost $15 million from 2015 and in the first half we generated over $85 million in net free cash flow up $117 million from 2015.

Beyond this measure of net free cash flow we also completed the Ausenco Australian transaction earlier this year that brought a further $64 million in to the treasury. With the planned production increases in the second half of 2016, we expect net free cash flow to increase over the balance of the year further strengthening our balance sheet and supporting our debt reduction plan.

Looking forward I would like to pick up on what Peter discussed in terms of production and cost guidance for the rest of the year. Our consolidated gold and silver production is unchanged at 1.26 million to 1.34 million ounces of gold and 6.9 million to 7.2 million ounces of silver. First half gold and silver production have us well positioned based on planned production increases in the third and fourth quarters. In light of the second quarter challenges at Chapada, we are revising our full year guidance to 110 million pounds of copper.

Looking at cost for 2016 we’ve update our co-product cash cost in all-in sustaining guidance to reflect year-to-date results and more importantly current foreign exchange rates. As you’ve heard local currencies have been stronger than our initial budget assumptions so we’re taking the opportunity to update expectations based on current conditions.

On a consolidated basis we now expect cash cost and all-in sustaining cast cost per ounce of gold of between $635 and $675 and $880 and $920 respectively. Silver cash cost are now expected to be between $8.50 and $9 per ounce while all-in sustaining cost are expected to be between $12 and $12.50 per ounce.

Now for copper, cast costs are now expected to be between $1.55 and $1.75 per pound while all-in sustaining cost are expected to be between $1.95 and $1.15 per pound.

I will now turn the call back over to Peter.

Peter Marrone

So ladies and gentlemen those are the highlights for the quarter and perhaps if we can open up the call to questions.

Question-and-Answer Session

Operator

Thank you, Mr. Marrone. We will now take question from the telephone lines. [Operator Instructions] Our first question is from Botir Sharipov of HSBC. Please go ahead.

Botir Sharipov

Hi, Peter and the team, a few questions from me if I may. What would you cost be in the second quarter both cash cost and all-in sustaining cost if you didn’t have a input cost ratio as Chapada? I don’t know if you guys calculated that.

Peter Marrone

We have a rough estimate, we would have been closer to what forecast - Jason perhaps you have the number there.

Jason LeBlanc

Sure, I think big picture number is, in terms of cash cost I think that in-pit crusher problem contributed to $25 per ounce and I think on an all-in probably another $10 or so that.

Botir Sharipov

Okay, thank you. And what sort of I guess throughput do you have right now at Chapada in July?

Jason LeBlanc

In August it will full production, July early the first week of July we were still doing the repairs but it started at the end and it’s going like planned. So the plan is to achieve the full throughput of 58,000 to 59,000 ton per day.

Botir Sharipov

Okay, great. And then just moving on your FX assumption does – the new assumptions do they include your hedging impact or are they before the hedging?

Jason LeBlanc

Well there is the hedge assumption, but the cash cost that results from it do incorporate the benefit of those hedges yes.

Botir Sharipov

Okay, great. And I guess the last question looks like you are more pointed speaking about Agua Rica now, can you possibly give us a maybe a timeline of a potential deal if any.

Jason LeBlanc

Well it’s difficult Botir to refer to specifics on timelines or potential deals. What I can say is that we’ve now completed the review of this project to a feasibility level of understanding. Now to be fair, a lot of that hard work had been done by Xstrata when Xstrata had entered into that deal with us several years ago. We’ve picked up the ball from there and as you know Xstrata was purchased by Glencore who is now the operating partner of Alumbera and the discussion has been about the possible integration of El Gorica into Alumbera.

So the studies on El Gorica as a standalone project and as an integrated project into Alumbera have reached a level of certainty that is very, very high. That has led us then to the following, discussions with several parties clearly one important one would be the partners and one partner in particular the operating partner at Alumbera. It is logic, it is compelling, Xstrata have compelling nature of a deal. They struck a deal with us to integrate one project into the other and so we have advanced significantly the technical reviews of that project.

What do I think is the timeline. Given the size and scale of something of this size and given the improvements in Argentina significant improvements in Argentina politically, geopolitically, socioeconomically one very significant one Botir is the elimination within the first month maybe the first three weeks of the term of this new president eliminating the retention tax at 10% tax which added more than $300 million of value to El Gorica alone.

So our view is that with those improvements it makes for a very viable project and a very viable integration event with Alumbera. So the discussion should continue from there. So with the socioeconomic events the improvement in Argentina, the improvement of the project but given the size and scale we anticipate that something like that takes in the range of about a year. So we’re several months into that year. We’re confident that within this year there is a deal to struck. More importantly is what does Yamana want from this deal.

Well as I said in the earlier part of the presentation, we think that the right thing to do and the optimal point for Yamana given the size and scale that we are today is to remain a partner. We are 12.5% partner, a participant in Alumbera. We think that something in the range of 10% to 20% up to 20% is very respectable and reasonable. There is a lot of gold in that deposit. There is a lot of copper in that deposit also but it provides a great byproduct credit which has been very successful for us in the 13 year existence of this company.

So we see the deal construct as an interest in the project perhaps some of that gold is part of that interest and a cash component to it. But because of the interest in the project and cash component that means if the cash component would likely larger could it be less and I think Botir that with that in mind and that construct which is different from what we had been saying before we had been attempting to do before it makes – because that cash component is so much easier to deal with it makes for more doable deal.

So that’s the construct generally, that’s the timeline with a reasonable high degree of certainty that there is deal here to be done.

Botir Sharipov

Thank you, very helpful.

Operator

Thank you. Our next question is from David Haughton with CIBC. Please go ahead.

David Haughton

Good morning Peter and team. Thank you very much for the update. Probably a question for Daniel if that’s okay Peter. Just looking at Suruca I see that you’ve moved up the potential staff to 2019, you’ve got a study coming out mid next year. Is this project approved or are you still pending the outcome of the study.

Daniel Racine

It’s still waiting the outcome of the study but what we know right now it’s a positive study. So it should be approved. It’s a heap leach project it’s already easy to build so we don’t see any – and we don’t see why the project won’t be approved.

Peter Marrone

And David may add to that. You might remember that Suruca had gone through a feasibility level study several years ago. As you are aware we’ve significantly I believe significantly improved the bench strength of this company on operations and also on our technology services and we have better protocols than we had before. The level of probability on the technical merits of a project and the peer review that we conduct internally and externally to make sure that a project works.

So Suruca has gone through feasibility study. We actually started to spend money on the development of Suruca and then with the declining gold price we suspended that effort. So what were doing now is we’re saying brush up the work that had been done before and bring it to the new standard of Yamana and then move forward from there.

So as Daniel said the study is positive. The likelihood is high but bear with us as we complete that checking of the boxes in these protocols that we’ve established over the last couple of years and when the project was approved or studies and the vast part of the equipment is already on site so.

David Haughton

Okay. The last time we saw some numbers we were thinking about $40 million to get it up and running. I know that you’ve got a study that will probably fine tune that but is that a reasonable sort of starting point?

Barry Murphy

Yes I will say Barry Murphy here, that’s correct. The slight inflation since those numbers were initially payable but that’s the ballpark we’re talking at the moment.

David Haughton

Okay. And since I’ve got you Barry, at here is at Yamana you’ve got your start up CapEx. Can you just remind us what your life of mine sustaining capital CapEx is including mine development to keep ahead of the mill feed?

Barry Murphy

I don’t have the number in front of me. If you give me a second I’ll forward that David. You are looking for the life of mine sustaining capital?

David Haughton

If you wouldn’t mind Barry please.

Barry Murphy

Sure, okay give me a moment and I’ll get it to you in a second.

David Haughton

Okay. Another development question if that’s okay Peter. Maybe over to Gil. C1 one coming up and getting the go ahead. Just wondering about its spend profile, $84 million would the bulk of that be spent in 2017 and then dribbling into 2018 or what kind of thought have you got there.

Peter Marrone

Yes, really for the balance of this year David we’re really looking at soft cost as move the very details execution of say design engineering and the project execution plans and protocols so yes, the capital spend a bulk of it will be next year.

David Haughton

All right and I’ve seen that you have underground there, quite a lot of ounces potentially but is 2.3 grams viable for this kind of ore body?

Peter Marrone

Well if you look at the deposit that’s the M&A resource at a cut off of about 1.5 grams. When you start comparing that to our other operations notably Fazenda Brasileiro we would be very happy to have those grades at Fazenda Brasileiro as well. So that’s generally in the range of what we’re producing very profitably at. The zones are wide. It looks to me just on a first blush that we might be able to even do some transverse stilting and bulk tonnage mining underground but of course we have the technical work to do there, but I think it looks very promising.

David Haughton

All right. And with the kerosene treatment, can you point to any other mines where you have seen this operating?

Peter Marrone

There are a number of operations that are using kerosene blanking and carbon ores, there is a whole long list of them I’d be happy to share that with you.

David Haughton

Okay, yes, if you could drop an email that would be fine. And then last one, maybe over to Jason, just looking at the balance sheet I know that you have got total data of about 1.76 bill but you are only showing long term debt of 1.6, I’m wondering why the current portion of that debt is not showing up on the current liabilities?

Jason LeBlanc

Yes, the gross is about 1.7, David.

David Haughton

Okay. And the current portion of that 95, I just don’t see it on the balance sheet, wondering what happened?

Jason LeBlanc

Yes the primary portion of that would be the 73 odd million dollars that comes due in December of this year

David Haughton

Okay.

Barry Murphy

David, it’s Barry here again, the number you have got in terms of total sustaining capital for the life of mine is in the region of $240 million which includes all the mine development CapEx through the life of mine as well as the mine closure costs at the end of life of mine.

David Haughton

Okay. And do you have a ballpark number for that closure, Barry?

A – Barry Murphy

The closure we are looking at about $30 million, - it’s in that number.

David Haughton

Thank you. And look forward to an email Gil, thank you very much for answering all these questions.

Operator

Thank you. [Operator Instructions] Our next question is from Anita Soni with Credit Suisse. Please go ahead.

Anita Soni

Hi, guys, just a very quick question. The cost revision that you had on the co-product cost, I don’t see anything for byproduct cost, well did it have a similar impact?

Peter Marrone

Yes, indeed we focused in on the co-product to revise the guidance. As you know we have had to changes to the copper over the balance of year and I think wanted to focus on the pure, pure gold. There could be an ancillary knock on effect from how we can perform on the copper for the balance of the year. So you know, reserve that right to do a little bit better hopefully.

Barry Murphy

Anita, the byproduct is not expected for the entirety of the year because of Q2 and because of the production profile for Q2 of copper and where copper price is standing today the byproduct is not expected to be very meaningful.

And so part of what we are trying to highlight is that the co-product is changed because of the impact that we described. Byproduct won’t be very meaningful based on what the assumptions are today.

However as Jason is touching on, we are assuming 110 million pounds of copper coming from Chapada. This is a big size and scale operation and given its size and scale one can conceive that with a very modest uptake in throughput, modest uptake in grade and some of the less conservative assumptions that have been made we can have a far more meaningful increase in copper, not gold but copper.

And that would imply then that the overall cost would come down for copper, the production would go up, the margin would increase and it would represent a significant improvement to the byproduct credit.

So what Jason is touching on is there is an element of uncertainty in terms of where that would be because there is certainly the scale of operation implies that it should be able to do better than 110 million pounds, perhaps significantly better than 110 million pounds but we are not at that point. So you should assume that the byproduct credit would be zero.

Anita Soni

All right. Thank you very much.

Operator

Thank you. Our next question is from Steven Butler from GMP Securities. Please go ahead.

Steven Butler

Guys, good morning. In terms of couple of the assets, obviously the grade was affected at Chapada given the crusher issues and therefore you had to supplement the stock power. We understand that for sure, Peter.

Jacobina and El Penon, questions on those two assets were, maybe just great sequencing perhaps but I was liking the trend at Jacobina for the last couple of quarters on getting meaningfully above the two gram level but you slipped back to 2.09, is it simply sequencing or anything else in Jacobina to explain it?

The last couple of quarters 2.59, 2.36, 2.27, down to 2.09. So a question there, and El Penon is ready believes that the grade will increase a bit in the second half?

Gerardo Fernandez

Good morning, Steve, this is Gerardo Fernandez. For Jacobina, the operation is managing the blending but you know we have a very high grade show in Canavieras South and we are advancing developing there.

Some of the areas are more composite structurally but very high grade, so we need to do the delineation really in some of these areas with high grade above 5 grams per ton. We continue to develop further so that lowest to have a better future expectations from that area but in the short term we used other areas available to produce.

So sequencing, nothing has changed in terms of the grade itself where mine is managing the resource and the reserve to preserve the high grade and mining with quality and controlling dilution in the future.

Butch mentioned some of the resource we need to drilling, delineation, drilling those are very positive and we are seeing the same in the drifting we are just taking it slow and using the flexibility.

Steven Butler

Are you going to expect any grade increase at Jacobina in the second half?

Gerardo Fernandez

Yes, we expect the grade to go up. For El Penon sequence, Q2 we are planning to do significantly more secondary development in both Quebrada Orito mine and also in the Narobin area so in the East or North mine and so as part of that sequence the grade came down compared to last quarter but is expected to go up by the end of the year.

Steven Butler

Okay. Thank you very much.

Operator

Thank you. There are no further questions registered at this time, I would like to turn the meeting back over to you Mr. Marrone.

Peter Marrone

Thank you very much. There were several questions asked, we appreciate the questions. Let me round out some of the answers to the questions. Butch here you asked about the cash costs if Chapada had performed according to our expectations in Q2.

So perhaps if I can round the square to what Jason had said, the impact then to cost would have been entirely the FX and so we would have anticipated cost, it would have been meaningfully below where we deliver cost for the quarter and they would be closer to perhaps slightly below what we are currently guiding for the entirety of the year.

On David's question on Curuca, we should have picked up on a point. Now Barry made the reference to $40 million this is the original estimate. We’re updating that so I think it’s reasonable to say that there should be some range of estimates so we think that that numbers between $40 and $60 million.

However, that represents 40,000 to 50,000 ounces the actual number is 48,000 ounces in the original study of production per year for at least five years. And as Butch can better explain we’re also seeing some significant opportunity in another deposit called Hermathermolito which is an oxide deposit some of which is copper and gold and some of which is gold. And so we think that we should be able to extend the production expectation coming from Curuca alone.

On the question that was asked by Anita on C1 Santa Luz in the spend, I believe it was Anita and MNI for the underground I want to make sure that this is clear. The economics that you saw in this presentation and when we publish the report that we’ll put on our website so that everyone can see with clarity what C1 is about. That economics was entirely on the open pit reserves. So there is no upside coming from resources, open pit resources and certainly no upside coming from underground.

And Steve your question on grades, perhaps you may have noticed that in the quarter silver grade was slightly better and gold grade was slightly lower and unbalance an average doubt to provide for a very decent quarter for El Penon and as Gerardo mentioned that sequencing and grades for gold will improve over the course of the balance of the year.

One final note. We had a lot to say yesterday. With C1 Santa Luz, Mercedes, our dividend and our financial results but we don’t want to understate the importance of exploration and specifically to Chapada, Jacobina, Canadian Malartic and Gualcamayo. While Butch touched on that we touched on it in one page of our presentation and there's a lot more to say.

And so given the volume of material that everyone had to digest into last night and given that we’re dotting the I’s and crossing the T’s on our exploration efforts, you should anticipate that over the course of this quarter in this quarter perhaps even over the course of the month of August we’re just evaluating what and when we can say certain things to dot the I’s and cross the T’s as I mentioned.

We’ll provide and exploration update. And the objective of that exploration update is to say what’s the near term production and resource expansion? And as I said especially at Chapada, Jacobina, Canadian Malartic and Gualcamayo, so please anticipate that. That will be significant, it will show further upside in certainly in these assets.

We’re an America’s focus company ladies and gentlemen as you’ve heard us say before. We’re not a South American focused company. We’re North American and South American focused company and we hope to continue the progress in our efforts at Canadian Malartic, at Odyssey, Monument Bay, Kirkland Lake and across of course the other countries in which we operate in the Americas.

Thank you very much for participating on the call.

Operator

Thank you, Mr. Marrone. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.

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