Home » Gold & Precious Metals Stocks » Transcripts

Yamana Gold Q3 2007 Earnings Call Transcript

posted on: November 08, 2007 | about stocks: AUY

Text not found.
Font Size:
Print
Email
- Single Page View

Yamana Gold Inc. (AUY)

Q3 2007 Earnings Call

November 8, 2007 11:00 am ET

Executives

Peter Marrone - Chairman and CEO

Chuck Main - SVP of Finance and CFO

Analysts

David Stein - Cormark Securities

Brian Christie - National Bank Financial

Rodney Stevens - Salman Partners

Anita Soni - Credit Suisse

Steven Butler - Canaccord Adams

Senthal Goslan

Barry Cooper

Robert McLeary

Robert Dunn

Presentation

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Yamana Gold's Third Quarter Earnings 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. 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 prices of gold and copper, and timing of the development of new deposits; success of exploration activities; permitting timelines; currency exchange rate fluctuations; requirements for additional capital; government regulation of mining operations; and environmental risks.

Forward-looking statements are based on the opinions and estimates of management as of the date such statements are made. Risk factors are discussed or referred to in the company's Management's Discussion and Analysis of Operations and Financial Condition and Annual Information Form.

Although the company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that could cause actions, events or results not to be anticipated, estimated, or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.

The company undertakes no obligation to update forward-looking statements if circumstances or managements' estimates or opinions should change. Accordingly, participants are cautioned not to place undue reliance on forward-looking statements.

I would also like to remind everyone that this conference call is being recorded and will be available for replay today at 1:30 pm. The replay number is 416-695-5800 or toll free 1-800-408-3053, both with the passcode 3239999 followed by the pound sign.

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

Peter Marrone

Thank you for the introduction, and your attendance, gentlemen and ladies.

On the last quarter's conference call, we highlighted the depth and breadth of our operations team at Yamana, and some of you have heard me say that it is our view that the scarcest resource in this industry is human resource. And with the combination of the Yamana, Northern Orion, and Meridian Gold that we've completed in this quarter, we've taken the human resources that we already had within Yamana, and supplemented those with the people that have come to us from both Northern Orion and Meridian.

The new senior operating exploration and executive teams, as well as the three Meridian Directors who have joined our Board, were announced on October the 18th. And as a result of all of these activities and these events, we have now more than 5,500 employees in Yamana compared to the modest 12 employees when we formed this company, just a little over four and a half years ago. And we have, certainly in my view, an unparallel depth of management. This includes approximately 130 geologists in this company, who will be advancing our extensive exploration portfolio, and approximately that same number of mining engineers.

It's a good mix of talents with very little overlap, in terms of operations, and in terms of geographical presence between principally Meridian and Yamana, and the integration of the two groups. And we are pleased that this first and most important phase of the transition and integration of our companies relating to the combination of those companies, has been completed as quickly as it has, and as seamlessly as it has.

We undertook a task of creating a management and employee platform before our growth began, and before we embarked on our major acquisitions. And we are pleased that our integration has added to that already robust human resource.

Now, one of the clear messages that we have communicated, beginning at our Analyst Day on October the 18^th, and that we have continued to communicate over the past few weeks, is that the go-forward for this company is organic growth. With the development of the robust pipeline that we have ,and with the exploration opportunities that we have, we have now seven producing mines in the company--including two major extensions of those mines--product development, and advanced exploration stage projects, and probably what is the best exploration portfolio in all of Central and South America, with an exploration team, as I mentioned, of roughly 130 geologists dedicated to that exploration effort so we’ll be able to take advantage of those opportunities, and with the seasoned development and operations team that's confident that building mines and operating those mines.

We are results-driven management. Process is important, but it is also important to emphasize results. And that has been the success, certainly what I believe to be the success, for this company for the past four and half years of our existence. And that will continue to be the marker of that success going forward into the future.

We develop strategic targets with the concurrence of the respective groups, and we then strive to deliver on those strategic targets. We're entrepreneurial, and that is important that I emphasize that. Our view is that the success of a mining company depends on maintaining their entrepreneurial spirit, notwithstanding the fact that one becomes bigger as we have.

So, we are a large company today, but we plan to maintain that entrepreneurial spirit that has driven the success of this company. And with a focus on the Americas, that's what we know, and we like the geographical and geopolitical friendliness the industry, and mining that comes from the places in the Americas that we operate. It's where we believe we can make a difference. Part of our plan is also to be in areas where there is developed infrastructure. And that adds to a whole host of benefits, including capital costs that are more manageable and modest by comparison to some other situations.

So, in addition to announcing the new combined team on October the 18th, we also unveiled a strategic growth plan and target for reaching a sustainable level of 2.2 million ounces of gold production by 2012. That's focused entirely on organic growth, the plan initially targeting 1.2 million ounces of production in 2008, and progressively increasing 1.5 million ounces by 2009, and then progressively from there to 2.2 million ounces by 2012. Production to these levels will be differently driven from enhancements, expansions, improvements and development of existing assets.

Exploration successes, again from that robust exploration portfolio, that highly confident and large exploration team, and if I may mention, a $75 million exploration budget per year, will add and supplement to these levels. Specific aspects of the strategic plan include sustainability of production; low-cost production, both before, and particularly after, byproduct credits; focus on growth and resources production--that's important for a mining company--but equally for any company; our focus on growth in cash flow and earnings, and our cash flow and earnings on a per share basis; also organic resource and production growth from development of existing projects and further exploration efforts from our extensive portfolio of exploration concessions in the Americas; focus on locations that are friendly to industry, as I mentioned, and mining in particular, with mining category culture in history; and underpinning our efforts; our three principle jurisdictions, perhaps four, but the two principle jurisdictions in which we operate being Chile and Brazil, which are not only mining currently, but have significant mining history and mining pedigree. Adding to that, then, would be our efforts in Argentina, and then, in Mexico.

We focus in areas with developed infrastructure on programs with manageable and modest capital costs. As I mentioned before, results driven to exploration, development and construction and operations, and also ensuring the priorities given to sustainability--and sustainability comes in many, many forms--environmental friendliness, community health and safety issues, focusing on government community and social relations. And we believe that that goodwill in the places that we operate will give us that social license for further development of other projects that develop with that organic growth.

And as I mentioned, Yamana has seven producing mines--two of which are undergoing expansion, five development stage properties, and an extensive exploration portfolio, with a target number of 2.2 million ounces by 2012. And some of the principal components that underpin that target include increasing the sustainable gold production at Chapada, with plant capacity increases; increasing production at El Penon ,with modest plant capacity increases; selling improvements, along with the development of the newly discovered Bonanza vein; increasing production at Jacobina, largely from the development of new mines--as you may be aware, Jacobina is a complex of mines with a common plant; and focusing on these new mines, principally Canavieiras and Morro do Vento where we have a large portion of our resource, and upgrading that resource to proven and probable reserves, and where the grade is meaningfully higher than where we're mining today, is Joao Belo; beginning production at Gualcamayo, and then increasing that from our baseline from open pit operations, and ultimately moving to this incredible potential at QDD Lower West, which is the potential underground area that we are now further exploring; increasing production at Minera Florida in Chile with quite capacity increases; developing Mercedes in Mexico, with a target date for production of 2010; developing C1 Santa Luz in Brazil, with a target date for the feasibility study by the end of this year and production in 2009; develop the Jeronimo project, pursue an expansion of what is today a small mine in Central America but a platform for expansions to 90,000 ounces per year, and then using that as a platform for further exploration of an area that is relatively under explored and where we have an extensive exploration package; modest mining method enhancement at Sao Francisco to increase production and continued development effort at Sao Vicente, La Pepa and Amancaya.

Ultimately, we have to demonstrate return to shareholders in more than from production growth alone, as you've heard me say before. And from that, we believe the cash flow and earnings is as important as production, and in the ground resource growth. I hope you'll agree with me, we've continued to demonstrate the importance of financial performance on a quarter-by-quarter basis.

Last year, we were not an earnings company, and we were not generating the robust cash flow that we're generating this year. At the beginning of the year, we were not. And during the third quarter of this year, our third full quarter with full operations at Chapada and Sao Francisco, in particular, we realized an increase in quarter-over-quarter revenue of approximately 300% over the comparative quarter, and 9% from the immediately prior quarter; mine operating earnings of $125 million; cash flow from operations of $105 million or $0.30 per share; adjusted after-tax earnings of almost $72 million, or $0.20 per share; cash cost containment at our major mines, both before and after byproduct credits; increase in operating margins on our gold production, as Chuck will go through in greater detail in a few moments; increase in gold production quarter-over-quarter, and increase in revenue quarter-over-quarter.

We have consistently said that we would deliver consistent financial performance in terms of cash flow and earnings at the beginning of 2007, and I hope we can say to you with some confidence and comfort that we have demonstrated that. And that's the hope that we'll continue to achieve.

Yamana delivered one of the best returns on invested capital and return on investment in the industry, and we plan to continue to deliver strong cash flow, earnings and returns for shareholders, along with growth in underground resources and growth in production, at the same time, to the advancement of these developments efforts, and ultimately taking, as I mentioned, that 2.2 million ounces of sustainable production from 2012 on.

So, from a baseline of under 1 million ounces pro forma this year from this combination, to 1.2 million ounces imminently in 2008--we're almost into 2008--and then growing on a step-up basis to 2.2 million ounces by 2012,a and thereafter. All of our growth comes from gold, all of our exploration relates to gold. And we're fully leveraged to gold and the gold price.

Seven mine product development stage projects, an exceptional exploration package fully funded in all of our operations, strong cash position today, with a growing cash balances as a result of the robust cash flow that Yamana continues to deliver--we have all of the assets in place to achieve that goal.

And with that, perhaps, if I can turn it to Chuck for the more specific results for the quarter.

Chuck Main

Thank you, Peter. Good morning and welcome to everyone. Peter has already given an overview of our very strong production and financial results.

On the last call, I talked briefly about the high quality and hardworking Yamana staff. I'm glad to report that we have made a significant addition to that team by virtue of the team that is joining us from Meridian. When we first went to Reno, we were definitely impressed with the high quality team there. We look forward to working side by side.

The third quarter saw the company realize various new financial records, including revenue, operating profit and cash flow. The year-over-year increases in operating profit and cash flow are extremely strong, and we made positive progress Q3 over Q2. The adjusted earnings of $71.5 million after-tax, and sales of $200 million for the quarter, were milestones that continue to reflect the benefits of our organic and acquisition growth. Our year-to-date revenue now exceed the $0.5 billion level.

Excellent progress has been made on the production front for the third quarter, with quarter-over-quarter gold production increase of 9%. Gold production quarter-over-quarter increases were 13% at Chapada, 51% at Jacobina, 26% at Fazenda Brasileiro. Concentrate production at Chapada was up 9%.

And we've added a new line to the Sao Francisco mine statistic charts, called full recovery rate. The full recovery rate of 77% reflects the rate we are achieving for heap leach pads that have needs for the full extraction cycle. The recovery rate previously disclosed is a calculation of gold recovered, provided by gold placed on the heap leach pads. That calculation does not take into account the six-month leach cycle at Sao Francisco and future amounts of gold we'll recover.

Cash flow from operations before changes in working capital was about $105 million, representing an increase of 15% over the second quarter, and 618% over the comparative year quarter. There are various overviewed points that affect the financial statements. The income statement and production information includes revenue for full quarter for our five mines.

The prior quarter, Q2 2007, reflects the results of operations at six mines -- as Fazenda Nova sixth mining in the second quarter, although there were 500 residual allowances recovered from Fazenda Nova in the third quarter. The corporation, in third quarter 2006, includes the results for the same mines, excluding Chapada, and had two months of production at Sao Francisco, which commenced commercial production on August 1st, 2006.

On adjusted earnings, we have adjusted for the same items that we have in the past. The most significant adjustment is to add back the $50 million non-cash unrealized loss on the mark-to-market on the copper forward contracts. This represents 82% of the adjustment items. It is an important point that, although the contracts commercially achieved the objective of hedging the copper prices, an accounting anomaly does not allow us to use hedge accounting, as there are two metals in the concentrate. We continue to review the merits of this anomaly.

If hedge accounting was permitted, the mark-to-market loss would not appear in the income statement. We believe that adding the mark-to-market loss back more accurately portrays the economic substance. For this reason, and because it is unrealized as a non-cash item, it is a reconciling items in determining our adjusted earnings.

The net earnings for the current quarter was $30 million, and for the comparative period last year, it was a loss of $12 million, providing a year-over-year improvement in quarterly earnings of $42 million. We pay particular attention to cash flow generation as a measure and indicator of value creation going forward. The cash flow from operations prior to working capital movements was $105 million, or $0.30 per share, in the third quarter. This represents an increase of 15% over the second quarter level. We consider this to be a major accomplishment.

Our operating margin, excluding depreciation per ounce, for the third quarter has increased to $1,100 per ounce, a 9% increase over the second quarter this year. Therefore, we have been able to increase our cash margin per ounce during the quarter despite pressures on our cost structure due to higher price commodity inputs and the impacts of the exchange rate.

Our realized gold sales price per ounce was $686 per ounce--roughly equivalent to what it was in the second quarter. Our realized copper price for the quarter was $3.54 per pound, with current spot prices around $3.26 per pound.

Cash cost per ounce of gold produced after byproduct credits declined a negative $339 per ounce. A significant decrease in cash cost were achieved at Fazenda Brasileiro, where costs decreased 16% quarter-over-quarter.

A portion of operating cost at Jacobina starting in August are no longer being charged for the sill pillar failure account. With production continuing to ramp-up to normalized levels, the unit cost at Jacobina will be on the decline in the fourth quarter. The unit cost will also be favorably impacted by the increasing quantities of ore grades from Canavieiras in the fourth quarter. The blended ore grade in the fourth quarter is expected to be approximately 2%, 2 grams per ton.

The operating margin loss for Jacobina in the second quarter of approximately $3 million has now reversed to a small operating profit in the third quarter, and future profitability improvements are expected at Jacobina. Our treatment charge per ton of concentrate gold at Chapada was $77 per ton, and the copper refining charge was approximately $.077 per pound of copper sold. These levels will vary in particular quarters, depending on the customer mix.

We continued investing for the future with total capital expenditures of $63 million, which included $14 million on mine construction, and $9.3 on exploration. Significant capital expenditures by mine includes $23 million at Jacobina, reflecting progress on the expansion plan at Jacobina, and $18 million at Gualcamayo, reflecting construction and exploration value-adding activities.

The current reais hedge group is at R$195 million over a three-year period, and an exchange rate of 2.316 to 1. The year-to-date gain on the currency hedge was approximately $19 million, of which $1.2 million is treated as other comprehensive income.

A couple of comments on the tax expense. The overall provision rate was 33% for the current tax provision, of which 28% is related to deferred taxes. It should be noted that 12% of the effective tax rate relates to unrealized exchange gains on the intergroup debt never has been realized. The tax rate excluding this gain on the intergroup debt was 20.5% for this quarter.

We have commenced the implementation of a global restructuring plan in order to minimize the annual global effect of tax rate; the restructuring plan will be completed by the end of the year. The full impact of this plan will be realized in 2008.

Our balance sheet continues to be strong, with $67 million in cash at quarter end, along with accounts receivable of $130 million, of which additional cash of $79 million was collected, subsequent to the quarter end. As at the quarter end, there was no long-term debt.

Subsequent to the quarter end, $700 million was drawn down on our acquisition facilities relating to the Meridian and Northern Orion acquisitions. This debt bears interest at LIBOR, plus a margin of 135 basis points for six months. After six months, the margin reduces by a reference to a grid based on debt to EBITDA. We expect that the margin will be approximately 95 basis points. Three months LIBOR is currently at 4.9%, so overall, the interest rate will be in the range of 6% to 6.25%.

Looking forward to accounting for Meridian, Northern Orion in the fourth quarter, it should be noted that Meridian will be treated as a multi-step acquisition; we expect to own 100% by year-end. However, there will be a minority interest in the earnings relating to Meridian in the fourth quarter. Our interest in Meridian Gold's earnings as of October 15th will be 78% thereof, until November 2nd. At that date, our interest in their earnings will be 90%, until 100% ownership level is reached. Amalgamation with Northern Orion occurred on October 13th, and we have 100% interest in Northern Orion from that date.

Meridian has filed its third quarter report, and it's available on SEDAR. Northern Orion will not be filing a third quarter report. Key statistics for Northern Orion for the third quarter are, in millions of dollars, equity in earnings of Alumbrera, of $19.1 million, net earnings $20.7 million, cash flow from operating activities $25 million, copper production of 6.2 million pounds and gold production of 22,000 ounces. The Alumbrera cash distributions received for the nine months were $80 million, of which $24 million was received in the third quarter.

Pro-forming the amount of common shares will be as follows. It was 356 million shares outstanding at September 30th on the 78% take-up. On October 12^th, we had another 179 million shares. Another 24 million shares on the 12% take-up, takes us to 90%. And we'll be issuing another $23 million on when we take-up the remaining 10%. We issued 84 million shares for Northern Orion, and therefore, the pro forma shares outstanding will be 666 million.

For accounting purposes, the purchase price of Meridian will be approximately $3.2 billion with $1.8 billion as the purchase price discrepancy. The purchase price allocation will be assessed and the preliminary script will be available at year-end. We anticipate a significant portion being allocated to mineral properties and a small allocation to goodwill, although this is subject to more detailed analysis. The total purchase price for Northern Orion is anticipated to be approximately $1.3 billion, with a purchase price discrepancy to be allocated of approximately $465 million.

With that, I'll now turn the call back to Peter.

Peter Marrone

Thanks very much, Chuck. I want to leave you with some messages before entertaining questions. As you know, I am a Yamana shareholder and I strongly believe that there is incredible value and upside to our stock price. Last quarter, I noted that there are other gold companies that show comparable profiles, financial profile than ours and those companies that are trading at prices per share at multiples where Yamana is trading. And so, for the benefit of the shareholders in this company that have been patience throughout this transaction, and as a shareholder myself, I hope I can confidently say to you that it is only now a matter of time.

Now, what I have referred to as the transaction noise surrounding this transaction is dissipating, there is no reason why Yamana should be trading at a level that it is trading at given the financial performance in particular that we've demonstrated over this quarter, and quarter-by-quarter. Yamana's trading based on our estimation, a low cash flow multiple compared to peers, a low earnings multiple compared to peers, and a low multiple compared to net asset value. And which doesn't account for the eminent value enhancement events that include: our resource estimate and feasibility study at C1 Santa Luz by the end of the year; our resource estimate at Mercedes in the first quarter of next year followed by our feasibility study at the end of that year; our resource estimate at each of Jeronimo, Millo, La Pepa, and Amancaya early next year.

Continued advancement of Agua Rica, and capitalizing in its true value potential, particularly in light of recent comparable transactions which would place a significantly higher value on this project than what we had assumed when we purchased Northern Orion, continued evaluation of our development work at the Bonanza vein at our El Penon mine--where at present, we do not have a published resource estimate, although it shows high grade and scale—suffice it to allow us to say to you that we have a target production level of 500,000 ounces of gold equivalent per year from that El Penon mine, which is a significant increase over the current production level, and also, of course, the upside that comes from our advanced exploration efforts.

These are short-term and intermediate events, but we believe we will increase our value. And in the meantime, we plan to continue to deliver on our current and plant operational and financial performance. We have consistently indicated that our mines will deliver robust operational performance, earnings and cash flow and returns for shareholders, and they are doing so. And I believe that they will continue to do so. And so, I believe that the Yamana share price will appreciate and begin trading at levels that are reflective of the strength and significant growth potential of this company, as reflected in the current performance from the quarter that we just completed.

And finally, I'd like to say, on behalf of this entire team--I'd like to thank our shareholders for the continued support and encouragement during the past several months, as we completed these transactions, and I'm confident in being able to deliver some strong even stronger performance going forward with the completion of these transactions.

And with that perhaps that we can now open up the floor to questions.

Question-and-Answer Session

Operator

(Operator Instruction) Our first question is from David Stein of Cormark Securities. Please go ahead.